Brazil auction tests oil major appetite for deepwater fields

RIO DE JANEIRO (Reuters) - Top global oil companies will compete on Friday in Brazil’s billion-dollar auction for some of the world’s most prolific deepwater oilfields, a test of their appetite for capital intensive offshore projects after three years of low oil prices.

Competition between firms such as Exxon Mobil, Royal Dutch Shell and Total> is expected to be fierce for the more than 12 billion barrels of estimated oil reserves Brazil is offering. At current prices, that volume of oil is worth around $600 billion.

After reforms to the energy sector in the past year and a half, Brazil will auction eight blocks on more attractive terms than ever before to international firms for access to its pre-salt fields. They are reservoirs of oil that sit beneath thousands of feet of salt under the deep Atlantic waters off eastern Brazilian shores.

Big oil firms have stepped back from multi-year projects such as those in deepwater fields since oil prices crashed in 2014, as they cut costs to survive at prices of around $50 a barrel.

But the production potential and the size of the reserves on offer make Brazil attractive despite the capital constraints oil majors face in a low price environment.

“The quality of the reserves in Brazil is one of the best in the world, if not the best,” said Wael Sawan, Executive Vice President for Shell’s deepwater division. He said that the nature and density of the reserves meant they produced “unparalleled volumes” of oil, he said.

Reforms enacted under President Michel Temer had made the fields more attractive than they would have been a couple of years earlier, Shell’s Sawan said.

Shell is the largest foreign operator in Brazil’s deepwater oilfields. Sawan said the firm would participate in the auction but declined to give any further details.

Exxon and Total are also expected to bid in the auction, oil industry sources said.

Exxon has been struggling to replace crude reserves in recent years. The U.S. major stole the show at the last Brazilian oilfield auction in September, which was for areas outside the pre-salt.

Exxon took 10 areas, six in partnership with Petrobras, and paid a record 2.24 billion reais for one block alone. That set the stage for an aggressive bid for pre-salt, analysts said.

Exxon’s Brazil Country Manager Carla Lacerda on Thursday declined to comment on Exxon’s plans ahead of the bid round, but a Brazilian oil executive said a joint bid between the American firm and the Brazilian company would make sense.

“Petrobras is already dancing with them,” he said.

Exxon is being punished by shareholders for failing to replace reserves more quickly.


The last pre-salt auction was a limited success. In 2013, the first pre-salt round saw just one bid by Petrobras, Shell, Total, CNPC and CNOOC, for one block on offer, the Libra area.

This week, Brazil is for the first time allowing foreign oil firms the right to operate in the pre-salt area, one of the biggest reforms enacted under Temer. Previously, they had to work as a minority partner with Petrobras in the area.

Other reforms included cuts to local content requirements, which had been aimed at stimulating the domestic oil service industry but slowed development and deterred investment.

Those changes may prompt the 16 companies registered to bid aggressively, despite political risk in Brazil, which has seen successive governments mired in corruption scandals.

Petrobras itself is still reeling after a massive graft scandal in which construction companies bilked the state oil giant out of billions.

“I don’t see how this can fail,” said Magda Chambriard, former director of Brazil’s oil regulator ANP. “Investors are scared with the low oil prices, but...they are looking for a project pipeline, with good projects and chances to grow.”

The contracts will be offered under a production sharing scheme, where the winner will offer the government the biggest share of oil after cost. The government will rake in 7.75 billion reais ($2.39 billion) in signing bonuses if it sells all the blocks, which are located in the Campos and Santos basins.

Petrobras has exercised its preemptive right to three blocks - Sapinhoa, Peroba, and Alto de Cabo Frio Central - meaning it will serve as operator and likely take a 30 percent minimum stake in the consortia behind the winning bids for those areas.

Expectations are high for the Peroba block, which has an estimated 5.3 billion barrels of oil, while Carcara and Alto de Cabo frio Central are also seen as enticing.

Several of the blocks are expected to go to companies that are already developing nearby blocks, such as Shell, Norway’s Statoil and Petrobras.

($1 = 3.2376 reais)

Additional reporting by Simon Webb; Editing by Simon Webb and Andrew Hay