Brazil’s Oil Sale Could Generate Trillions

By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Some of the world’s biggest oil companies joined forces in a successful bid for the country’s first pre-salt offshore oil field, Libra, this week, the R$15 billion signing fee a fraction of what will be invested in the area in the coming years. Europe’s Shell and Total, along with two Chinese companies, will share the costs, and vast profits, with Petrobras.

President Dilma Rousseff dubbed the auction a great success, but others were less prone to superlatives in their assessment. As 1,100 army troops kept a group of several hundred protesters at bay outside the hotel in Barra da Tijuca where the auction took place, inside there was considerably less activity, with the five-way consortium presenting the only bid for the field.

Rousseff rebuffed critics of the entry of international companies into the auction to share the wealth generated by a natural resource dubbed by President Lula in 2008 as ‘Brazil’s lottery ticket’, saying “85 percent of the profits generated in Libra will stay in Brazil and with Petrobras.” The destination of the royalties has been the main cause of the six-year delay in the sale since the discovery was announced.

“This is a long way from privatization,” she continued in a televised address to the nation, adding; “… production of these riches will brings profits commensurate with the huge investments that will take place in our country.”

The R$15 billion signing bonus is indeed a fraction of the R$3.7 trillion that the Fundição Getúlio Vargas research university estimates could be generated over the next thirty years. The destination of the resources is still to be defined, but in response to countrywide protests earlier in the year, Rousseff vowed to divert a significant proportion into education.

The lack of any competition was, unsurprisingly, a source of conjecture. Eleven companies had already paid millions upfront just to be eligible to take part, but that figure was expected to be nearer forty. With just one bid tabled, the 41.65 percent minimum amount of ‘profit oil’ – the production that had to be guaranteed to the state as part of any bid – was not exceeded.

Senator Agripino Maia considered the lack of interest to be “a sign of the times,” adding that “without any competition, [the auction] is either not trustworthy or suspect… this is the auction of a country’s dreams in regard to health and education.” Finance Minister Guido Mantega also suggested that, while the result was a success, “the size of the investments required put off a greater participation from oil companies.”

Nevertheless, the presence of Holland’s private oil giant Shell and France’s Total, each with a twenty percent stake, brought a crucial gravitas to a bid that looked as if it might be the preserve of Asia’s nationalized companies. For Shell, the opportunity to buy back acreage they had returned to Brazil’s Petroleum Agency (ANP) having made no discoveries in shallower depths than the six kilometres of the pre-salt layer was too good to pass up.

China’s CNPC and CNOOC formed the remainder of the consortium, both with a ten percent share, leaving Petrobras with forty percent, ten more than the minimum required. The delays in readying the auction and spiralling costs of operating in Brazil have been widely blamed for the lack of wider interest from European and American companies like Chevron and BP.

Despite the prospect of huge investments on the horizon, the deal saw Petrobras’ share price up five percent by the close of the BOVESPA stock exchange.