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.

Minster for Mines and Energy Edison Lobão (second left) commemorates the sale with the winning companies, Rio de Janeiro, Brazil News

Minster for Mines and Energy Edison Lobão (second left) commemorates the sale with the winning companies, photo by Fernando Frazão/ABr.

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 Libra field, situated some 170 kilometers from Rio, image by Petrobras.

The Libra field, situated some 170 kilometers from Rio, image by Petrobras.

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.

9 Responses to "Brazil’s Oil Sale Could Generate Trillions"

  1. Rita Michel  October 23, 2013 at 6:21 PM

    The general statement that the profit from this “lottery ticket” will benefit education and health should be followed up immwdiately with a task force detailing how and when the funds will be used.

    Also President Rousseff has to stop with sincere speeches and start with a plan that requires foreign investors benefiting from the upcoming sporting events to put a part of their projected profit into health, educatiotn, postal service reform, infrastructure and housing for those displaced by changes implemented in preparation for the events.

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  3. Dirk Nordmann  October 27, 2013 at 11:42 PM

    If you just require foreign companies to do things without removing the immense hurdles to doing “things”, you will get nowhere.

    The 2012 OECD average time to start a new business was 12 days. The brazilian average was 119 days.

    Just quoting the Economist, Sept 28, 2013

    “The complexity of the tax code also raises compliance costs. A mid-sized Brazilian firm takes 2,600 hours to prepare its annual tax return, almost ten times the global average. Rigid labour laws make it hard to deploy workers efficiently and lead to costly court cases, 3.2m last year alone. Many businesses prefer to hide in the informal sector. A 2006 McKinsey report estimated that by remaining in the shadows a retailer could more than triple its profit margin, but at the cost of forgoing investment and economies of scale. A simplified regime for small firms introduced since then has persuaded many to register, but the resulting efficiency gains are limited
    by a new problem: too many “Peter Pan” firms unwilling to grow up and lose their privileges.
    A plethora of other costs help drive up prices. Poor roads and a limited rail network make for high freight charges. High crime rates have bred a private army of 650,000 security guards. Prime office rents in big cities are vertiginous; Rio’s are the highest in the Americas, north or south. A low savings rate, high bank-reserve requirements and the government’s considerable funding needs (it runs a budget deficit each year, despite that 36% tax burden) make credit expensive. FIESP, São Paulo’s association of industrialists, says firms’ financing costs make up 5% of the end price of manufactured goods.”

    “Just 1.5% of Brazil’s GDP goes on infrastructure investment from all sources, both public and private. The long-run global average is 3.8%. The McKinsey Global Institute estimates the total value of Brazil’s infrastructure at 16% of GDP (see chart 5). Other big economies average 71%. To catch up, Brazil would have to triple its annual infrastructure spending for the next 20 years.”

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