Brazil’s Biggest-Ever Oil Auction a ‘Total Disaster’ as Bidders Stay Away

offshore drilling rig brazil
Photo: Shutterstock / marchello74

By Sabrina Valle, Peter Millard and Luiza Ferraz (Bloomberg) –Brazil’s largest-ever auction of oil deposits flopped, sending the real tumbling, after state-controlled Petroleo Brasileiro SA did most of the bidding while other major oil companies stayed away.

Petrobras, as the company is known, joined with China’s Cnooc Ltd. and China National Oil & Gas Exploration & Development Co. in submitting the winning bid for the giant Buzios field, the prize of the auction. Petrobras was the sole bidder for the Itapu block. Two others, Sepia and Atapu, received no bids. Exxon Mobil Corp. and other oil majors didn’t make any bids.

The Brazilian real fell against the dollar as the outcome diminished expectations for how much of the U.S. currency will flow into the country to develop the massive offshore oilfields. Petrobras shares also initially slumped more than 5% — the company holds a 90% stake in the winning Buzios group, meaning it will need to spend more than initially anticipated to develop the block.

“Total disaster is the best way to describe this morning’s round,” said Ross Lubetkin, chief executive officer at Welligence Energy Analytics, a consultancy. “Not one major participating is a glaring failure. Meanwhile, the failure to license Sepia and Atapu means the government misses out on $9 billion in signature bonuses.”

The auction was meant to be part of Brazil’s shift away from nationalistic oil policies and help it shake off some of the toughest years in the country’s history, after a wide-ranging corruption probe was followed by a devastating recession in 2015 and 2016. With the economy still struggling to grow, Brazil was looking to the sale to inject some badly needed cash into public coffers.

With estimated total reserves of 20 billion barrels of oil, the areas being auctioned were expected to raise about $25 billion in government fees and another $25 billion in compensation for Petrobras, which has already invested in drilling and platforms.

Brazilian officials said the almost 70 billion reais ($17 billion) in licensing fees from the two auction blocks that were awarded still amount to the largest ever collected by a government. But the compensation to Petrobras will fall to only a fraction of $25 billion, because its partners in Buzios hold just a 10% stake in the venture. The exact amount isn’t known yet.

The auction was still a huge event for Brazil, oil regulator Decio Oddone said at a Rio press conference following the auction announcement. Energy Minister Bento Albuquerque called it a success and said it shows Brazil is on the right path. He added that the country will offer the two fields that went unsold again next year.

“We will need to evaluate why oil majors didn’t participate,” Albuquerque told reporters Wednesday.

‘Very Expensive’

The Buzios block alone represents one of the largest reserves of discovered crude to be sold since Iraq opened up after the second Gulf War. Despite the block’s size, Stephen Greenlee, Exxon Mobil Corp.’s president of exploration, said in an interview last month that Buzios was “very expensive.”

Exxon Leads Supermajor Walkout From Marquee Brazil Oil Auction

One of the reasons why Buzios was considered so pricey: The field is already producing over 400,000 barrels a day of crude, roughly the same as departing OPEC member Ecuador, with four platforms that have cost Petrobras about $20 billion. While that’s a unique opportunity in the industry, it also means that the winners would have had to compensate the state-run oil producer with some combination of cash, crude and investments over the years.

Petrobras was little changed at 29.64 reais at 1:32 p.m., after earlier plunging as much as 5.2%.

“This will add extra pressure to their cash flow,” Marcelo de Assis, the head of Latin American upstream research at Wood Mackenzie Ltd., said of the effect on Petrobras. “They will spend about $7 billion above the $9 billion they got from the government” because they aren’t splitting future costs with more partners, he added. Petrobras received the $9 billion for settling the original Transfer of Rights contract.

”We expected competition, there was none,” Petrobras CEO Roberto Castello Branco told reporters after the auction, declining to comment further.

–With assistance from Julia Leite.

© 2019 Bloomberg L.P