Auctioning Brazil’s oil and gas

Multinational corporations set to enter bidding war for rights to Brazil’s largest energy reserve.

The company that wins the bid must share more than 40 percent of profits with the Brazilian government [Reuters]

Sao Paulo, Brazil – The auction of a giant oil field in Brazil is bringing the country to the centre of attention of the global energy industry – and raising questions about Brazil’s energy strategy.

In 2007, Brazil’s majority state-run oil company Petrobras announced the discovery of large oil reserves off the country’s coast. Analysts say it is the biggest discovery in the last 20 years, which may in the long run shift the epicentre of the world’s oil supplies to the South Atlantic.

Madga Chambriard, director-general of the National Oil Agency (ANP), told Al Jazeera she estimates that Brazil’s gas and oil production will roughly double in the next 10 years, from 2.4 million barrels per day to 4.5 million.

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Estimated to hold between eight and 12 billion barrels of oil, the Libra field – which holds the largest reserves ever found in Brazil – will be auctioned off to oil companies on October 21.

According to Solange Reis, a security and energy expert and coordinator at the United States Political Observatory, Libra is extremely attractive to the oil industry. 

“Technical studies have shown a large probability that [initial estimates of Libra’s oil reserves] are accurate. Oil is a scarce resource in the world – it isn’t easy to find fields with Libra’s characteristics,” Reis told Al Jazeera.

Big players absent

On September 19, ANP announced a list of 11 oil companies that have paid a $900,000 fee to take part in the bid. Notably, oil majors such as Exxon and Chevron (USA) and BP and BG (UK) have chosen not to participate. “Each of them gave me a reason, but all I can say is that neither have to do with the structure of the bidding round,” Chambriard said.

However, the way the auction is structured “may not interest companies aiming [for] profits in the short run”, said Giorgio Romano, coordinator of the International Relations department at Brazil’s Federal ABC University.

Under Brazil’s oil regulatory framework, which was altered in 2010, the company or consortium that offers the largest share of its profits to the Brazilian government will win the competition. The terms of bidding on Libra stipulate that companies must offer to hand over at least 41.65 percent of profits made from the field.

“The new framework increases oil revenues captured by the government [in comparison to concession agreements] and guarantees more control by the state with the creation of a new state company, Pre-Sal Petroleo SA [PPSA], which will control oil commercialisation conditions”, Romano told Al Jazeera.

Under this model, he said, Petrobras will be guaranteed a 30 percent participation in the production, will act as the operator, and will be entitled to make strategic decisions.

“The new framework attacks privileges and powerful interests,” he said.

Big oil

Chambriard is not concerned by the fact that some big Western oil companies are not participating in the bid.

If this system isn't favourable to quick profits and companies need to pay a signature bonus of $6.7bn, American companies might also have been more interested in directing high investments to the production of shale gas at home.

by -Giorgio Romano, professor

“We are happy with the list, because we were able to motivate large oil companies to take part in this opportunity, which is unique in the world. Seven of the 12 largest in market value are running, including the second, PetroChina,” she said.

Romano sees the decision by three large Chinese oil companies to take part in the bid as a strategic decision on the Chinese government’s behalf. “These companies aim at guaranteeing oil provision, but China is also interested in selling equipments for pre-salt explorations, which is a huge market.”

ANP’s director-general also said Brazilians would benefit from the oil field, as 75 percent of the royalties will be invested in education and 25 percent in health care, according to a recently passed bill. 

“In the Libra case, we are working with an estimate of a minimum 75 percent government take [in taxes, royalties, signing bonuses and a share in profit oil], believing that the competition may increase this number to over 80 percent,” Chambriard said. 


While the government is optimistic the bidding process for the Libra field will prioritise national interests over foreign ones, some critics are calling for the bid to be cancelled.

Ildo Sauer, former gas and energy director at Petrobras and professor at the University of Sao Paulo, said this is an inappropriate time for the auction to be held, because Brazil hasn’t developed a strategic energy policy compatible with its potential future production and later oil commercialisation. Estimates predict Brazil will export two million barrels of oil per day in 2020.

“Before the bid, it is important to conclude the exploration process and quantify how many barrels Brazil has in reserve, then develop a production plan with a rate that won’t affect international prices, and so that we are exporting only the amount of oil necessary to invest in education, health, urban reforms, renewable energy and technology,” Sauer told Al Jazeera.

Without a strategic plan, he said, this bid might contribute to accelerating oil production and falling oil prices. “Brazil’s strategic ally should be Russia and OPEC countries, not the United States,” he said.

Romano agreed that Brazil needs to develop an energy policy, but said the bidding should not be cancelled. He said the country needs to attract investment soon so that it won’t need to start importing crude oil. Petrobras has a net debt of about $75bn, which is partly caused by a subsidies policy to stabilise fuel prices.

“We are far from being prepared for our future responsibilities. The foreign ministry is not even part of the National Oil Council, because Brazil never thought it would become an international player in the energy field,” Romano said.

“But we must move forward and think about strategies at the same time. Petrobras has technology, but does not have funds.”

Source: Al Jazeera