Brazil’s Offshore Oil Auction a $17 Billion Flop

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A highly anticipated auction for drilling rights in four offshore locations (blocks) in Brazil’s massive Santos Basin drew just three bidders. State-controlled oil company Petróleo Brasileiro S.A. (NYSE: PBR), better known as Petrobras; China’s Cnooc Ltd. (NYSE: CEO); and China National Oil and Gas Exploration and Development, a unit of state-owned China National Petroleum, were the only bidders.

In addition to these three, 11 other firms had been approved to participate in the auction that occurred Wednesday in Rio de Janeiro. Among these non-bidders were BP, Equinor, Exxon Mobil, Shell and Total. Some, like BP and Total, had already said they would not be participating because the assets were too expensive. The others must have reached the same conclusion.

According to a Reuters report, the two Chinese firms teamed up with Petrobras to acquire the rights to the Buzios block, the largest of the four blocks available. Petrobras on its own secured the rights to the smallest block on offer, Itapu. Signing fees of approximately $17 billion for the two blocks will go to the government of Brazil.

Brazil’s national oil regulator, Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, or ANP, had estimated between 6 million and 15 million barrels of oil in the four blocks, on top of 5 million barrels that went to Petrobras in a complicated transfer-of-rights exchange for the so-called pre-salt oil deposits in the offshore basin.

The signing fees were fixed in advance and winning bids were to be selected based on the highest profit offered to the government for each block. The minimum profit rate was set at 23.24% for Buzios and 18.15% for Itapu.

Had other bids been received, the government could have realized about $8 billion more in additional signing fees. The two blocks that received no bids, Sepia and Atapu, would have generated minimum profit levels of 27.88% and 26.23%, respectively. The two blocks will be put up for auction again next year.

Even if another bid had come for either of the blocks auctioned Wednesday, Petrobras had already exercised its preferential right to a 30% stake in and to be the operator of the blocks. Petrobras now has a total stake of 90% in the Buzios block while each of its Chinese partners has a 5% stake, according to Reuters.

Petrobras American depositary shares traded down about 2.4% at $15.97 in the noon hour Wednesday. The 52-week range is $11.89 to $17.90, and the 12-month consensus price target is $19.91.


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