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Brazilian Oil Investing

Brian Hicks

Written By Brian Hicks

Posted May 29, 2013

A portion of Brazil’s pre-salt oil field will be open to the highest bidder.

Brazilian oil regulator ANP announced that it will oversee the auction of the offshore field known as Libra—part of a larger sub-salt oil region that holds the country’s largest oil reserves.

oil drillingLibra holds 26 to 42 billion barrels of oil, of which 8 to 12 billion barrels is recoverable. The auction is open to foreign bidders, but only the Libra portion of the pre-salt area is up for bidding.

And the winner will still need to do business through Brazil’s largest state-run oil company, Petrobras (NYSE: PBR).

Though still in the midst of testing stages, many are predicting that Libra could surpass Brazil’s Tupi field—known as the largest crude discovery in the Western Hemisphere in 30 years.

The government’s sole aim is to secure future oil production from the pre-salt region.

The winning bidder will have offered the largest share to the government and will pay upfront costs for drilling and exploration.

Petrobras will take a minimum 30 percent stake and will pay an additional 30 percent in investment costs. If it wants a larger share in the field, the company will have to bid with other auction participants.

Petrobras will be the primary operator in Libra, while winning bidders will take more of an investment role. Bidding will take place in October instead of November, as was originally intended, to accommodate President Dilma Rousseff’s schedule.

Libra is part of a larger region known as the Subsalt Polygon and is responsible for over 80 percent of Brazil’s oil flow. The Subsalt Polygon may contain up to 100 billion barrels.

The polygon is also called the pre-salt layer, sequestered off the coasts of Brazil and Africa. Drilling through the salt bed is normally a costly and time-consuming endeavor, but luck would have it that much of the oil reserves from Brazil’s coastal waters are fixed above the salt bed, as Reuters reports.

While the auction only covers a portion of the Subsalt Polygon, the Libra is a gigantic oil field, and the auction is an important event in the country’s energy history—so important, in fact, that it will require the presence of the president.

Brazilian Oil Investment

Brazil has some of the tightest investment restrictions in South America. Many companies exploring and drilling in the nation have to do business with Petrobras.

The nation has failed to deliver on promises regarding its status as a major oil producer, and investors have been frustrated by the nation’s closed-door investment policy. If anything, critics of Brazilian energy policy cite tight restrictions as a primary reason why Brazilians have not made good on their promises.

As a result, Brazil has suffered from declining production, and imports have risen.

Brazil produces over 2 million bpd of crude oil, and Petrobras accounts for over 90 percent of Brazil’s oil success. Roughly 14 percent of that crude production originates from the salt-layer regions.

Nevertheless, investors are willing to fare strict regulations in order to attain a piece of the reserves.

Brazil held a previous auction May 14-15 this year, which included the participation of companies around the world.

Brazil’s strictly profit-sharing auction may be a little foreign to big companies accustomed to spearheading massive exploration campaigns, but having an investment stake will mean an extra channel of revenue and a chance to be part of the exploration process. Libra’s vast potential means winning bidders will be rewarded from any large discoveries made by Petrobras.

Petrobras is Brazil’s largest producer, and the country’s energy sector is mostly dependent on how much the company can extract.

Companies in Brazil

You’ll find that many energy companies currently in Brazil are heading straight for the subsalt region.

BP (NYSE: BP) paid $7 billion to Oklahoma-based Devon Energy (NYSE: DVN) for the right to partner with Petrobras in the exploration off the northern waters of Rio de Janeiro.

Fellow British company BG Group (LSE: BG) has been in the Santos Basin. Its partners are Petrobras and Repsol.

Chevron (NYSE: CVX) has had operations in the Frade reservoir for years, and Brazil is producing 65,000 bpd from this field. Despite having to pay damages from an oil spill and a legal battle with the Brazilian government, Chevron also participated in the May auction.

Total (NYSE: TOT) is another company that participated in the auction this month. The French company won exploration rights in northern Brazil.

Exxon Mobil (NYSE: XOM) is partnered with Hess (NYSE: HES) and Petrobras in the sub-salt region of the Santos Basin. Exxon’s most notable discovery was the Azulao-1 well that lead to the discovery of a reservoir that could contain up to 8 billion barrels of oil. Exxon also won May bids to two offshore projects in the Potiguar Basin.

Anadarko Petroleum (NYSE: APC) has been drilling in the Campos region, and its Wahoo-1 well may contain 700,000 barrels of oil.

Spanish company Repsol is partnered with BG and Petrobras and has multiple fronts in the Santos Basin and the Guara field, which is said to contain anywhere from 1.1 to 2 billion barrels of oil.

There were concerns that Brazil’s strict government regulation of foreign investment would turn away investors, but more than enough companies are lining up to deal with the Portuguese-speaking nation.

Brazil has had success with these types of auctions before, which is why auctioning is a good choice for Brazilians whenever they need more investment income or a push for more oil production


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