Brazil just held an oil and gas auction, and judging by the results, few companies are interested in developing the country’s oil and gas reserves right now.
The state-owned oil company Petrobras, which is still reeling from the corruption scandal, did not participate in the auction. The unusual absence was due to the company’s massive pile of debt. Petrobras has limited resources to throw around these days, and it can ill-afford to take on new projects that would require large capital expenditures upfront, with payoff somewhere down the road.
However, there was scant interest from international oil companies as well. Brazil’s oil auction failed to attract any oil majors, including Royal Dutch Shell, Total, Statoil, ExxonMobil, or BP, all of which either have a presence in Brazil or were registered to bid in auction.
Out of the 266 onshore and offshore blocks that were put up for bid, only 37 were successfully awarded to companies, the worst result in years. The bids brought in just 121 million reals (around USD$31 million). Worse, six of the ten basins that were offered received no bids at all, including the much-hyped Campos Basin off the coast of Rio de Janeiro, as well as the Camamu-Almada basin off the coast of the state of Bahia. The largest bid was for a block north of Bahia, offshore of the state of Sergipe, but the winning bid, from the Brazilian company, QGEP Participações SA, came in at the minimum price allowed. Related: Decoding Saudi Arabia’s Strategy In Its Oil Price War
“We sold 14 percent of the blocks which is a fair bit below what we were hoping for,” Magda Chambriard, an official with Brazil’s oil regulator, told Reuters.
In a departure from the past, none of the successful awards occurred in Brazil’s prolific pre-salt, the vast reserves of oil trapped beneath a thick layer of salt in deepwater. Excitement around the huge potential of the pre-salt is what has driven the immense interest in Brazil’s oil sector over the past decade. But, due to the high costs of development, developing pre-salt oil fields makes little sense when oil prices are so low.
“The feeling is one of frustration,” Aluizio Dos Santos, the president of the Organization of Oil Producing Municipalities, told Reuters while at the auction in Rio de Janeiro.
The results were undoubtedly worse because of Petrobras’ absence. In the past, the state-owned oil firm has accounted for more than half of the successful bids. This is the first time in history that Petrobras did not bid at all. Related: Lithium Market Set To Explode – All Eyes Are On Nevada
Another reason that some analysts believe that interest was so tepid was because of local content rules. Brazil requires a certain amount of equipment for oil projects come from local providers, rather than imported from abroad. Oil companies argue that this raises the cost of development.
It wasn’t just offshore blocks that Brazil’s government auctioned off. Controversially, Brazil was also auctioning blocks in the Amazon Rainforest, including across indigenous territories. The move is being met with protest from environmental and indigenous groups. The lack of interest from the oil industry, however, could make the issue a moot point, at least for now. There wasn’t nearly as much interest in drilling as feared. Environmental groups are still incensed that the government is willing to open up the rainforest for drilling however, and if oil prices rebound and drillers express more interest in the Amazon, conflict will escalate between environmental and indigenous groups on the one hand and the oil industry on the other.
The disappointing results came just as Mexico is experiencing similar trouble in attracting interest from international oil and gas companies. Low oil prices and mounting debt are deterring drillers, as few have extra cash that they are willing to risk on new projects. The poor showing in Brazil could prompt changes in rules, such as a reduction in the local content requirement.
The failed auction will dim Brazil’s chances of significantly increasing oil production. Already, Petrobras has had to dramatically lower its long-term production estimates. But the abysmal financial state facing the company, combined with the ongoing corruption investigation, are forcing more restraint. In fact, Petrobras’ share price rose on the news that it made no bids at all. Shareholders are clearly pleased that the company won’t be spending any more money on drilling. Related: LNG Bust Could Last For Years
(Click to enlarge)
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Figure 1 Blocks Up for Auction in Dark Orange
By Nick Cunningham of Oilprice.com
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