Brazil’s Hot Libra Auction: Worth the Price?

The 21 October pre-salt auction of the Libra field off Brazil's Atlantic coast is one of the most hotly anticipated hydrocarbon concession issuances ever.

The field, around well 2-ANP-0002A-RJS in the Santos basin, may have up to 42 billion barrels of oil, though 8 to12 billion barrels are considered recoverable today.

Industry analysts say the quality and quantity make it a potentially historic find, which could produce up to 1 million barrels per day once it is fully operational.

But Libra comes with a hefty price tag: Brazil wants to get at least $6.6 billion in cash from the winning bidder and very favorable terms.

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At that price, only the major oil companies are potential bidders, and even then we presume most will be joint bids.

Under current law, including Law 12.351, Petrobras will automatically be classified as operator of any wells and a minimum 30% owner in any consortium. Most companies expected a signing contribution of about $4 billion, but Brazil is gambling that the pre-salt hype could make for a huge payday.

Yet they shouldn't overplay their hand; on 26 June the lower chamber of the legislature quickly passed a bill to mandate that bids for the Libra contract would pay royalties of 60% on oil profits--at a minimum. To win, companies may need to offer even more. (Those monies would be earmarked for education and healthcare, a laudable development plan, but a tough business proposition.)

That bill, amending the Regime de Partilha de Produção na área do Pré-sal hasn't been considered by the Senate or the Executive, and may never take effect, but it is a clear demonstration of the emotion and political maneuvering behind Brazilian oil.

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The last auction, Round 11 in May 2013, was more competitive than expected overall, which may have contributed to Brazil's optimism. Yet the economy is struggling at the macro-level, unable to spur growth and struggling to attract investment in other industries. Mergers and acquisitions of Brazilian companies declined sharply from last year. And while the prospect of pumping 1 million barrels a day at Libra holds an undeniable attraction, several factors could dampen the romance.

Oil prices are well below historic highs, and the oil at Libra is beneath 5 kilometers of Atlantic water and salt that can be up to 2 kilometers thick. Other countries are conducting auctions this year, so oil companies do have options, even including the gas-centric Round 12 in Brazil, set for November.

By Southernpulse.com for Oilprice.com