Bottom line: In its final rules for the Libra auction scheduled for 21 October, the government of Brazil loosened the mandate to permit the winning bidder to retain 50% of oil produced (after recouping costs), up from 30% as contemplated in previous rules.
Analysis: Just 11 firms registered to bid on the ultra-deep pre-salt Libra reserves on 21 October, and there was a sense that Brazil may have been asking too much for what remains a complicated and expensive venture. Someone in Brazil’s National Petroleum Agency was listening--an excellent sign that as a governing partner Brazil is flexible and cognizant of market forces.
Recommendation: The high signing bonus, roughly $6.8 billion, and limited information about the formation (there is just a single operational well there) mean the proposition is still risky. Still, there are few opportunities of that size and potential quality available today; Brazil may not be Texas, but it’s a safe and politically stable place atop a 10 billion barrel oil field.
There’s another angle here worth watching closely: tanker trading, which will benefit from an increase in oil investment in Brazil. According to Lloyd’s List Intelligence, Brazil is opening up its upstream oil sector to investment of around $237 billion over a five-year period to boost production and refining capacity.