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Big Oil Rushes To Brazil Despite Expropriation Fears

offshore rig

The largest international oil companies will be vying on Thursday to grab acreage next to Brazil’s coveted offshore pre-salt layer, despite a last-minute court decision that removed two blocks considered top quality.

Brazil is holding its Concession Round 15 auction today and 20 companies—including majors Exxon, Chevron, BP, Shell, Statoil, and Total—have registered to bid on 68 blocks.

Two of the blocks initially included in the auction were choice blocks in the Santos basin considered top-geology plays and expected to draw big bids. However, those two blocks were taken out of the running by a Brazilian audit court on Wednesday, on the grounds that Brazil would get more money if it auctioned those blocks under production sharing contracts (PSC) instead of under concession.

Still, 15 blocks in the offshore Campos and Santos basins, which contain pre-salt geology, will be auctioned, as well as blocks in the offshore Ceara, Potiguar, and Sergipe-Alagoas basins, and acreage in the onshore basins of Parnaiba and Parana.

Some experts expect that Brazil’s action on Thursday and one under PSCs scheduled for June could attract higher-than-usual bids because Brazil is holding a wide-open presidential election in October.

The most likely leftist candidate, Ciro Ferreira Gomes, has said that he would expropriate oil assets bought by private companies if he won the election. According to Reuters, Gomes is currently behind rightist candidate Jair Bolsonaro in opinion polls.

Related: Oil Majors Should Invest In Deepwater Drilling

Most analysts and oil executives who have spoken to Reuters said that they did not expect Brazil—or Mexico, which is also holding presidential election this year—to fully reverse oil reforms, but many say that contract term changes or slower oil auction calendars are possible.

Horacio Cuenca, Upstream Research Director, Latin America, at Wood Mackenzie, expressed concern earlier this month that intense competition and aggressive bidding in Brazil’s upcoming auctions could erode the economic potential of future oil discoveries.

“As operators prepare for this year’s pre-salt rounds, convergence of big oil companies on the same handful of deepwater plays is a growing concern. Brazil’s pre-salt is one of the most relevant of those deepwater plays and strong competition here could ultimately make some of the world's most coveted prospects uneconomic,” Cuenca said.

UPDATE: ExxonMobil, Wintershall and Royal Dutch Shell were among the winning bidders on Thursday afternoon. ExxonMobil, along with its partners won 8 bids for a total 640,000 acres, including a $848 million bid. 

The rather succesful auction raised a total of $2.4 billion in shallow water and deepwater proceeds for the Brazilian government. 

A full overview of the winning bids can be found here.

By Tsvetana Paraskova for Oilprice.com

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