Brazil’s much-anticipated auction of deep-sea oil deposits ended in ignominy on Wednesday as global energy groups backed away from bids on almost all the offerings.
The development will be a blow to the Brazilian oil industry’s hopes as well as the administration of President Jair Bolsonaro, which had hoped to raise $25bn in licensing fees and tens of billions more in production compensation from the auction.
Steep prices, complex sharing rules and a broader reticence about Brazil appear to have frightened away major global players. After weeks of hype, two of the four deepwater prospects received no offers and the other two received the lowest possible bids.
Oil companies have become increasingly concerned about the viability of such projects amid a broader global push for clean energy. Many western oil majors are under shareholder pressure to think carefully about large developments, senior foreign diplomats in Brasília said.
“From the outset, there was overshooting — an auction strategy of trying to make the most of it,” said Cláudio Porto, founder of Macroplan Prospectiva, a consultancy.
Investors are still very cautious. The government played it too hard and ended up being frustrated.
“Reserves are indeed very valuable, but one factor is the external perception of Brazil. And I think investors — as these are very large and long-lasting investments — are still waiting for a bit more clarity about the scenario and how the overall business policy and the economic environment will evolve.”
Roberto Castello Branco, chief executive of Brazil’s state-owned Petrobras, added: “We thought there would be competition. There wasn't.”
In total, the four pre-salt fields — named for the thick crust of salt that sits above the crude — are believed to contain as many as 15bn barrels of oil. Officials in Brazil had hoped the auction would by the 2030s trigger a huge uptick in the nation’s oil production — from 3m to 7m barrels at day — a prospect that now looks unlikely.
Buzios — the largest of the four fields — received an offer from a consortium of Brazil’s Petrobras and China’s CNOOC and CNODC, offering the required $17bn signing fee and the minimum amount of “profit oil”, the amount they need to share with the government, at 23 per cent. The Chinese groups will each hold a 5 per cent stake in the partnership.
The second prospect, Itapu, received only an offer from Petrobras, while the third and fourth, Sépia and Atapu, received no offers at all. They are expected to return to auction next year under different rules.
“The fact that two blocks were not auctioned does not reduce the importance of the result of this event. This is the first auction of its kind offering large volumes already discovered, which reduces risk,” the Brazil Oil Institute said in a statement.
The auction had been expected to be biggest oil bidding round in history and was heralded as “historic” by Brazilian energy officials just moments before the event in Rio de Janeiro started on Wednesday.
A senior western diplomat who met with the oil majors ahead of the auction said the companies were “very excited” about it.
“This will show the greatness of the state,” said Bento Albuquerque, minister of mining and energy, at the beginning of the auction on Wednesday.
Analysts had estimated the resulting projects could trigger the creation of more than 400,000 jobs and usher in a rebirth of the nation’s oil industry, which has been savaged by the years-long “Lava Jato”, or “Car Wash”, corruption probe.
More than a dozen global oil groups, including ExxonMobil and Royal Dutch Shell, were present in the seaside city for the bidding.
A Shell representative said the company will “continue to evaluate new opportunities to invest in the country that are aligned with our investment expectations and ability to deliver maximum value to our shareholders in a safe and socially responsible way.”
The failure of the auction is also likely to damp broader investor hopes that Brazil is on course to liberalise its historically protectionist economy.
“Investors are still very cautious. The government played it too hard and ended up being frustrated,” said Mr Porto.
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