Publish in Perspectives - Wednesday, November 13, 2013
Petrobras is overburdened financially and operationally, which means the company is not well positioned to assume the operational responsibility of developing new fields in the pre-salt, experts warn. (Photo: Petrobras)
How successful was Brazil's auction of the Libra field? Three experts share their insights.
BY LATIN AMERICA ADVISOR
On Oct. 21, Brazil held the auction of its pre-salt Libra field, which is estimated to hold some 8-12 billion barrels of oil or oil equivalent. It was the first auction held under the nation's new production-sharing contract model, which requires Petrobras to hold at least 30 percent of every project and control operations. Only 11 companies of an expected 40 registered for the auction, most of which were national oil companies. What was behind the smaller-than-expected turnout? How attractive were the contract terms to bidders? Was the auction a success, why or why not, and what is the outlook for development of the field?
Christopher Garman, director of emerging market strategy & Latin America at the Eurasia Group: Government officials are celebrating the results of the first auction held under the government's production sharing agreement contract model for the pre-salt. Prior to the auction, there was a lot of speculation in the press that international oil companies (IOCs) would fail to show up entirely, with only Chinese state-owned enterprises (NOCs) potentially showing up to partner with Petrobras. With both Shell and Total opting to assume a combined 40 percent stake in the project, Rousseff and her advisors were able to claim that the new model was able to attract international heavy hitters. In addition, the lack of competition also allowed Petrobras to dodge a bullet. The new E&P framework obligates Petrobras to be lead operator for whichever consortium wins, with a minimum 30 percent stake. That means Petrobras ran a material risk of Chinese NOCs bidding aggressively in a competitive auction, thus forcing Petrobras to accept a very high share of profit oil, which would hurt the company financially. In other words, the government was quite happy to see little competition but with IOC participation. The real question to ask, however, is what comes next. Petrobras is overburdened financially and operationally, which means the company is not well positioned to assume the operational responsibility of developing new fields in the pre-salt. If the government opts to keep the current framework, it is a recipe to not conduct additional bid rounds in the pre-salt for at least two to three years. At heart is whether the government wants a slow or rapid pace of production in the pre-salt. The current model is a recipe to develop it all very slowly. Opening up the sector to IOCs is synonymous with more investments, more production and more revenue earlier rather than later. To be sure, that may very well be one of the most important decisions for the next administration.
Georges Landau, head of Prismax Consultoria in São Paulo: The tender for the giant Libra petroleum pre-salt field lasted only 30 minutes, and extraordinary security precautions were taken. The outcome was deemed positive for the government, but was criticized because only one consortium bid for the field and bid the minimum allowed by the tender rules, namely 41.65 percent in profit oil. Eleven oil companies registered, while 40 had been expected. The partners in the winning consortium were: Petrobras, the operator, with 40 percent; Shell and Total, with 20 percent each; and two Chinese state companies, CNOOC (China National Offshore Oil Corporation) and CNPC (China National Petroleum Corporation); with 10 percent each. The consortium subscribed to the 15 billion real signature bonus, and the contract will be signed in Brasília within 30 days. While none of the U.S. majors bid in this auction, the government feels vindicated in that two European oil companies, Anglo-Dutch Shell and France's Total, did participate, as did two Chinese state enterprises. There is already talk of modifying the model for future pre-salt auctions so as to allow for greater private sector participation. Petrobras' share in fees will be 6 billion reais at a low point in the company's cash flow, which however will be substantially improved following the government's imminent readjustment of fuel prices. According to the National Petroleum Agency, the Libra field will yield 1 trillion reais over 35 years. The aggregate total of royalties and the Social Fund is estimated to amount to 640 billion reais over this period and will be earmarked for education and health. The benefits to Brazilian industry at-large are estimated at 400 billion reais per year. And Petrobras has already developed unrivaled deep-sea technology.
Chirag Sabunani, Latin America Upstream Analyst at Wood Mackenzie: A consortium of Petrobras, Total, Shell, CNOOC and CNPC placed the only bid in a round that proved to be anything but competitive. A number of factors kept companies away. These include the high signature bonus, the risk of project delays and having Petrobras as the mandatory operator, considering that the company is financially and operationally over-stretched. In addition, reserves uncertainty (just one well has been drilled at Libra) and the potential for political interference through Pré-Sal Petróleo SA may have influenced companies' decisions. Despite the lack of interest, the government can take some satisfaction that it has attracted a world-class group of companies to develop one of the largest deepwater oil fields ever discovered. This project will generate billions for state coffers, plus the government will shortly receive a $7 billion signature bonus. This is cash that it can immediately invest in public health and education projects-it will be many years before the field starts to generate production revenue (excluding extended well tests). We calculate base-case NPV10 of $16 billion, equivalent to a full cycle internal rate of return of 14 percent, under our long-term oil price of $85 per barrel in 2013 terms. This is well above what could be achieved on the upstream M&A market, and only a handful of explorers succeed in generating such returns. Indeed, the companies that elected not to bid may now view Libra as a missed opportunity.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor