Brazil Offshore Oil Drilling Rights Draw Interest at Auction

Brazil Offshore Oil Drilling Rights Draw Interest at Auction

Brazil offered the world’s oil companies a chance to bid for drilling rights in its waters on Wednesday, and it declared the results encouraging.

The bidding, the first of nine rounds, was considered a test of investor confidence in President Michel Temer’s free-market initiatives. But it was also a measure of the industry’s interest in tapping deepwater oil fields, among the most expensive to explore, at a time of low prices.

More than 30 oil companies initially expressed interest in the bidding for 287 exploration blocks holding as much as 10 billion barrels of proven reserves. But in the end, only 20 companies from eight countries made bids. Seventeen companies won 37 blocks, including Exxon Mobil, which won eight blocks, mostly in partnership with Petrobras, the national oil company.

The China National Offshore Oil Corporation and Repsol of Spain also made winning bids.

The government raised about $1.2 billion in initial payments for exploration rights.

Government officials had expressed hope that as much as 40 percent of the blocks offered would be sold in the first auction held since one 2015, which was a flop.“We hope we have turned the page,” said Fernando Coelho Filho, the minister of mines and energy, at a news conference in Rio de Janeiro after the auction. “We want to promote a competitive exploration and production market in Brazil.” He added that the presence of Exxon Mobil and other international companies that had abandoned Brazil gave him reason for optimism.

But the outcome was a far cry from the potential that oil companies saw for Brazil a decade ago when huge offshore reserves were discovered. The price of oil at that time had climbed above $100 a barrel, political turmoil roiled North Africa and the Middle East, and oil companies sought new reserves in politically stable countries.

Brazil decided in 2010 to designate Petrobras as the sole operator in the prime offshore fields. Exploration plummeted as international companies looked elsewhere to produce.

Then came a frenzy of drilling in American shale fields that became accessible with horizontal drilling and hydraulic fracturing, methods designed to unlock hydrocarbons from hard rocks. A global glut and price collapse followed, making deepwater drilling expensive relative to other exploration activities, although prices are starting to revive.

To make Brazil even less attractive, Mexico, Guyana and several African countries have opened their rich deepwater fields to foreign companies, leading to expectations of new large-scale production over the next decade. And Petrobras, crippled by a series of corruption scandals, is now deeply in debt.

The auction follows a series of reforms started last year, dropping the designation of Petrobras as sole operator and lowering requirements for allotted Brazilian content in machinery and construction for exploration and production. The government also guaranteed that those winning exploration rights would own the oil and natural gas that is produced, minus royalties, taxes and a government share of profits.

Petrobras retains the right to choose areas of operation, although it may decide to operate in production-sharing agreements.

“Brazil now faces competition,” said Jorge R. Piñon, the former president of Amoco Oil Latin America. “That is good news for the oil companies because Brazil can no longer demand to be the operator, and they have to be cognizant that oil companies have limited capital with today’s oil price at about $50.”

The auction did not offer the most coveted areas, which will still await auction. In Mexico, early auctions in offshore areas recently opened to foreign investment produced modest results. But after the government sweetened its offerings, in part with looser regulations, companies showed more interest.

“The significance of today is the return of Exxon Mobil to the Brazilian market,” said Adriano Pires, the director of Brazilian Center for Infrastructure, a consultancy based in Rio de Janeiro. “The government is going in the right direction.”

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