RIO DE JANEIRO Nov 28, 2007 (Dow Jones Newswires)
Brazil's oil and gas exploration and production block auction Tuesday ended in a surprise. While it earned the government a record 2.1 billion reals ($1.1 billion), the big players in the country's oil industry were sidelined.
Oil majors such as Royal Dutch Shell PLC (RDSA) and Chevron (CVX) made no bids after the government withdrew the most promising blocks from the auction earlier this month. Those blocks are in Brazil's pre-salt area.
State-run oil company Petroleo Brasileiro SA (PBR), or Petrobras, only won stakes in 22 blocks, for which it will have to pay BRL149 million, a relatively minor sum for the country's biggest company by market capitalization. At the Brazil's eight previous auctions, Petrobras had won a great majority of blocks.
Instead of the dominant power in Brazilian oil, newcomer OGX Petroleo e Gas Participacoes SA (OGXP3.BR) conquered rights to most of the high-profile lots on offer in Brazil's Campos and Santos basins. OGX, the oil exploration unit of Brazilian holding EBX, will have to pay BRL1.48 billion for stakes in 18 blocks, representing 70% of all fees to be paid to the National Petroleum Agency, or ANP, from this year's auction.
EBX is the holding company of Brazilian billionaire Eike Batista, and controls his mining, petroleum and energy interests.
"Petrobras was surprised. It probably didn't expect that there would be such fierce competition," said Gilberto Pereira de Souza, an oil analyst at BES Securities in Sao Paulo.
Bids by its competitors were very high, Francisco Nepomuceno, executive director for exploration and production at Petrobras, said during the auction Tuesday. The price of bids by the state-oil company were based solely on what Petrobras thinks they are worth, he added.
Does that mean OGX paid to much for its stakes?
Hard to say, de Souza reckons, as only time will tell whether the company will make any relevant discoveries in its blocks.
"Batista is not a conservative guy. This is a daring bet, but he has the chance of turning OGX into a respectable oil company," de Souza said.
Batista definitely made clear he doesn't want OGX to become a paper tiger.
When setting up the unit earlier this year, he won over former Petrobras heavyweights to its ranks, among them ex-Chief Executive Francisco Gros and ex-exploration Executive Director Paulo Mendonca.
In a conference call late Tuesday, Batista said the price of his bids had been carefully prepared with his team, and that he expects the blocks won will bring the company some 2 billion barrels of oil equivalent in reserves.
OGX may also have spent a large amount on its blocks - which are in shallow waters or on land - as it failed to be classified as a deep-water operator by the ANP, said oil analyst Felipe Cunha at the Rio-based Brascan brokerage.
The company would only be able to enter Brazil's promising deep waters in a consortium with other companies, Cunha said.
OGX also was able to outbid Petrobras in many of the most interesting blocks, as the state-oil company is concentrating on the development of its ultra-deep Tupi mega-field, said Haroldo Lima, the ANP's general director.
Petrobras is indeed saving money to be able to finance the extremely expensive development of its Tupi mega-field, an industry person close to the company told Dow Jones Newswires on the sidelines of the auction.
Earlier this month, Petrobras said its giant Tupi field in the pre-salt area in Brazil's Santos Basin could contain up to 8 billion barrels of oil equivalent in reserves, making it Brazil's largest discovery so far.
But production at the field is expected to be very pricey.
Just a pilot production project estimated to produce an initial 100,000 barrels of oil a day from 2010 or 2011 on will cost Petrobras up to $3 billion, the Estado de S.Paulo newspaper said Monday. Wood McKenzie analyst Matthew Shaw puts the minimum development costs for Tupi over the course of the next 15 years at a massive $50 billion.
"That's an astronomical amount for one company," Shaw said, but added the field could produce up to 1 million barrels a day.
Producing from Tupi or anywhere else in the pre-salt area is very expensive due to the field's extreme depth: oil is found below water more than 2,000 meters deep, then another 5,000 meters beyond the sea bottom, below layers of rocks, sand and salt.
Despite the massive costs, oil majors were excited about the prospects of more discoveries in Brazil's pre-salt area, and likely equally disappointed when the government cut 41 blocks in the area from Tuesday's auction.
That oil majors didn't make bids "could be related to the withdrawal of those blocks with great potential," said Monica Araujo, an oil analyst at the Rio-based Ativa brokerage.
Only small and midsize foreign oil companies participated and won bids in Brazil's auction, such as StatoilHydro ASA (STO), Devon Energy Corp. (DVN) and Anadarko Petroleum Corp. (APC).
The biggest winning bid by foreign companies came from a consortium of StatoilHydro and Anadarko, which bought a block in the Santos Basin for $43 million.
>Copyright (c) 2007 Dow Jones & Company, Inc.
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