Interest Lacking at Brazil E&P Auction

Brazil's fourth annual E & P auction got off to a sluggish start on Wednesday compared to the previous year, with only six blocks sold out of the first 17 on offer, according to the ANP. Brazil's National Petroleum Agency is offering 39 offshore and 15 onshore areas, one area more than last year. Since the first round in 1999, Brazil has sold rights for 67 blocks for over $500 million, but this time analysts expect revenues below $100 million.

But the lack of oil discoveries in the past few years, political uncertainty ahead of October's presidential election in Latin America's largest economy and No. 3 crude producer, oil market turmoil and a reduced worldwide pool of bidders due to ownership changes are all affecting demand at the auction, analysts say.

The major surprise of the auction was the lukewarm interest shown by Petrobras, which has so far bought only two blocks in a consortium. "Petrobras' portfolio is full to the brim with oil blocks," said the company's E&P executive manager Carlos de Oliveira. "We are now analyzing every purchase with great prudence." Analysts had expected Petrobras, which bought about half of the total blocks sold in the previous three rounds, alone or in groups, to bid aggressively this time as well.

The successful sale rate of around 30 percent at the auction compares to 64 percent last year. "The auction is not a great success so far, but it is to no extent a failure," said Sebastiao do Rego Barros, head of the state-run National Petroleum Agency, which organized the two-day event. "By international standards, where sales normally don't exceed 20 percent of offer, we are pretty much OK... I am also satisfied that there are newcomers who are buying blocks."

Only 29 bidders have qualified for the round, compared to 42 last year, but the presence of seven newcomers demonstrates that Brazil remains an attractive opportunity, compared to less economically stable countries like Venezuela or Argentina.

BHP Billiton agreed to pay 13.5 million reais ($5 million) for BM-C-24 offshore block, exceeding the minimum bid by 45 times. BHP was the sole bidder on this block. The area lies in deep waters with depths of up to 1,500 meters in the Campos basin, which produces over 80 percent of Brazil's oil. "This is an interesting block as it is close to Roncador and offers certain similarity," said Robert Pascoe, BHP vice president for new ventures, referring to Roncador field, Brazil's last big oil discovery. "We see it is an interesting opportunity."

As analysts had expected, BHP and Newfield Exploration, which had taken part in previous auctions but failed to buy any blocks, joined the competition in a fairly aggressive manner. Newcomer Dover Investment Ltd of Canada bought the rights for the onshore BT-POT-10 area in the Potiguar basin, paying 2.35 million reais, well above the minimum bid of 100,000 reais. It will have to sign an agreement with Petrobras, which had earlier said that its neighboring field extended to the block on offer. Petrobras led two groups that included El Paso Corp., which bought two other Potiguar basin blocks. Not everyone was happy with the quality of the blocks. "We are not bidding because the blocks are not good enough in terms of prospects," said Bjorn Rasmussen, Norsk Hyrdo's director for oil exploration and production, adding that the company was also looking for farming opportunities. "We have long-term plans for Brazil, and maybe next time we will bid in the round," he added. Norsk is a newcomer to Brazil.

Brazil oil officials say newcomers such as Cepsa of Spain and Russia's Lukoil could end up being the auction's dark horses.