Brazil: In Auction Without Competition, Brazilian State Gets 67% Of Libra

Last Updated: 28 October 2013
Article by Felsberg E Associados's Mining Department

A consortium of two Chinese state companies (Cnooc e CNPC), two European oil majors (Royal Dutch Shell e Total) and Petrobras made the sole bid for the Libra field, winning the first auction in the pre-salt area of the Santos basin. The consortium offered the lowest oil profit share for the government, at 41.65%, the floor in the auction's rules. Still, officials considered the result a "success," despite the absence of competition and premium.

The auction lasted about 25 minutes, including a presentation of the rules and 3 minutes for the bids' delivery. The sole envelope was delivered 45 seconds short from the deadline, as the consortium wanted to wait for a possible second competitor, since Repsol Sinopec, Malaysia's Petronas and India's ONGC could launch a surprise bid.

The companies of the consortium had already been revealed by industry executives interviewed by Valor in the last few days. Anglo-Dutch oil major Shell and France's Total each bought 20%, while Cnooc and CNPC opted for 10% each, confirming the expected: nobody was willing to compete without Petrobras as a partner.

The Brazilian state company, the sole operator with a 30% mandated stake in any consortium, purchased an additional 10%, silencing the most nationalistic critics who protested against a "privatization of the pre-salt to the Chinese." Monday's auction offered 70% of the field.

In the end, Petrobras was left with 40% of Libra, demanding a R$6 billion signing bonus, the payment for the right to explore the area. The bonus was set in the auction at R$15 billion. Shell and Total will pay R$3 billion each while the Chinese share is R$1.5 billion from each state company. The contract will be signed in Brasília in 30 days.

A projection considering 30 years of production shows that Shell, Total, CNPC and Cnooc will receive close to 18% of the output and about 15% as profit over the investment, Luiz Quintans, a lawyer specialized in oil law, calculates. Considering the Petrobras stake as government oil income, the financial and oil gain for the Union will be around 67%.

The small Chinese participation – Repsol Sinopec decided to stay in the sidelines – showed the level of concern with the risks involved in developing oil and gas production of the giant field auctioned Monday. But officials positively evaluated the results.

"We couldn't imagine a bigger success," said Magda Chambriard, general director of the National Petroleum Agency (ANP).

The auction took place in a hotel in Rio de Janeiro's west, amid tension fueled by nearby demonstrations, leading the government to take novel measures like asking the executives to stay in the hotel during the weekend and surrounding the area with security forces.

Initially seen as excessive, the measures were proven correct. Demonstrators concentrated since early at 100 meters from the hotel and there were confrontations with Army and National Security Force troops protecting the proceedings.

Justice Minister José Eduardo Cardozo, present at the auction, praised the planning effort. The operation involved 1,100 security agents, including Federal Police and Navy. The demonstrations against the auction, as well as the 24 lawsuits trying to block it, argued that Libra is the pre-salt's "crown jewel." ANP studies point to between 8 billion and 12 billion barrels of recoverable oil. The minister of Mines and Energy, Edison Lobão, added it could have 120 billion cubic meters of gas.

Representatives from the winning consortium celebrated the result. "The goal was building the strongest possible consortium in terms of expertise. Libra is a big project and needs expertise from all over the world," said Denis de Besset, general director of Total in Brazil. Shell's president in Brazil, André Araujo, agreed. "We're very satisfied with the result of the consortium because it involves Petrobras, a leading company in Brazil for deepwater exploration."

Mr. Araújo also highlighted as positive the 10% higher Petrobras stake than the minimum participation mandated by law. He said it reinforces the company's interest in the project. Petrobras's CEO Graça Foster and upstream director José Formigli were at the auction but made no statements, as well as the representatives from the Chinese companies.

Petrobras issued a statement to the market celebrating the result: "Petrobras affirms its confidence in the success of developing Libra, supported by the expertise developed since 2006 with the discovery and implementation of pre-salt projects, which today have total production above 330,000 barrels of oil a day, and believes Libra is one of the most promising accumulations in the pre-salt area."

After the auction, Mr. Lobão and Ms. Chambriard were questioned about the lack of competition and of premium in the oil profit, or the share of oil destined to the government. They denied any government frustration. Mr. Lobão underscored the R$15 billion bonus payment and 41.6% oil profit as positives.

"The law doesn't demand absurdities, so much so that there was a consortium comprised of several companies that know what they're doing and understood that [Libra] is a good opportunity for them," he said, ruling out new pre-salt auctions in 2014. But he hinted there could be a 13th round of areas outside the pre-salt.

Ms. Chambriard noted the technical and financial capabilities of the consortium and said she would be concerned if the highest bid was made by less qualified companies. She said Libra guaranteed one of the largest government shares in oil fields in the world. She said Brasília will have over 80% of Libra, considering the signing bonus, royalties, oil profit percentages, income tax, social contributions and the Social Fund percentage to the union. "What happened was an absolute success in which Libra will result in around R$1 trillion to the Brazilian government throughout 30 years of production," Ms. Chambriard said.

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