Brazil and the future of oil in the Americas
Attention in the run-up to Brazil’s inaugural pre-salt auction has been strikingly dissimilar to the tectonic-shifting announcements of the pre-salt several years ago, Arthur writes. Yet with a mix of emerging market and European players, the list of bidders is perhaps a reflection of the nature of exploration and production in the Americas today.
As bidders registered for the first oil rights auction in Brazil’s pre-salt last Wednesday, the reaction was overwhelmingly pessimistic. Headlines focused on lack of oil majors such as ExxonMobil and BP, and the small number of bidders; 11 as opposed to some 40 expected by the Brazilian government.Skip to next paragraph
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Indeed, attention in the run-up to Brazil’s inaugural pre-salt auction has been strikingly dissimilar to the tectonic-shifting announcements of the pre-salt several years ago. Yet with a mix of emerging market and European players, the list of bidders is perhaps a reflection of the nature of exploration and production in the Americas today.
Next month’s auction of blocks in the Libra field is not only the first pre-salt bid round but also the first auction under the revamped hydrocarbons law, which gives greater control over pre-salt development to state-owned Petrobras. The outcome could have far-reaching implications for the future of Brazil’s efforts to exploit the pre-salt reserves.
The registered bidders include three Chinese firms (CNOOC, CNPC and Sinopec in partnership with Repsol); India’s ONGV Videsh, Japan’s Mitsui & Co., Malaysia’s Petronas, and Colombia’s Ecopetrol, as well as familiar European outfits Shell, Petrogal, and Total. Nothing to sneeze at to be sure, and certainly no reason to give up on pre-salt’s promise.
The Libra prospect holds an estimated 8 – 12 billion barrels of oil, and Brazil’s hydrocarbons regulator, ANP, reckons the field could produce up to 1 million barrels per day at its peak. The country currently produces about 2 million barrels per day nationally, placing it just behind Venezuela as South America’s second largest crude oil producer. (Related article: Where's the Next Play for the Giants of Oil?)
But a recent report by consulting firm Wood MacKenzie cautioned potential bidders, citing the sheer expense of the development as well as the contract terms as reasons for concern. The firm estimated that to fully explore, appraise, and develop the Libra field would cost over $80 billion. Upfront costs were also cited as a possible deterrent, specifically the $6.5 billion signature bonus. Finally, the report argued that the 35 year contract may be insufficient to develop the technically complex reserves.
Other commentators cited competition from the United States, and the shale revolution, as a factor in investors’ decision making. With the output from US unconventional fields on a seemingly endless rise and oil prices trending down a bit, the exploitation of complex pre-salt reserves becomes more expensive, and the investment more risky.
The emphasis on deciphering the pre-salt risk begged the critical question: would companies agree with the Brazilian government’s position that the geology has been decoded. Earlier dry holes in the pre-salt serve as a reminder that it is not exactly a winning lottery ticket. Rather it is, after all, the oil and gas business.