Brazil heralded this week's auction of a huge oil field as a vindication of its state-dominant approach to its oil riches, but some industry experts say the country must modify its rules before new fields are sold for Brazil to achieve its aim of becoming an oil powerhouse.
The government hailed the auction of the massive Libra oil field on Monday as a success after four foreign oil giants agreed to join forces with state-owned Petróleo Brasileiro to undertake the development.
The companies are expected to invest around $200 billion over the 35-year lifetime of the concession.
The new model is "a great conquest for Brazil," said President Dilma Rousseff, saying in a televised address Monday night, saying that hundreds of billions of dollars of proceeds will be channeled into health and education in the coming years.
Brazil is vying to become a top oil producer following the discovery in 2007 of enormous "pre-salt fields" off the country's southeast coast, which sit under a deep layer of salt. It was the biggest offshore discovery since Mexico's Cantarell field in the late 1970s.
But detractors point out that it took the country five years to hold the first auction related to the discovery, and will take years more to develop. Meanwhile, Brazilian production has slipped to 1.9 million barrels a day from a peak of 2.11 million in 2011.
A big reason for the delay, industry experts say, was a new regulatory system that the government designed to give it about 80% of the proceeds from oil—one of the highest percentages in the world.
Enlarge Image
The rules also required Petróleo Brasileiro, or Petrobras, to have at least a 30% stake in every project and operate the fields. Those requirements, many say, are straining the company's capacities and potentially limiting the pace of development.
Experts also say the new rules that require private firms to buy roughly half of their supplies locally in an effort to spur Brazilian industry will drive up costs.
Further, the bidders— Royal Dutch Shell RDSB.LN +0.02% PLC, Total SA, Cnooc Ltd. and China National Petroleum Corp.—will provide a record signing bonus of about $7 billion.
The new legislation was put to the test for the first time on Monday, when the government sold the rights to operate Libra, a field with estimated reserves of between 8 billion and 12 billion barrels of oil, with a potential daily output of about 1.4 million barrels a day. And many people laud the results.
"I think the result was very well-balanced," said Joaquim Levy, head of Bradesco Asset Management, which has some $130 billion in assets under management.
The government says the delay in writing new rules and holding an auction will produce better results for the economy. By requiring oil companies to invest locally, it hopes to spur local development. Even under the old rules, there have been some successes: the nation's naval construction industry is now undergoing an oil-related boom after it was decimated in the 1990s.
Yet that comes at a cost. After the government opened up the oil industry to the private-sector in 1998, there was a rush of investments that led to a series of discoveries, culminating with the pre-salt fields. But there followed a five-year period with no new auctions, slowing the pace of discoveries and sapping the industry of momentum.
Only 11 firms took part in the auction compared with 71 firms in the previous auction under the old rules, which still apply for fields other than the pre-salt discoveries.
Part of the decline in numbers is because the fields are in deep waters, making it a reach for many smaller companies. But in a telling sign, two of the world's most experienced deep- CVX -0.42% —passed on the bidding.
Chevron declined to comment. An Exxon spokesman said the company will evaluate potential future opportunities in Brazil.
The dilemma for the Rousseff administration is clear. Politically, it is important that the government be seen as keeping as much of the oil wealth in Brazil as possible. That is especially true since the mass protests that erupted in June, with millions of Brazilians demanding a more responsive government. Hundreds of protesters clashed with police on Monday before the auction.
Yet at the same time, the government wants greater oil investment to help anemic economic growth.
Growth was a meager 0.9% last year, and is expected to come in at a still disappointing 2.5% this year. Allowing companies other than Petrobras more scope to invest in oil fields could accelerate spending.
"Neither a complete success nor failure, the auction demonstrates the continuing constraints faced by Brasilia," risk firm Stratfor wrote in a research note to clients.
Haroldo Lima, a former head of the government regulator who helped draw up the new legislation, said the government could speed up development of the oil riches by giving Petrobras the choice of which fields it wanted to develop rather than forcing it to operate all the fields, allowing other firms to develop the rest. That possibility had been discussed when the legislation was being developed, but was discarded, he said.
"If the government removed the obligation to be operator from Petrobras I think it would be a big advance," said João Carlos de Luca, who is president of the Brazilian Petroleum Institute, which represents Brazilian oil companies, and chief executive of Barra Energia, a small Brazilian oil company.
Some analysts said the auction's relative success in attracting the likes of Shell means Brazil is unlikely to make changes to regulatory scheme any time soon. "We won't hear about [any changes] until 2015," said Paula Kovarsky, an oil and gas analyst at Itaú BBA in São Paulo. "That's unfortunate for the industry."
Brazil's aggressive terms highlight a tension among the world's biggest publicly traded oil companies: They must find more fuel to replenish their reserves, but not at the expense of profits.
When Brazil's vast oil fields were first discovered some six years ago, there was a shrinking pool of investment options for large oil companies. Today, however, with large natural gas reserves discovered in the U.S. and more options available in Africa and possibly Mexico, those companies have plenty of choice.
In the case of Libra, Shell and Total may have opted for a relatively straightforward increase in their oil reserves, to offset production elsewhere, analysts said. Shell, which has about half of its production in lower-margin natural gas, "desperately needs oil" to help boost its profit margins, says Fadel Gheit, an analyst at Oppenheimer & Co.
Mr. Gheit says the Shell's trouble over the last two years exploring for oil in the arctic increased the pressure to buy into an already-discovered area, even at a high price. With development costs rising across the industry, "the question is how high is it going to be above budget," he said.
Total said the Brazil investment would "ensure our ability to grow our output post-2020."
Analysts say Exxon is still feeling the effects its 2010 entry into Iraq, in which it agreed to a modest return to develop the giant West Qurna field. Chief Executive Rex Tillerson said this year that the deal was partly to blame for the drop in Exxon's profit margins, vowing to do better.
Operating in Brazil also presents legal risks. Brazilian prosecutors filed two lawsuits against Chevron seeking more than $10 billion each, and criminally charged 11 of the company's employees, after two underwater oil spills in 2011 and 2012. The criminal charges were dismissed earlier this year. The company settled the lawsuits for $42 million.
