Shell saves Brazil’s showcase oil block auction by joining consortium

A consortium that includes Brazil’s Petrobras, the British-Dutch holding Shell, French-owned Total and two Chinese companies won Tuesday’s auction for drilling permits at a giant offshore oil block, which experts believe may hold the largest petroleum and gas reserves in the world.

The consortium was the sole bidder in the Brazilian government’s auction after Spanish giant Repsol pulled out of the bidding, and Exxon of the United States and BP of Britain announced that they would not participate.

Shell helped make the auction a success by entering into the consortium after Brazilian government officials feared that the state-run oil company and the two Chinese firms, CNPC and CNOOC, would be the only ones interested in exploiting the so-called Libra underwater oil field located beneath an undersea salt flat off the coast of Rio de Janeiro.

The Brazilian government, which wanted more global participation from well-known oil giants, had expected a massive turnout for the auction – at one point it predicted at least 40 international firms would cast bids – but in the end only about 10 registered for the auction, including Petrobras, with the consortium casting the only bid.

The Libra pre-salt field is the largest petroleum reserve to be discovered to date by Brazil and is located in the Santos Basin, about 140 miles off the coast.

The Brazilian state-owned firm will have 40-percent participation, with Shell and Total getting 20 percent each and CNPC and COOC equally dividing the remaining 20 percent.

Magda Chambriard, director general of the National Petroleum Agency (ANP), said the government hopes to receive some 300 billion reals (close to $140 billion) in royalties, of which 75 percent will be invested in education and 25 percent in public health.

“It was very difficult to imagine a better outcome,” Chambriard said. “These companies are among the top 10 in the world based on their valuation in the energy market. This means billions in profits for our government in the next 30 years.”

According to ANP, the Libra oil field holds between eight billion and 12 billion barrels of oil, making it one of the world's most promising reserves.

Just hours before the auction, Repsol, through its Hispanic-Chinese affiliate, Repsol-Sinopec, announced that it was pulling out of the auction. Last week, Exxon and BP also announced that they would not be participating.

Outside the Rio de Janeiro hotel where the ceremony was held security forces clashed with protestors and oil workers who denounced the auction as a selling-off of national assets. A wide perimeter around the hotel in Rio’s Barra de Tijuca borough had been blocked off, but after the protestors began destroying automobiles and barricades that had been set up, police and army units fired tear gas and rubber bullets to keep the demonstrators at bay.

Despite the protestors’ complaints, the fact is that the Brazilian government will actually get 41.65 percent of the oil that is pumped from the field. This percentage figure was the minimum that was listed in the bid and reportedly made many oil companies apprehensive about competing.

The winners of the bid have to invest some $46 billion to help install between 12 and 18 large platforms and hire at least 90 tankers for support. The contract will last for 35 years but the first well won’t be working until 2019. Experts believe that 10 years after the first wells become active, production will reach its maximum capacity of 1.4 million barrels daily.