The auction for seemingly lucrative offshore Brazilian oil fields was supposed to attract big bids from international oil companies, granting the government a substantial financial boost. The Brazilian real dropped by 2.2% on the currency markets on hearing the news. 

Of the four blocks up for bidding only two attracted bids at all. Petrobras joined with Chinese oil firms CNOOC and CNODC to win the giant Buzios field, while Petrobras, Brazil’s state-run oil company, was the sole bidder for the Itapu block. Worse still, the bids that did come in were the minimum amount allowed. 

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Claims by the government that the auction raised $17.2bn and valued fields were added to the Petrobras portfolio have fallen flat. 

In upfront fees, the Brazilian government wanted to achieve $26.2bn but fell well short, hampering efforts to reduce the strain debt is exerting on the wider economy.

Many oil majors said they did not bid at all due to the strict terms imposed on operators and because the costs of buying access to the oil fields were considered excessively high. 

Had the auction price been lower and reflected current conditions in the oil industry, it is fair to say oil majors would have taken more of an interest. 

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During October the chief executive of Total, Patrick Pouyanne, announced the French company would not participate. He blamed large signing fees and said the company required more direct control over its operations. In failing to bid, it is reasonable to assume other oil majors believed likewise.

Fees for winning bidders should have been lower 

Instead of demanding such high revenues from the auction the authorities should have lowered their fees for winning bidders. This would have reflected the current conditions of the oil industry. 

The Brazilian government wants to become the world’s fifth-largest oil-producing nation, up from ninth at present, but this means pumping much more oil at a time when oil prices are depressed because of production outpacing demand. 

Attracting leading international players under such circumstances was always going to be tough. 

Even though global oil stockpiles are coming down there are serious concerns the wrong target is being used and the problem is significantly worse than first believed. Consequently, international oil majors are reluctant to invest in fields unless the price of doing so is attractive on a long-term basis. 

Terms of deal deterred international interest

Under the existing terms, winning bidders would have been required to negotiate with Petrobras over compensation for the investments made by the state-owned company into the fields. 

Adding costs to already high signing fees was a further deterrence for oil companies seeking better value from the oil and gas extraction sector.