Brazil will on Wednesday begin reversing what industry officials say was a costly and ultimately disastrous decision a decade ago: setting aside billions of barrels from the Western Hemisphere's largest oil discovery in 30 years for its state-run oil firm at a time when deep-pocketed foreign companies were clamoring to invest.
Brazil removed key acreage from a 2007 auction that could have yielded $100 billion in signing bonuses plus hundreds of billions more in spending commitments when the price of oil was near record highs, according to several former executives at Western oil companies.
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Now, Brazil may generate just a fraction of what it could have as it looks to exploit its oil potential and revive its economy.
"We are trying to put the country back on track," Energy Minister Fernando Coelho told an oil conference in Houston earlier this year.
Wednesday's auction is the first of nine bidding rounds planned through 2019 for areas that could hold roughly 10 billion barrels of recoverable oil, or enough to supply the U.S. for almost a year and a half.
Included in upcoming auctions are areas that Brazil had originally intended to lease out in 2007, shortly after Petróleo Brasileiro SA, or Petrobras, discovered huge reservoirs of crude in an ultra-deep layer known as the sub-salt, off the southeast coast.
At the time, the U.S. shale boom was still a dream, experts were worried that global production might peak and oil prices were en route to an all-time high. The size and timing of the find appeared so fortuitous, then-President Luiz Inácio Lula da Silva said God must be Brazilian.
Foreign oil companies were desperate for new reserves. "A lot of people were very excited about it," recalled Shafe Alexander, BP's country manager in Brazil.
But days before the auction, Mr. da Silva yanked 41 exploration blocks that were believed to contain sub-salt oil, after being convinced by Petrobras' former head of exploration and production that it would be a "crime against the fatherland" to open the reserves to other oil companies, according to a former official.
A spokesman for Mr. da Silva defended the former president's decision. "Any country would re-evaluate the situation of an auction when presented with new information about the areas," the spokesman said.
Brazil's oil output today is less than half what industry officials say it should be.
And Petrobras, which produces the vast majority of Brazil's oil, has been hobbled by years of mismanagement and corruption that have forced it to slash jobs and production targets. Saddled with the largest pile of debt in the global oil industry, Petrobras plans to invest only $15 billion a year over the next half-decade, less than the cost of servicing its loans and a third of 2013 levels.
The impact here in Brazil's oil capital has been stark, with high unemployment, rising crime and draconian budget cuts by the cash-strapped government.
"People thought Rio de Janeiro would turn into something like Houston," said Adriano Pires, a longtime energy consultant based here. "Instead it became Luanda."
Given Petrobras' problems, Brazilian policy makers say the only solution is foreign capital. In the past year, they have relaxed restrictions on private investment in the sub-salt and eased requirements that oil companies source equipment and machinery in Brazil, which had driven up costs and limited interest from the private sector.
But Brazil faces a very different market from 2007.
Crude prices have fallen to around $55 a barrel from a peak of nearly $150 in 2008. The shale boom allowed the U.S. to practically double its output and presents a quicker, cheaper alternative to deep water ventures like Brazil's, where a single well can cost $100 million to develop.
Rather than peak production, majors now worry about a peak in demand as consumers shift to more-abundant natural gas and governments promote renewable energies. Forecasters now repeat the phrase "lower for longer" to summarize the outlook for oil prices.
And competition for investment dollars is heating up. The National Petroleum Agency, or ANP, says 2017 will see roughly 40 auctions world-wide. Regional neighbor Mexico, whose deep water prospects sit next to existing equipment and infrastructure on the U.S. side of the Gulf of Mexico, began opening its oil industry to foreign operators in 2012.
Working in Brazil's favor are the huge size of its oil reservoirs. In the sub-salt, the average well produces 30,000 barrels a day and can keep pumping for years or even decades. By comparison, the best wells in New Mexico and the Permian Basin of Texas, the U.S.'s largest oil producer, churn out about 2,000 barrels a day and begin to peter out after just a few weeks.
As a result, the ANP estimates the nine scheduled bidding rounds will generate $80 billion in investments, while Mr. Coelho expects companies to shell out up to $2.7 billion in signing bonuses.
Wednesday's auction doesn't include known sub-salt reservoirs, though energy officials say some of the offshore blocks may contain sub-salt oil that hasn't been discovered. Nevertheless, it has drawn interest from 32 oil companies, including many of the world's biggest: Russia's Rosneft, China's Cnooc, as well as Western firms such as BP, Total and Repsol.
A pair of sub-salt auctions scheduled for Oct. 27 has drawn interest from a total of 17 companies.
"It shows we are doing now, 10 years later, what we should have done 10 years ago," Décio Oddone, head of the ANP, the country's energy regulator, said in an interview.
in Houston contributed to this article.
Write to Paul Kiernan at email@example.com
(END) Dow Jones Newswires
September 26, 2017 05:44 ET (09:44 GMT)