RIO DE JANEIRO — Brazil’s government had high hopes that a huge auction held Wednesday to award offshore oil drilling rights would cement the country’s status as an emerging giant in the sector, capable of attracting the industry’s heavy hitters.
Those hopes were unfounded.
Only Brazil’s state-run oil company, Petrobras, and a couple of Chinese firms submitted bids for an auction that the Brazilian government had billed as the largest oil auction in history.
Most of the 14 companies eligible to participate stayed away. Two of the four fields on offer got no bids.
Petrobras was the dominant bidder for the other two, winning one entirely and taking a 90 percent stake in the other, the largest field on the block, known as Buzios. Two Chinese firms, Cnooc Limited and the China National Oil and Gas Exploration and Development Company, shared the remaining 10 percent stake in Buzios.
The disappointing outcome suggests Brazil overestimated the price of admission that oil companies were willing to pay to get a foothold in vast reserves that lie under the ocean floor off its shores.
Brazil had hoped to reap more than $26 billion in signing bonuses for the right to explore so-called pre-salt reserves, which are buried under sand and a thick layer of salt. The windfall would have been a boon to debt-saddled Petrobras and a handful of states that are in the red.
But the bonuses amounted to about $17.4 billion, which analysts regarded as a sign that Brazil relied on wishful thinking when it set the price companies had to pay upfront if their bids were accepted.
“Basically, they threw a party with cheap beer but charged a very expensive ticket for people to get in,” said Edmar de Almeida, an economist at the Federal University in Rio de Janeiro who specializes in energy. “Then, no one showed up.”
The Brazilian government had hailed Wednesday’s auction as a historic milestone that would help a sputtering economy start growing at a healthy rate. During a recent visit to Beijing, President Jair Bolsonaro of Brazil told his counterpart Xi Jinping that he hoped China would participate in “the biggest auction there’s ever been.”
Roberto Castello Branco, the chief executive of Petrobras, looked disappointed as he told reporters that the company had expected competition. “There wasn’t,” he said.
Rodrigo Maia, the speaker of the lower house of Congress, who was instrumental in creating the law that established the rules for this auction, also expressed disappointment.
“This outcome is negative, no doubt about it,” he told reporters. “Our expectation was that the private sector would have more interest.”
The law established a system to distribute oil revenue among the federal government, states and municipalities, several of which are in the red.
Brazil discovered large offshore oil reserves in 2006 during the government of President Luiz Inácio Lula da Silva, a leftist who invested heavily in social programs for the poor.
Getting the fields to start producing took years as politicians argued over how to build up Brazil’s oil sector and how to spend its proceeds.
Brazil’s National Petroleum Agency estimated in 2017 that the delays in exploration cost the country more than $300 billion in government revenue and investment.
That meant Brazil largely missed some of the most profitable years for the oil industry, when oil was trading at $100 per barrel. In the lead-up to Wednesday’s auction, Brazil made other missteps, analysts said, including establishing an auction system that forced investors to pay an unusually large amount of upfront.
That formula reflected the debt-saddled government’s urgency to get an injection of money within months. Significant revenue from the profit-sharing agreements the government hoped to strike with oil companies would take years to materialize.
Wednesday’s auction notwithstanding, Brazil is on track to become the world’s fourth-largest oil producer, with an expected output of five million barrels per day.
Brazil has struggled in recent years to attract foreign investors, who are put off by the mounds of red tape, high taxes, political instability and corruption.
But Fernanda Delgado, a research coordinator at Fundação Getúlio Vargas university who studies the oil industry, said Brazil is nonetheless an attractive market to investors at a time when American sanctions are crippling two other oil giants, Iran and Venezuela.
“Despite Brazil’s difficulties in doing business and its political issues, it’s still the safest area in terms of oil investments,” she said.
The post Brazil Had High Hopes for Its Big Oil Auction. They Went Bust. appeared first on New York Times.