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Analysis: Brazil oil bidding tepid

Though state-run Brazilian energy firm Petrobras is a world leader in offshore oil drilling, extracting oil from extreme depths is a difficult and costly endeavor.
by Carmen Gentile
Miami (UPI) Dec 24, 2008
Brazil earned nearly $40 million from the first round of bidding for oil and gas exploration rights, with state-run Petrobras picking up 27 lots, a lackluster opening round of bids sum attributed to concerns about the global economic slowdown and falling oil prices.

The tenth round of annual bidding for blocs saw bids from only two large oil companies: Brazil's Petrobras and Royal Dutch Shell.

Though Brazilian energy officials hailed the auction as a success, revenue generated from the bidding fell far short of last year's auction, which brought in about $900 million. Far fewer lots were sold in 2008, noted experts, who also speculated that Brazil's slowing economy following several years of exceptional growth -- coupled with the sharp decline of oil prices in recent months -- has most international oil firms on hold until at least 2009 and perhaps beyond.

"I guess big time investors are waiting for the offshore blocks, probably next year," said one Brazilian oil expert.

Investors are also likely waiting for Brazil's Congress to pass oil law reform, which is expected to take place some time next year.

The Brazilian government is planning to introduce a legal framework to redefine terms for producers hoping to begin production on the pre-salt offshore discoveries that made international headlines over the last couple of years and could catapult the country into the world's Top 10 oil producers.

Analysts say oil companies hoping to purchase a block of the new discovery should expect higher taxes and other new regulations for new operations in Brazilian waters.

"The government is likely to propose moderate tax increases on existing concessions and adopt production sharing agreement (PSA) contracts for future E&P (exploration and production) on its pre-salt discoveries," read an analysis released this week by the Eurasia Consulting Group.

Though the current global economic downturn, coupled with falling oil prices, has not dissuaded international petroleum firms from jockeying for a share of the new offshore discoveries, the economic climate has delayed the process, read the report authored by Eurasia analysts Erasto Almeida and Christopher Garman.

Meanwhile, the political wrangling over future profits from the billions of barrels of oil thought to lie beneath the ocean off Brazil's shores is also contributing to the legislation's delay.

Since the first discovery of large offshore oil deposits in 2007, Brazilian lawmakers have begun seeking ways to spend what surely will amount to a multibillion-dollar windfall.

However, profits from what some experts say is a 55 billion-barrel reserve off the Brazilian coast are not guaranteed, considering that investment in the deepwater drilling is expected to surpass $100 billion.

Brazilian President Luiz Inacio Lula da Silva, a longtime champion of the left whose monetary policy has been somewhat conservative during his first six years in office, said the country's oil profits should be spent revamping Brazil's educational system, particularly for the country's vast poor populace.

A former union leader, Lula said earlier this year that Brazil's recent oil fortunes would help it wipe out endemic poverty once and for all, a bold claim considering the South American country has one of the world's largest economic divides been the haves and have-nots.

Lula warned that the money must not be spent on "silly things," a direct reference to the recent frenzy of discussion among lawmakers in Brasilia on how to spend Brazil's future oil fortunes. Among the recently proposed expenditures is a fleet of nuclear submarines.

With full-scale production years away, talk of costly warships and the pricy revamping of an antiquated educational system is premature, analysts warn.

"All of the findings so far are probable. … They aren't proven yet," Jorge Pinon, energy fellow at the Center for Hemispheric Policy at the University of Miami, told United Press International.

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