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The Real Reason Big Oil Bailed On Brazil

This year’s final oil auction in Brazil ended in a flop on Thursday, with Big Oil staying away from bidding and only one of five blocks awarded, suggesting that the massive upfront payments and complex royalty schemes have kept the world’s largest oil companies from participating.

International oil majors didn’t bid in the 6th Production Sharing Bidding Round for promising areas in the pre-salt layer today, with only Brazilian state-held oil firm Petrobras offering a minimum bid for the Aram block, which it won in a consortium with China National Oil and Gas Exploration and Development Company (CNODC).  

The underwhelming results of Brazil’s final oil auction for this year came a day after another near-flop in the biggest oil auction ever held in Brazil, in which Big Oil didn’t bid and Petrobras picked up two of the four blocks on offer.

In October and November, Brazil held three oil auctions for different areas under different regimes in its offshore basins.

The first auction, held in October, was a relative success, attracting major international oil companies, with Big Oil scooping up exploration blocks. Total, Shell, BP, ExxonMobil, Chevron, Petrobras, Petronas, and Repsol all won oil exploration blocks in the concession bid round.

But the next two auctions showed that despite the massive resources on offer, Big Oil is still cautious on splashing upfront payments to scoop up blocks, regardless of how prolific they promise to be.

After winning an exploration license in the auction in October, Total confirmed that it would not participate in the Transfer-of-Rights (TOR) Surplus Round, because the competitive tender is only offering non-operated interests. ExxonMobil has also hinted that it would be staying away from the TOR round, because it’s too expensive.

Related: Dreams Of An Aramco IPO Are Fading Fast

The final auction on Thursday was underwhelming compared to analyst expectations. After the TOR auction on Wednesday, Wood Mackenzie said that it expects the majors to be more aggressive in Thursday’s auction. They weren’t. Petrobras got one block, while the other four received no bids.

Commenting on the TOR flop on Wednesday, Luiz Hayum with Wood Mackenzie’s Latin America upstream research team said:

“The high upfront payments hindered the round results.”

By Tsvetana Paraskova for Oilprice.com

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