ANALYSIS-Huge Brazil oil sale could undercut long-term bonanza
RIO DE JANEIRO, Oct 16 (Reuters) - Brazil's government sees the planned Monday sale of Libra, an oil discovery billed as the biggest offshore oilfield ever sold, as a crowning achievement of an energy plan designed to end poverty and help the country join the developed world.
Yet despite the excitement, some warn that the auction, the first under a three-year-old legal framework that expands state control over Brazil's most prolific oil region, will discourage investment and limit the long-term benefits of oil development.
Libra's sheer size, and the high cost of extracting oil there, threaten to overwhelm Petroleo Brasileiro SA or Petrobras , the state-run oil company that the government has mandated take the lead in developing the field.
With Petrobras already laden with debt and strapped for cash, Libra may force the company to abandon or delay the exploitation of more-promising assets elsewhere in Brazil, crimping its profit for years to come.
The government's bid to maximize its take from Libra also has scared off some of the world's largest oil companies, all active participants in previous auctions, at a time when energy discoveries elsewhere and other problems have dimmed the euphoria that once surrounded Brazil's oil sector.
Add all that up, and Libra looks like less than a bonanza.
"I'm convinced this will be the first and the last oil sale under the new model as it's structured today," said Christopher Garman, Emerging Markets director of the Eurasia Group, a New York-based political risk consultancy.
"If not, there will be consequences," Garman said in an interview from his Washington office. "There's a lot of oil out there, but this probably isn't the best way for the government to sell it."
With Brazil's decade-long commodities boom over, growth sluggish, inflation high, and new U.S. shale oil and gas production raising questions about the sustainability of high long-term oil prices, Libra is less attractive than two to three years ago, he added.
What is on sale, though, is potentially huge. Libra holds 8 billion to 12 billion barrels of recoverable oil, according to both Brazil's oil regulator, the ANP, and Dallas-based, oil-reserve certification company Degolyer & MacNaughton (D&G).
If the projection holds up, Libra could nearly double Brazil's oil reserves or have enough oil to supply the world's crude demand for as much as 19 weeks. At peak output, Libra may pump 2.5 million barrels per day, more than double Brazil's current output and nearly as much as major exporters Mexico and Venezuela.
Libra, Brazil's largest-ever discovery, is the latest in a series of "subsalt" finds beginning in 2007 that struck oil southeast of Rio de Janeiro, trapped deep below the seabed by a layer of salt.
SIZE IS EVERYTHING
Brazilian President Dilma Rousseff expects Libra to earn the government $400 billion over 30 years and do more than make Brazil richer. By paying for improved services such as education and health care, she says, Libra will also reduce Brazil's big, longstanding gap between rich and poor.
For critics, though, Libra's size is the problem. It will cost tens of billions of dollars to develop, $7 billion of it up front. By law, Petrobras must lead development as operator and pay at least 30 percent of the total cost no matter who wins.
Petrobras is already struggling to pay for a $237 billion five-year investment plan, the world's largest corporate spending program. Government-ordered fuel subsidies have lost it $18 billion and counting. To raise cash, Petrobras is selling most of its overseas assets and the cash crunch has put projects from frontier fields to refineries on hold.
One of those assets is off the coast of the northeastern state of Sergipe, where Reuters reported last month that Petrobras and its Indian partner IBV Brasil SA found more than a billion barrels of oil.
Closer to shore, easier to develop and containing higher-quality oil than Libra, the Sergipe discovery could spur development in one of Brazil's poorest regions, said Cleveland Jones, a geologist with the Brazil Petroleum Institute at Rio de Janeiro-State University, in Rio de Janeiro.
"The most attractive offshore play in Brazil right now isn't in the subsalt with Libra, it's in Sergipe way up the coast," Jones said. "Because of Libra, Sergipe will probably have to wait, and that's not good for Petrobras, Sergipe or Brazil"
Meanwhile, Petrobras' older fields are declining and new fields are behind schedule, trimming revenue and boosting debt.
Moody's Investors' Service downgraded Petrobras' debt on Oct. 3 and the outlook is negative. While the government said it will finance Petrobras itself if needed, that would defeat the purpose of selling the area in the first place.
"Petrobras shouldn't need to be the exclusive operator with a minimum stake," said Delcidio Amaral, a Workers' Party Senator and Rousseff ally. "Libra should go to the highest bidder. If terms are attractive, there should be plenty of bidders."
That is another problem, though - a lack of bidders.
Only 11 companies paid the 2.05 million real ($940,367) fee to qualify for the auction, a quarter of the "more than 40" expected by ANP Chief Magda Chambriard. Giants such as Exxon-Mobil, BP Plc, BG Group Plc and Chevron Corp stayed away.
Instead, state-owned companies, such as CNOOC from China dominate. Spain's Repsol SA and Portugal's Galp Energia SGPS SA are in, but they have already sold part of their Brazil units to China's Sinopec.
And while majors such as France's Total SA and Royal Dutch Shell Plc paid to get in, there is a good chance that many of the companies that signed up will not make bids, Eurasia's Garman said.
"They either doubt the size of the play, or don't think they can make money," said Wagner Freire, a Rio de Janeiro oil geologist, consultant and former senior Petrobras executive. "The Chinese may bid big, but their interest is more strategic than commercial. For China, the only thing worse than expensive oil is no oil at all."
Meanwhile, confidence in Brazilian oil estimates has been shaken by the rapid collapse of independent oil company OGX , part of Eike Batista's financially troubled EBX Group. Shares plunged more than 90 percent in the last year and the company's debt trades at 8 cents on the dollar, a level suggesting imminent default.
The collapse started after rosy oil reserve and output projections failed to come true. Some of those projections were backed by resource reports by D&G, the same certification agency that prepared the government's Libra estimate. D&G's estimate is also based on the drilling of only one well.
The rules themselves have also reduced investor confidence and come as Rousseff and her Workers' Party face trouble selling other assets such as roads and airports. The government has a growing reputation for a mistrust of business and a dislike of profit. A lack of investment has crimped growth.
Unlike previous auctions, Libra is a production-sharing contract. The winner will be the group that gives Brazil the biggest cut of "profit oil" to sell on its own account. Profit oil is oil produced after paying initial investment costs.
The mininum bid is 41.65 percent. While Brazil has said it expects 75 percent or more, it has also set up a new state-owned oil company to sell its share of the oil and have a direct say, and limited veto, over how and when Libra will be developed.
($1 2.18 Brazilian reais)
(Reporting by Jeb Blount; Editing by Brian Winter and Marguerita Choy)