Brazil to reclaim sub-salt oil exploration blocks awarded in 2006 auction

The long-expected decision to cancel the winning bids comes after the
government put off final signing and approval of the concessions for
years even after it overturned legal challenges to the 2006 auction
where the rights were sold.

It also underlines the government’s increasing grip over vast new oil
reserves being discovered offshore of Rio de Janeiro and Sao Paulo
states.

Before the auction was halted, oil companies such as Brazil’s
state-controlled Petrobras, Italy’s ENI, Spain’s Repsol, India’s ONGC,
and Norway’s Norsk Hydro had won 10 exploration blocks with the highest
bids.

The winning bids were made only months before Petrobras’s 2007
announcement of the offshore Tupi prospect, then the largest oil
discovery in the Americas in two decades. The Tupi showed that the
blocks from the eighth-round auction the year before might hold far more
oil than many expected before their sale.

The blocks are located in a region now know as the sub-salt, which is
believed to hold more than upward of 50 billion barrels of oil, enough
to provide all needs in the U.S., the world’s largest oil consumer for 7
years or more.

While still undrilled, the concessions sold in 2006 are likely worth
billions of dollars and may have fetched far more at auction if the
government and bidders had know about Tupi.

The government’s decision to take back the blocks did not violate any
contract because leases for the areas were never fully ratified and
signed, meaning no contract existed, Minister Lobao told reporters late
on Wednesday

“Brazil rigorously honours its contracts, but there was no contract
of any kind signed in relation to the eighth round, which the National
Energy Policy Council decided not to carry on further,” Lobao said.

The blocks to be returned to the government are located in the
prolific offshore Santos Basin, home to some of Brazil’s biggest oil
discoveries to date including Tupi, which has been renamed Lula, and
Cernambi. Those two fields alone hold an estimated 8.3 billion barrels
of oil and natural gas equivalent.

Analysts said Brazil’s decision not to grant concessions for the
blocks was expected and was unlikely to have an impact on the investment
risk of entering Brazil’s oil industry.

Legal injunctions are common before Brazilian oil concession rounds.
They often get lifted, sometimes minutes before the auction.

But the court injunction that halted the eighth bidding round did so
between the time winners were declared and the moment the winners were
to sign concession contracts.

The government eventually overturned the injunction but never
completed the auction of the remaining eighth-round blocks or moved on
to sign the contracts for blocks that were sold.

ENI in that round bid more than 300 million Real (187 million dollars
at current exchange rates) to win sole rights to explore and produce in
the Santos Basin’s BM-S-857 block, a record amount at a time when the
potential of the deepwater blocks was less clear.

In late 2007, Petrobras announced the first of a series of massive
deepwater discoveries in the sub-salt region, a deep water area the size
of New York-state that covers most of the Santos and Campos basins near
Rio de Janeiro.

Soon after, the government halted all new auctions of deepwater
fields. In 2010, Congress approved a law ending the existing concession
model and creating a production sharing model for new oil projects in
the sub-salt region.

New auctions cannot begin until lawmakers reach an agreement on how
royalties from that oil production will be distributed among Brazilian
states.