Brazil Oil Auction Flops as Most Foreign Players Stay Away

Brazil’s largest-ever auction of oil deposits flopped, after state-controlled Petroleo Brasileiro SA scooped up two of the blocks while the remaining two went unsold and majors like Exxon Mobil Corp. decided not to bid. The real tumbled.

Petrobras, as the state-controlled company is also called, together with China’s Cnooc and CNODC submitted the winning bid for the giant Buzios field. Petrobras was also the sole bidder for the Itapu block.

The Brazilian real fell against the dollar as the outcome diminished expectations for how much of the U.S. currency will now flow into the country to develop the offshore oilfields. Petrobras shares also erased earlier gains and slumped more than 5%. Petrobras holds a 90% stake in the winning Buzios group, meaning it will need to spend more than initially anticipated to develop the block, which isn’t in line with the company’s stated plan to deleverage.

The auction was meant to be part of Brazil’s shift away from nationalistic oil policies and shake off some of the toughest years in the country’s history, after a massive corruption probe was followed by a devastating recession in 2015 and 2016. With the economy still struggling to grow, the country was looking to the sale to inject some badly needed cash into public coffers.

One of the reasons why Buzios is so attractive is also why it was so pricey: The field is already producing over 400,000 barrels a day of crude, roughly the same as departing OPEC member Ecuador, with four platforms that have cost Petrobras about $20 billion. While that’s a unique opportunity in the industry, it also means that the winners would have need to compensate the state-run oil producer with some combination of cash, crude and investments over the years.

Buzios represents the largest reserves of discovered crude to be sold since Iraq opened up after the second Gulf War, with wells that are already producing at rates second to none on the planet. Despite the block’s size, Stephen Greenlee, Exxon’s president of exploration, noted in an interview last month that Buzios was “very expensive.”