Key Test for Brazil as it Readies Major Oil Auction

After almost six years of waiting, Brazil's energy giant Petrobras is readying a major auction this month of its deep-water "pre-salt" oil reserves, despite fears of excessive state meddling.

The October 21 Libra oil field auction in Rio de Janeiro -- which experts say could put 12 billion barrels of oil up for grabs -- has been highly anticipated as the start of the sell-off of the total deep-water reserves.

The Libra field is part of a vast discovery of reserves announced in 2007. The area is spread over 149,000 square kilometers (57,530 square miles) in the Atlantic Ocean -- the biggest find in two decades.

According to official estimates, the total reserves -- buried beneath several kilometers of ocean, bedrock and hot salt beds -- could hold more than 100 billion barrels of high-quality recoverable crude and could turn Brazil into one of the world's top exporters.

Last May, the government oversaw auctions for some 300 non pre-salt blocs, most of them located in hitherto unexplored regions off the country's north and northeast.

That attracted unprecedented interest from around the world and another auction of 240 land-based blocs of gas will be held next month.

But experts say the Libra sale -- the first of the pre-salt reserves -- is the big prize.

Betting big on Libra

The field in the country's southeast, some 230 kilometers (140 miles) off the coast of Rio, could yield a million barrels of crude per day within five years, experts say.

Currently, Brazil produces two million barrels a day. It is looking to boost that output to five million bpd by 2020, thanks in large part to the pre-salt reserves.

Eleven oil firms will take part in the auction, but Petrobras will have sole operating rights and is guaranteed at least a 30 percent concessionary stake under the terms of a 2010 law.

The law, passed during the tenure of then president Luiz Inacio Lula da Silva, aims to channel a large chunk of Brazil's oil revenue into education and health.

"The scenario has changed with pre-salt and the 2010 law for the sector. But we are optimistic. Today, Brazil has what is most important for the sector -- oil and gas," Ricardo Savini, head of Deloitte/Brazil's Oil and Gas Center of Excellence, told AFP.

"There will be three auctions this year, exploration activity is resuming," added Savini.

Petrobras' investment plans through 2016 come in at $236 billion -- 60 percent of that earmarked for oil and gas exploration as well production.

U.S. players stay away

Despite the massive international interest in the Libra sale, U.S. players will be conspicuously sitting it out.

"The absence of U.S. giants is due to excessive state intervention" in the sector, said Adriano Pires of Brazil's Infrastructure Center.

Pires added that the creation of a new state firm to handle the pre-salt reserves, PPSA, "keeps private investors away."

"During those six years without auctions, foreign investors went to look elsewhere," he noted.

Countering the doubters, Alexandre Szklo, energy planning expert from Rio Federal University (COPPE/UFRJ), says: "Libra is a very promising field and the low geological risk means there is a larger than usual state intervention."

He believes Libra "will act as a test case" for the future of pre-salt exploration in Brazil.

While the Americans are staying on the sidelines, European firms are in on the act, including Anglo-Dutch giant Shell and France's Total. So is China National Petroleum Corporation (CNPC).

For Szklo, investing in a changing energy environment can take many forms, with investment criteria not just based on profit margins.

"Private American capital has been diversifying its portfolio: Esso, for example, is making large-scale acquisitions of shale gas producers in the United States and Canada," he said.

And "Chinese companies are now going to start having a major role -- these companies are looking above all for energy security, before profitability."

Brazil's National Petroleum Agency (ANP) meanwhile said it was satisfied with the 11 firms that will join the Libra auction.

Seven of them are indeed in the top 11 global industry players by market capitalization: CNPC, ranked 2nd; Shell (3rd); Colombia's Ecopetrol (6th); Petrobras (7th); Total (8th); China National Offshore Oil Corporation (CNOOC) (ranked 10th), and Repsol/Sinopec (Sinopec - 11th), according to the ANP.

Even so, Friday saw credit rating agency Moody's downgrade Petrobras' long-term debt rating from A3 to Baa1.

The company carries net debt of $36 billion and Moody's indicated it foresaw leverage hitting peak levels beyond those of its industry peers through end 2014.