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Brazil Hosts Major Auction for Oil Fields

Brazil Hosts Major Auction for Oil Fields

RIO DE JANEIRO—The world’s largest energy companies lined up Thursday for a major auction of coveted Brazilian oil fields, even as Brazil’s government rolled back some market-friendly policies that would have made its oil industry more competitive.

Bidders offered more than $800 million plus large shares of so-called profit oil to Brazil’s government for the right to explore three blocks in the Campos and Santos basins, thought to hold about 14 billion barrels of oil.

A consortium formed by Exxon Mobil Corp. , Statoil Brasil—a unit of Norway’s Equinor AS A—and Portugal’s Petrogal won the largest block, known as Uirapuru, with a $679.4 million signing bonus plus 75.4% of profit oil, an offer higher than the minimum bid by 240%. Brazil’s state-controlled Petróleo Brasileiro SA, or Petrobras, exercised its right to be the operating partner, with a 30% share of the consortium.

It was the government’s fourth auction for areas in the pre-salt region of southeastern Brazil where as much as 100 billion barrels of crude are believed to be locked under salt layers far beneath the seabed.

The smallest block on sale, known as Itaimbezinho, failed to attract bidders. Still, the final result was within market expectations.

“Competition was very high,” Brazil’s top energy regulator, Decio Oddone, said to reporters after the auction. “The Brazilian society will appropriate 90% of pre-salt proceeds.”

The pre-salt reserves were discovered in 2006, but private companies were kept away and production delayed by rules that required Petrobras to be the operating partner with at least a 30% stake in any consortium in the region.

The government eased those rules last year to allow other companies to work without Petrobras if the state giant declined to participate in a project, although Petrobras still has the option to be the operator in areas it chooses.

The auction comes just days after Brazilian truckers went on strike to protest diesel prices that have soared along with international oil prices. The strike brought commerce to a standstill and forced the government to reinstate price controls for diesel using tax cuts and other subsidies, which it estimated will cost $2.5 billion this year.

The decision prompted the resignation of Petrobras’s market-friendly chief executive, Pedro Parente, who had relied on the market pricing policy of the past two years to improve results and lower debt at the state oil company.

Despite wavering over fuel prices, the government has a history of respecting contracts in the oil industry, leading analysts to believe companies securing blocks in the pre-salt would avoid any potential backpedaling in the future.

Exxon Mobil, which is becoming one of the largest players in pre-salt, noted that its latest winning bid brings to 25 the total blocks it has in offshore Brazil.

“Uirapuru is a uniquely valuable block that represents tremendous opportunity for us,” the company said in a press release. “We look forward to exploring and developing [Brazil’s] world-class resources.”

Some analysts have been warning that high bids for pre-salt blocks pose risks for oil companies.

“High interest for the pre-salt is leading to very risky bets,” said Juliana Miguez of Wood Mackenzie, an energy consulting group. She warned projects could become unprofitable if production doesn’t turn out as expected, “but based on pre-salt estimates, they are feasible.”

The long-term nature of the projects is also making bidders play down near-term concerns, analysts say.

“The exploration cycle can last two governments,” or eight years, said Helder Queiroz Pinto Junior, an economics professor and former oil regulator. “The companies focus on the geological conditions, and these are promising areas.”

Strong competition led Petrobras to increase offers on two oil fields. The new CEO, Ivan Monteiro, said the company is prepared to make higher bids.

“We continue with the premise of increasing the company’s exploratory portfolio,” he said. “We came from two very difficult years.”

Petrobras’s participation is a sign for some that the blocks hold good prospects.

“No one knows the Brazilian coast better than Petrobras,” said Adriano Pires, director of Rio-based think tank Brazilian Infrastructure Center. “Investors recognize that the company…has been very careful in its investment decisions.”

Write to Luciana Magalhães at Luciana.Magalhaes@wsj.com and Paulo Trevisani at paulo.trevisani@wsj.com

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