Petrobras and the Pre-Salt Problem

Oil refineries

Source: http://www.flickr.com/photos/37467370@N08/

The Brazilian “pre-salt” oil field Libra started with high expectations. Those expectations finished nose-diving October 21, when the rights to develop the field were auctioned off. Petróleo Brasileiro S.A. (NYSE: PBR), commonly referred to as Petrobras, was the sole bidder during the contest, winning with the minimum price. Petrobras is a state owned company and operates in twenty-five countries. Through the auction, Petrobras took 40 percent of the field.

The Libra pre-salt field held incredible potential for investors. Ahead of the auction, the BBC gave Libra’s specifications, and its prospects for investment. The field encompasses 579 square miles, and could contain 12 billion barrels of oil. ”Pre-salt” is a reference to the layer in the earth where the oil lies.

The potential ultimately failed to translate to investment, or international intrigue, and only eleven nations entered bids. Analysts claim this is because of the heavy hand the Brazilian government has in the development of the field as part of the contract. The terms stipulated that Petrobras was to have a 30 percent stake, and play critical roles in the field’s operations. The Globe and Mail says that Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVXstayed away due to the direct state involvement.

Reuters has Carlos Sampaio, a Brazilian legislator, saying that since there was “no contest” involved in the auction of the field,  ”the government failed.” Where auction is eliciting some surprise is over the partnership created it created. Petrobras won the auction, but it is not the only company that will be involved with the field. Taking a 20 percent claim each are Royal Dutch Shell Plc and France’s Total SA. The remaining 20 percent is held equally by China’s CNOOC Ltd. (NYSE: CEO) and China National Petroleum Corp.

The Libra field also fell victim inevitable march of time. Brazil made major pre-salt field discoveries in 2007. Between then and the 2013 auction, the U.S. shale gas industry picked up. U.S. oil giants, like Exxon, shifted their attention away from pre-salt to fracking. In September of 2012, XTO Energy President Jack Williams waxed poetic about the opportunities shale presented at a conference in Philadelphia. Williams tied the success of natural gas to American innovation and the Founding Fathers. XTO Energy is a subsidiary of Exxon.

In that interim period, shale gas also provided the chance to invest abroad. Chevron entered a deal with the Romanian government in 2010, leasing land to develop shale gas operations according to the Guardian. Chevron has recently had to pull out of the site in Pungesti due to protests over the energy policy.

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