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ExxonMobil & 13 Others to Partake in Huge Brazil Oil Auction

Zacks Equity Research

Brazil is set to conduct an auction of drilling rights for offshore prospects this November. The sale of the leases is expected to entitle Brazil to a signing bonus of around 106 billion Reais ($25 billion), making it the biggest so far. Deepwater blocks Atapu, Bouzios, Itapu, and Sepia — located in the pre-salt zone offshore Brazil — will be offered for sale on Nov 6, 2019.

Companies in the Auction

A total of 14 companies have registered for the lease sale, including global energy giants like Exxon Mobil Corporation XOM, Chevron Corporation CVX, Royal Dutch Shell plc RDS.A and others. This auction in Brazil is expected to offer more oil than all the Mexican proven reserves, per Bloomberg. As such, Petroleo Brasileiro S.A. or Petrobras PBR, BP plc BP, TOTAL S.A. TOT, CNOOC, Equinor ASA and others have registered as prospective operators. Colombian energy company Ecopetrol S.A. and two others have enrolled as potential non-operators.

Significance of the Auction

Interest of global energy goliaths in the auction reflects the importance of the blocks that are up for sale. Notably, in 2010, Petrobras had received the rights to pump out 5 billion barrels of oil from the area, wherein it found more oil than primarily expected. Additional oil reserves in the region are expected to have an upper limit of 15 billion barrels and the government is expected to auction off this surplus oil.

Markedly, oil block auctions usually involve the risk of not finding any hydrocarbon at all, which is not the case here. The lease sale to be held in November incorporates a huge discovered oil reserve and state-run Petrobras is currently active in the region, churning significant amount of crude. This makes the auction a lucrative opportunity for energy companies with upstream operations.

Following several regulatory changes and contract reviews in the past few years, the government reached a milestone last week. With legal uncertainties out of the way, Brazil is ready to auction off the surplus crude. The National Petroleum Agency of Brazil has changed the auction rules in order to boost competition and earn more from the event. Auctions like this are important for the government as the national debt of the country is currently 79.8% of its Gross Domestic Product.

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