Transfer of Rights auction. Photo: Petrobras

After three years of anticipation, the Brazilian government’s hopes to reduce its public debt went down the drain on Wednesday, as what was billed as the “world’s biggest oil auction” turned out to be a near no-show. Of the BRL 106.5 billion in revenue expected to be raised, the sale of only two of the four pre-salt oil fields on offer generated roughly BRL 70 billion, which must be shared with state-owned oil company Petrobras, as well as Brazil’s states and municipalities, leaving little left for the federal government.

</p> <p>The results could have been even worse if it hadn&#8217;t been for Petrobras. As the Brazilian state-owned oil company is facing an uphill battle to reduce its corporate debt, it wasn’t expected to have a large role in the auction. However, it surprisingly ended the auction with a 90 percent share in the Búzios oil field—the most valuable of all on offer—and the full control of the Itapu field. The remaining two received no bids.&nbsp;</p> <p>The only foreign companies to join the party were Chinese firms CNODC and CNOOC, both weighing in with the minimum share of 5 percent each, alongside Petrobras, on the Búzios field. Before Wednesday&#8217;s flop, there were signs that something was wrong. Last week, <a href="https://g1.globo.com/economia/noticia/2019/10/30/bp-e-total-decidem-nao-participar-do-leilao-de-excedentes-da-cessao-onerosa.ghtml">British giant BP, French multinational Total</a> and Spanish-Chinese joint venture <a href="https://g1.globo.com/economia/noticia/2019/10/30/repsol-sinopec-rejeita-termos-de-mega-leilao-do-pre-sal.ghtml">Repsol Sinopec</a> all decided not to participate. In fact, of the 14 companies that applied, <a href="https://economia.uol.com.br/noticias/redacao/2019/11/06/leilao-pre-sal-cessao-onerosa-petrobras.htm">only seven showed up for the event.</a>&nbsp;</p> <p>In spite of that, the president of the National Petroleum Agency (ANP), Décio Oddone, considered the auction a success. In his view, the lack of foreign participation “wasn’t a surprise, given the size of the auction not only in terms of the initial bid but also with huge investments foreseen,” he told news agency EPBR. However, he noted that the fact that companies would still have to negotiate sharing agreements and additional payments with Petrobras was a possible reason why foreigners kept away from the auction, <a href="https://www.dci.com.br/economia/oddone-diz-que-acordo-posterior-com-petrobras-trouxe-mais-risco-para-o-leil-o-1.839512">per newspaper DCI</a>.&nbsp;</p> <p>The considerable values in demand were justified by the Brazilian government as a fair price to pay, considering the investments already made to prove the existence of the oil reserves, which significantly reduced the initial cost for companies.&nbsp;</p> <h2>Oil revenue: what’s left for the government?</h2> <p>In spite of the flop, the auction still managed to become the largest ever in Brazil’s history, with a total revenue of BRL 69.96 billion. It was already established that Petrobras would be compensated by the government to the tune of BRL 34.6 billion for its initial investments—now BRL 34.1 billion, considering the interest rate as of September 30. Of the remaining BRL 35.86 billion, 15 percent will go to Brazil&#8217;s municipalities, 15 percent will go to state governments and 3 percent will go to Rio de Janeiro alone, as the main producing state. This leaves the federal government with roughly BRL 24 billion.&nbsp;</p> <p>That is way below the BRL 48.1 billion the federal government had expected. However, it shall bring some relief nonetheless, according to Economy Ministry special secretary Waldery Rodrigues. Quoted by EPBR, he said the amount is bigger than the BRL 22.4 billion currently frozen in the federal budget and will help “release money for the most important ministries.”&nbsp;</p> <p>He also added the government was already considering a more conservative result; the lowest-end estimate prior to the auction was BRL 52.5 billion.</p> <p>The auction also happens only a day after Economy Minister Paulo Guedes released a <a href="https://brazilian.report/power/2019/11/06/paulo-guedes-wants-completely-reform-brazilian-state/">plan to fully revamp the Brazilian federation</a>, increasing fiscal checks and balances for states and municipalities. The counteroffer of his austerity measures was precisely the transfer of BRL 400 billion to states and municipalities over 15 years based on the royalties of the pre-salt oil and gas extraction.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/882319"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <hr class="wp-block-separator"/> <h2>Regrouping</h2> <p>In a press conference, the Minister of Mines and Energy Bento Albuquerque noted that the fields which weren’t sold this time may be reevaluated and auctioned again next year under different rules&nbsp;</p> <p>“We will analyze the best regime, to see what’s best for the federal government and make it viable. I’m not sure about the current regime. (&#8230;) We’ll make it following compliance and legal safety measures,” he said, <a href="https://extra.globo.com/noticias/economia/areas-nao-arrematadas-no-leilao-poderao-ser-oferecidas-em-2020-sob-outro-regime-rv1-1-24065326.html">quoted by Extra newspaper</a>.</p> <p>Wednesday&#8217;s pre-salt areas were offered under the production sharing regime, in which the winning company is the one that offers the Brazilian state the largest share of oil and natural gas—that is, the largest portion of surplus oil after royalties and the company’s own costs—<a href="http://rodadas.anp.gov.br/en/partilha-producao-2">as defined by ANP</a>.&nbsp;</p> <h2>From underdog to pretty in pink</h2> <p>Petrobras shares&#8217; behavior on Wednesday was a good way to measure investors’ reaction to the company’s role in the auction. Propelled by the expectation of gains <a href="https://g1.globo.com/economia/noticia/2019/11/04/cessao-onerosa-o-que-e-e-o-que-esta-em-jogo-no-megaleilao-do-pre-sal.ghtml">of up to BRL 120 billion</a> considering the government and foreign companies compensations to the Brazilian company, its shares were 3 percent up when the auction started. But, when the first envelopes were opened and it won the rights for the Búzios field, Petrobras shares sank nearly 5 percent on B3.&nbsp;</p> <p>According to Eduardo Guimarães, a stocks analyst at Levante Investimentos, the initial reaction may be explained by dashed expectations, but he believes Petrobras’ purchases were wise. “It got the best field (Búzios) for the minimum bid. The company is focusing on where it has the largest return on capital. It makes more sense to sell refineries and invest where it gets the best return, in pre-salt oil”, he told <strong>The Brazilian Report</strong>.&nbsp;</p> <hr class="wp-block-separator"/> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2019/11/petrobras-shares.jpeg" alt="petrobras shares" class="wp-image-27241" srcset="https://brazilian.report/wp-content/uploads/2019/11/petrobras-shares.jpeg 634w, https://brazilian.report/wp-content/uploads/2019/11/petrobras-shares-300x191.jpeg 300w, https://brazilian.report/wp-content/uploads/2019/11/petrobras-shares-610x389.jpeg 610w" sizes="(max-width: 634px) 100vw, 634px" /><figcaption>A wild day for Brazil&#8217;s state-owned oil company</figcaption></figure> <hr class="wp-block-separator"/> <p>In the afternoon, <a href="https://www.investidorpetrobras.com.br/enu/15995/Fato-Relevante-Resultado-Leilao-Excedente-Ingles%20final.pdf">Petrobras released a statement</a> justifying its acquisition, saying it “is consistent with the strategy to focus on investments in which we are the natural owner.” Búzios is the largest discovered deepwater field in the world and already produced around 100 million barrels of oil and gas equivalent (BOE) since extraction began in April 2018 and Petrobras sees it as a “world-class asset with significant reserves, low lifting cost and economically resilient to a low oil price scenario”</p> <p>For Itapu, Petrobras considered the full acquisition of the area as “extremely attractive economically, given the low additional investments and conditions to purchase, corresponding to a signing bonus of BRL 1.766 billion and oil profit at the lower level of 18.15 percent.”</p> <p>The company also reassured investors on the most pressing issue: net debt. The company said the BRL 63.14 billion purchase of the Búzios and Itapu fields will be “supported by current cash position and cash generation from 2019’s fourth quarter” and reaffirmed it will continue to pursue its deleveraging target for 2020, aiming to reduce it from the current level of 2.4 times the company’s EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to 1.5. It intends to use the proceeds from the payment of the deferral from the <a href="https://brazilian.report/money/2018/12/26/petrobras-transfer-rights-deal/">Transfer of Rights</a> surplus to contribute to maintaining its debt reduction path. It seems to have helped, as Petrobras preferred shares reduced their fall to 0.7% at B3 by the middle of the afternoon.&nbsp;</p> <p>For Mr. Guimarães, the most likely path will be by selling assets.“I don’t believe Petrobras will be able to pay dividends soon unless it sells its share in Braskem and some refineries. Selling only minor assets won’t help pay dividends.”

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MoneyNov 06, 2019

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BY Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.