MercoPress. South Atlantic News Agency

Brazil to reclaim sub-salt oil exploration blocks awarded in 2006 auction

Energy minister Lobao, “no contracts signed in the eighth round”

Brazil's government will reclaim promising oil exploration blocks won by companies in a bidding round five years ago but never formally leased to the winners, the country's energy minister Edison Lobao said.

The long-expected decision to cancel the winning bids comes after the government put off final signing and approval of the concessions for years even after it overturned legal challenges to the 2006 auction where the rights were sold.

It also underlines the government's increasing grip over vast new oil reserves being discovered offshore of Rio de Janeiro and Sao Paulo states.

Before the auction was halted, oil companies such as Brazil's state-controlled Petrobras, Italy's ENI, Spain's Repsol, India's ONGC, and Norway's Norsk Hydro had won 10 exploration blocks with the highest bids.

The winning bids were made only months before Petrobras's 2007 announcement of the offshore Tupi prospect, then the largest oil discovery in the Americas in two decades. The Tupi showed that the blocks from the eighth-round auction the year before might hold far more oil than many expected before their sale.

The blocks are located in a region now know as the sub-salt, which is believed to hold more than upward of 50 billion barrels of oil, enough to provide all needs in the U.S., the world's largest oil consumer for 7 years or more.

While still undrilled, the concessions sold in 2006 are likely worth billions of dollars and may have fetched far more at auction if the government and bidders had know about Tupi.

The government's decision to take back the blocks did not violate any contract because leases for the areas were never fully ratified and signed, meaning no contract existed, Minister Lobao told reporters late on Wednesday

“Brazil rigorously honours its contracts, but there was no contract of any kind signed in relation to the eighth round, which the National Energy Policy Council decided not to carry on further,” Lobao said.

The blocks to be returned to the government are located in the prolific offshore Santos Basin, home to some of Brazil's biggest oil discoveries to date including Tupi, which has been renamed Lula, and Cernambi. Those two fields alone hold an estimated 8.3 billion barrels of oil and natural gas equivalent.

Analysts said Brazil's decision not to grant concessions for the blocks was expected and was unlikely to have an impact on the investment risk of entering Brazil's oil industry.

Legal injunctions are common before Brazilian oil concession rounds. They often get lifted, sometimes minutes before the auction.

But the court injunction that halted the eighth bidding round did so between the time winners were declared and the moment the winners were to sign concession contracts.

The government eventually overturned the injunction but never completed the auction of the remaining eighth-round blocks or moved on to sign the contracts for blocks that were sold.

ENI in that round bid more than 300 million Real (187 million dollars at current exchange rates) to win sole rights to explore and produce in the Santos Basin's BM-S-857 block, a record amount at a time when the potential of the deepwater blocks was less clear.

In late 2007, Petrobras announced the first of a series of massive deepwater discoveries in the sub-salt region, a deep water area the size of New York-state that covers most of the Santos and Campos basins near Rio de Janeiro.

Soon after, the government halted all new auctions of deepwater fields. In 2010, Congress approved a law ending the existing concession model and creating a production sharing model for new oil projects in the sub-salt region.

New auctions cannot begin until lawmakers reach an agreement on how royalties from that oil production will be distributed among Brazilian states.