Brazil oil block goes to Shell, Total, China firms

RIO DE JANEIRO (AP) — A consortium including Shell, Total, two Chinese firms and Brazil's state-run petroleum company Petrobras won the right to develop an offshore field that could hold up to 12 billion barrels of oil, Brazil's government said Monday.

It was the first auction held under a new legal framework meant to give Petrobras and Brazil more control over its finds in recent years, oil buried deep under water and a formidable layer of salt, reserves that could hold 100 billion barrels.

The decision managed to discourage both critics, who say the rules will scare off potential investors, as well as leftist protesters who tried to stop the sale.

About 300 demonstrators calling for nationalization of Brazil's oil industry clashed with police outside the hotel where the bidding took place before the auction, with security officials firing tear gas and rubber bullets.

The protest was originally called by striking oil workers, whose union has long opposed any foreign involvement in Brazil's petroleum production.

Protesters overturned the car of one local TV channel and set it aflame. Among the demonstrators were the masked, black-clad "Black Bloc" anarchists who have a growing role in Brazil's steady drumbeat of protests.

Pro-business critics contend that the law, which mandates that Petrobras be the sole operator of the finds and maintain a minimum 30 percent stake in oil blocks, will scare off big private firms. They also say it will slow investment in and development of the oil — as much as 100 billion barrels of it — that Brazil is counting on to catapult the country to developed-nation status and fund ambitious education and health programs.

Government officials are already locked in arguments about how to share royalties that haven't surfaced, and the Navy is buying submarines to protect the fields.

There were only 11 participants in the auction and the winning bid by the consortium was the only one made, according to the government. Petrobras holds a 40 percent stake in that consortium, Shell and Total each account for 20 percent and Chinese firms CNOOC and CNPC have 10 percent each.

Adriano Pires, one of Brazil's top energy analysts, called the new rules "very interventionist" and said the auction was a disappointment even before it began because of the lack of interest. He chalked that up to the new rules that will make production expensive.

"We are talking about non-conventional oil located 6,000 to 7,000 meters deep," he said. "The $500 billion that will have to be invested over the next 12 to 15 years made companies conclude that the rate of return made participating in the auction unattractive."

The technological hurdles to reaching the riches are intensely challenging, even for Petrobras, considered a world leader in offshore development.

The deep-water reservoirs lie some 185 miles (300 kilometers) offshore in the Atlantic, more than a mile (kilometer) below the ocean's surface and under another 2.5 miles (4 kilometers) of earth and corrosive salt. The salt beds can break loose and shear off piping, making it among the toughest substances to drill.

With a slowing economy and delays in producing that offshore oil, some say the Brazilian government will loosen rules to make them more business friendly during the next auction in two to three years.

The New York-based Eurasia Group said in a research note that Petrobras' "growing operational and financial constraints" along with government pressure to stoke a lagging national economy means changes are expected at the next auction.

"Allowing international oil companies to develop the pre-salt side by side with Petrobras would kill two birds with one stone," Eurasia Group wrote. "It would lead to a quicker pace of production in the pre-salt with more investments, and provide needed relief to Petrobras."

It added that "it isn't lost on government officials that the shale gas and tight oil technological revolution in North America has reduced Brazil's leverage to attract capital."