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Libra | The Morning After

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Source: Jornal O Globo.

BRASÍLIA – This Monday, President Dilma Rousseff said in  prepared remarks for radio and television, that the auction of the Libra field does not entail the privatization of Brazilian oil, as the opposition claims. In the president’s view, the auction “represents a historical landmark in Brazilian history,” and “its success” will be repeated in future auctions of deep water pre-salt fields. The president made a point of saying that Brazil protects its sovereignty, but that it is open to private investments and respects contracts.

— According to the results of the auction, 85% of revenues produced at Campo de Libra will belong to the Brazilian state and to Petrobras. This is a far cry from privatization. The private companies with which we partner will also benefit, because they will realize significant profits from the deal, compatible with the risk assumed and the investments they will make in Brazil,” the president said.

Business journalist Luis Nassif details criticisms of the project, which weathered 24 petitions for an injunction halting the auction.

To better understand the criticisms of the Libra auction.

The project has been oriented by the perception that the wealth of the pre-salt fields constitute either a risk or an opportunity for Brazil.

The risk is that Brazil will content itself exclusively with oil profits.

The opportunity consists in using the pre-salt to develop Brazilian industry and the competence of Brazilian engineers in the deepwater market. Another opportunity is the generation of funds for areas crucial to citizenship, such as education.

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To obtain these objectives, various mechanisms were created:

1. A system of sharing in which the State will participate directly in the revenue earned from the exploration of the wells.

2. The creation of a separate company, Pré-Sal Petróleo, to oversee the sharing contracts and receive the federal union’s portion, following the Norwegian model.

On which see also

Foreign companies were required to set up Norwegian-based subsidiaries, conform to Norwegian labour and safety regulations, and train Norwegians to ensure that the country was not technically dependent on outsiders to develop their resource. They were also required to use Norwegian subcontractors and local shipyards even if their bids were more expensive.

The same author recounts Norway’s “hard bargaining” over participation in its sovereign North Sea fields.

3. Fixed percentage of local content in the construction of platforms.

4. Operation is exclusive to Petrobras, in order to exercise full access and control over information and production.

5. A legal guarantee that the majority of revenues from the oil fields conceded will be applied in the area of education.

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These points will continue to play a role in oil field auctions. Criticisms of the deal are of another kind.

The market complains that restrictions will drive the big international players away, reducing competition and the size of the bids received. In order to obtain the highest possible bid, all of the original principles would have to be let go of. To remain true to those principles, the quest for larger profits will have be abandoned.

It is, therefore, a question of choice.

The competing bidders -– Petrobras, Shell, Total, CNPC e CNOOC -– formed a single consortium and submitted the minimum bid, offering 41.67% of production to the federal union. The other 40% of the capital belongs to Petrobras. Technically, 81.67% of the oil extracted remains in Brazil.

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Criticisms and interpretations of the Libra auction have tended to be somewhat disjointed. On one hand, it is argued that the preponderance of the Chinese companies signal a new geopolitical posture on the part of Brazil. Wrong! The reasons were entirely commercial.

On the other hand, there is the understanding that the Chinese state, controller of the two Chinese bidders, might simply renege on its contracts with Brazil. Conspiracy on top of conspiracy: The U.S. has already carried out various operations in the Middle East to defend its native oil companies.

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So where is the problem?

Operation will be the exclusive task of Petrobras. Partners will only inject capital. True, there was a problem with Petrobras increasing its debt load to the point where it could not operate alone. But the new company, Pré-Sal Petróleo, can be capitalized and enter the scene as an investor.

This year, the federal union is experiencing some momentary fiscal restrictions. Once these are resolved, the exploration of Libra will be exclusively up to Petrobras.

The contract calls for 35 years of exploration at the field. Inside Petrobras, it is admitted that the reserves could amount to more than the 8 to 12 billion barrels announced.

In the last three elections, Petrobras was the most convincing argument wielded by the Workers Party (PT). So much so that in 2006, presidential candidate Geraldo Alckmin dressed up in T-shirts bearing the logo of state-owned companies in order to deflate rumors that he would privatize these companies.

In 2014, the government will have to find itself another key talking point.