OPINION: Brazil’s plans to sell off production rights to oil deemed “surplus” to the 5 billion barrels at the centre of a 2010 transfer of rights agreement with Petrobras has been described as the biggest offering of its kind ever seen.

This billing is not as exaggerated as it sounds, with billions of barrels of oil available on fields that have already begun producing, but Brazil must be careful not to believe its own hype.

International oil companies have already shown considerable appetite for the pre-salt offerings in recent licensing rounds.

The latest production numbers from the Brazilian regulator show why, with pre-salt production approaching 1.95 million barrels of oil equivalent per day, from just 91 wells.

One of the four fields on offer, Buzios, looks to be bigger than Brazil’s current biggest producer, Lula, where output was averaging 1.149 million boepd in March.

Encouraged by this, the Brazilian government’s handling of the sale reflects a primary concern for raising hard cash — with long-term economics in second place.

The signature bonuses for production rights to the four fields on offer amount to 106.5 billion reais ($271 million).

Of this total, Buzios alone will demand a signature bonus of 68 billion reais and Sepia 23 billion reais, but the minimum share of profit oil reserved to the government is relatively modest at 23.5% and 27.65%, respectively.

Winning bidders will also be expected to compensate state-controlled Petrobras for investments sunk into the Rights Transfer fields, and recently-outlined criteria suggest that research outfit Wood Mackenzie’s estimate of $20 billion is not far off the mark.

The rewards on offer mean companies will not necessarily be put off by high capex costs, and there is even comprehension about the administration’s need to focus on big signature bonuses: with the country struggling to come out of economic recession, investors have come to see the promised pension reform as a pivotal issue.

To get this unpopular reform through Congress, President Jair Bolsonaro has promised to share the rewards with regional governments, but this link between the sale of production rights in the pre-salt and such a political agenda poses risks for Brazil.

The focus on signature bonuses, with up-front outlays, undermines the economics and makes the offering more interesting to companies whose primary interest is in the reserves rather than the returns.

The risk is that the number of consortia participating in the bidding process is reduced, and, with the auction date set for 28 October, potential participants are starting to wonder when the Brazilians will open the data room and worry about the time that will be available for analysis, questions and internal approvals.

Some of them are baffled that Brazil also intends to go ahead with the sixth pre-salt round on 7 November, possibly overestimating the capacity of portfolio managers to win approval for such investments.

With Petrobras very likely to exercise its own preferential bidding rights before a 17 May deadline, there is a risk that the pre-salt offering, attractive as it is, could end up with a dearth of competing consortia.

The Libra-Mero development, successful as it is from a technical viewpoint, is remembered as a failure to the extent that it attracted a single bid from a Petrobras-led consortium.

The surplus sale is probably too big and too attractive for a repeat of this, but there is a danger that Brazil’s focus on the short-term gain will ultimately sell the country short.

(This is an Upstream opinion article.)

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OPINION: Short-term gain may spell pain in Brazil