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Brazil to Auction Off Massive Offshore Oil Field

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Earlier this week, the Brazilian government announced that it will be auctioning off a massive oil field that is 140 miles off the shore of Rio de Janeiro.

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With tensions and violence escalating in Syria, crude oil has once again come into the spotlight, as investors weigh the potential of a US-led intervention on the commodity. And though Syria is not a major oil producer, its close geographic proximity to key sea routes and pipelines has investors understandably concerned over the potential of violence spilling into other countries in the region where roughly one-third of the world's crude is produced. Though no major decision has been made by the US government, or other major world leaders, support for a US strike on Syria continues to build, which will undeniably affect the crude market.

This week, however, crude oil traders learned of a new potential opportunity in the space after Brazil's government confirmed that it will sell one of its massive oil fields in late October of this year.

Can Libra's Potential Be Tapped?

On Tuesday, Brazil's government announced it will hold an auction to sell a massive offshore oil field this fall. The site, named Libra, is located roughly 140 miles off the coast of Rio de Janeiro and is estimated to hold roughly 8 billion to 12 billion barrels of recoverable crude oil, making it the largest deepwater oil field ever discovered if the commodity is actually found to be recoverable.

Libra, however, is considered to be a pre-salt oil deposit, meaning that the oil reserves themselves are buried beneath 6,600 feet of water and a further 16,500 feet of sand, rocks, and a thick layer of salt. Brazil's oil regulator, the ANP, estimates that it will take an investment of approximately $174 billion to develop the field over the 35-year length of the contact.

These estimates, though quite high, could potentially become even greater since pre-salt oil exploration has proven to be a costly business. Petrobras (NYSE:PBR) also owns several major pre-salt offshore oil fields, and in its 2011-2015 business plan, the company stated it will invest $224.7 billion to develop the fields, which is a $33 billion increase from the previous year's plan.

A Costly Risk or a Valuable Investment?

In addition to the massive costs that will be associated with developing Libra, offshore drilling in these types of fields are also extremely dangerous. Many analysts believe several companies may place joint bids for the field in an effort to mitigate risk. The winning bidder, however, will only have four years to confirm Libra's actual size and to determine whether or not the field is commercially viable. If the field is deemed viable, production will still take several years.

For Brazil, the development of Libra could add as much as 1 million barrels of oil per day, increasing Brazil's current oil production to about 2 million barrels per day.

Though the potential profits of this kind of investment will likely not be realized for several years -- and then only if the field can be developed -- investors should certainly pay close attention to October's auction.

Follow us on Twitter @CommodityHQ

Editor's note: This article by Daniela Pylypczak was originally published on Commodity HQ.
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