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* Production-sharing auction to be 1st under 2010 law
* Giant Libra area seen producing up to 12 bln barrels
* Auction moved up 1 month to meet president's schedule
By Jeb Blount
RIO DE JANEIRO, May 23 (Reuters) - Brazil plans to sell theright to explore and develop its largest-ever oil discovery inOctober, auctioning an offshore petroleum prospect that isexpected to produce about 12 billion barrels of oil over 35years.
The sale of the Libra prospect, which Brazil on Thursdaysaid would be held a month earlier than expected, will be thefirst under new "production-sharing" rules that tighten statecontrol and raise government participation in a Bangladesh-sizedoffshore area near Rio de Janeiro.
Known as the Subsalt Polygon, the area is home to severalgiant discoveries, including Libra, as well as more than 80percent of Brazil's current oil output. The name refers to Libraand other giant strikes where oil is trapped in rock under asalt layer.
Much of the oil in the region, though, is trapped inreservoirs above the salt band.
Brazil's oil agency, the ANP, discovered Libra in May 2010.With certification agency Veritas, the ANP estimates Libra holds26 billion to 42 billion barrels of oil in place. Of that,production could recover 8 billion to 12 billion barrels, or anamount equivalent to three to five months of world oil demand.
"In my 30 years in the oil business, I've never seen someoneauction off something of this magnitude," Magda Chambriard,director-general, of the ANP told reporters. "This is a big,major prospect."
The auction was moved up from November to conform withBrazilian President Dilma Rousseff's schedule, Chambriard said.Unlike previous auctions, the sale will be held in Brasilia, thecapital, rather than Rio de Janeiro, the center of Brazil's oilindustry.
"Something of this size clearly requires the presence of thepresident," Chambriard said. "This is a very significant area.
According to Denis Palluat, head of the Brazilian operationsof France's Total SA, Libra is an "enormous area" that offersalmost no exploration risk. Its sale will attract interest fromoil companies around the world, he said.
NEW AUCTION RULES
The announcement comes on the heels of a sale of higher-riskfrontier exploration areas last week, Brazil's first oil-rightssale in five years.
The auction sold 142 areas to 30 companies from 12countries. It raised $1.4 billion in cash and promises to investat least $3.4 billion in exploration, easing concern thatgrowing government intervention in the oil industry would curbthe appetite of foreign and domestic oil companies andinvestors.
Total picked up some of the most expensive and high-riskareas at last week's auction.
That auction was held under Brazil's longstanding concessionsystem, which still applies to all future sales in areas outsideof the Subsalt Polygon. Under the concession system, winners ownthe rights to all output in exchange for the payment of aroyalty, and in the case of unexpectedly large discoveries, anadditional "windfall" payment on the excess.
In the Subsalt Polygon, winners will be those companies thatoffer the government the largest share of future oil output tosell on its own account. This "profit oil" will only be paid tothe government after the winning bidder or group has paid offthe initial costs of exploration and development.
Additionally, state-controlled oil company PetroleoBrasileiro SA, or Petrobras, will have to take aminimum 30 percent stake - as well as pay 30 percent of allinvestment - in any winning bid group.
'A GOOD START'
Petrobras will be the only company licensed as operator ofnew Subsalt Polygon areas, meaning it will have control of mostexploration and development decisions. Other partners will beprimarily financial investors.
"The great challenge for the government will be makingproduction sharing as attractive as the concession model," saidJoão Carlos de Luca, head of Brazil's Petroleum Institute, thecountry's main industry organization. "It's a good start."
The industry had also expected the government offer moreareas in the Subsalt Polygon, he said.
If Petrobras wants a bigger stake it will have to bid for itlike any other company, the ANP's Chambriard said. When therules were passed in 2010, analysts said the new system wouldprimarily be attractive to large state-owned oil companies moreinterested in long-term supply than in developing the prospect.
Because the government is more interested in maximizing itsshare of future oil output than winning a large up-frontpayment, the auction will have a fixed entry fee and biddingwill focus on the amount of oil companies are willing to giveBrazil's government, Chambriard said.
MORE AUCTIONS EXPECTED
The size of the potential new fields in the Subsalt Polygonmake it unlikely that the government would sell areas in itsborders more than once every two years, Chambriard said.
The Subsalt Polygon may contain as much as 100 billionbarrels of oil, according to the Brazilian Petroleum Instituteof Rio de Janeiro-State University.
A separate auction for natural gas prospects, both shale andconventional, was pushed back until November so the subsaltauction could be moved up, Energy Minister Edison Lobão saidThursday.
The government hopes to hold auctions for oil and gasprospects outside the Subsalt Polygon on an annual basis,returning to a schedule that was in effect from 1999 to 2008.Auctions were halted for five years as the government draftednew rules to boost its control of giant new offshore reserves inthe Subsalt Polygon.
