Oil is a big business with even bigger money attached. That's why governments that control oil assets are eager to auction them off to the highest bidder in the hopes of getting a major payout.

But Brazil's recent oil block auction didn't go as planned, and that's not good for the state-controlled Petroleo Brasilio (NYSE:PBR), usually abbreviated as Petrobras. The company and its investors were hoping for a large payday from a change in how the Brazilian government managed its oil, coupled with some big bids from oil companies like ExxonMobil (NYSE:XOM)

The Nov. 6 auction, though, was a bust. Here's what investors need to know.

An offshore oil rig lit up at night

The deepwater drilling industry is revving back up after oil's underperformance in the mid-2010s. Image source: Getty Images.

Black gold in South America

We've known for a long time that there was oil in South America: Venezuela was a founding member of OPEC in 1960, and Ecuador first joined in 1973. And until 1995, Petrobras had a monopoly over Brazilian oil production.

In 2007, things changed when the Lula field was discovered in the so-called "pre-salt" offshore province. Lula is believed to be one of the largest oil discoveries of the last 30 years, but upon its discovery, the Brazilian government promptly stopped auctioning off "pre-salt" exploration blocks, essentially keeping the blockbuster find to itself and Petrobras. 

Lula was just the tip of the iceberg. Petrobras ended up discovering a lot more oil in the pre-salt than it was authorized to develop. So in 2016, Brazil's government ended Petrobras' monopoly over the pre-salt, and this year put four major pre-salt blocks up for auction in an event it called the biggest oil auction in history. The country expected to reap as much as $26 billion from the auction as companies like ExxonMobil scrambled to get a piece of the promising pre-salt play. 

At least, that was the idea.

The boom that went bust

Representatives from ExxonMobil were present at the auction, increasing speculation the company would make a play for one of the four blocks up for bidding. But it didn't. And, aside from Petrobras itself, neither did pretty much anyone else.

Two of the four blocks received no bids at all. One received the minimum bid from Petrobras. Buzios, the largest block, which was considered the marquee prize of the auction, also received only one bid (the minimum) from a joint venture between Petrobras and China's CNOOC and CNODC. But Petrobras owns 90% of that venture while the Chinese entities hold just 10%, so the amount of total foreign investment received was minimal.

Some observers blamed the high price for the lack of participation: Companies were not only expected to put up a large portion of their bids upfront -- at least $17.1 billion for the Buzios block alone -- but bidding companies would be required to compensate Petrobras for its prior work exploring the block.

Additionally, in an October interview, a Brazilian government official had revealed a pending rule change to give Petrobras the rights to market any pre-salt barrels of crude that were collected by the government. That wouldn't be an insignificant amount of oil: The minimum amount for any of these blocks was 18.5%. Basically, if the deal between Petrobras and the government went through as described, a significant portion of any third-party crude drilled in the pre-salt would go straight to Petrobras to sell. 

Exxon's wild card

All those restrictions may have seemed particularly onerous to Exxon because it's hit its own South American oil bonanza in next-door Guyana. An Exxon-led consortium (that includes CNOOC and Hess) picked up an offshore block in Guyana in 2008. Thanks to a lack of significant petroleum finds in the country up to that point, ExxonMobil was able to acquire the block on favorable terms.

The risk paid off. That 6.6 million acre Stabroek block has proven to hold massive petroleum reserves: More than 6 billion barrels of oil equivalents have been discovered there to date. In September, Exxon announced its 14th discovery on the block. It has committed $6 billion to develop the block, which is one of the largest oil discoveries of the past decade. 

That's not to say that an energy company can't develop more than one deepwater oil field at the same time, even on the same continent. But with Exxon devoting so many offshore resources to developing its Guyana project -- on comparatively favorable terms -- Brazil's onerous requirements probably looked a lot less appealing. 

What's next for the companies

Brazil will likely attempt to auction the two remaining pre-salt blocks again next year, offering more favorable terms. But there's no guarantee they will receive any bids then, either. Adriano Bastos, the head of BP's Brazil operations, said in an interview that he believes most companies will continue to sit out the pre-salt auctions, even if they are offered on more attractive terms, because of a glut of development opportunities across the globe. 

In the meantime, Petrobras loses out on the perceived benefits of third-party investment. However, it did manage to secure additional pre-salt drilling rights for the minimum bid, so while it's a missed opportunity, especially relative to expectations, it's not going to have a negative impact on the company's current situation. 

ExxonMobil, on the other hand, has struggled with declining production in recent years. The company's willingness to sit this one out should cheer investors, because it says that Exxon isn't willing to pursue additional production at any price, and that it feels confident about its existing production decisions. That's a good sign for potential investors.