Initial blockbuster bids at Brazil's two-day licensing round surprised delegates at the auction, in part because the 27 blocks hold huge geological risks. That, coupled with the country's nascent regulatory structure, was expected to make investors wary.

But the government had sweetened its tax terms in last-minute horse-trading with prospective bidders, and that apparently persuaded companies to take a leap of faith into a country that holds South America's biggest oil reserves after Venezuela.

The first foreign companies to explore Brazil's prolific offshore basins will include Italy's Agip, a unit of ENI Spa, and two major US-based oil concerns--Texaco Inc and its rival Exxon Corp.

Petrobras, Brazil'sstate-controlled oil company, also made a surprisingly strong appearance. It reclaimed rights to four blocks that the industry regulator, National Petroleum Agency (ANP), took away when Petrobras was stripped of a 45-year monopoly.

In one $10 million bid, Petrobras teamed with two US-based companies--Kerr McGee Corp and Amerada Hess Corp--for rights to a block in the Santos basin where Hess already has a joint exploration project with Petrobras.

"We believe there's huge potential here for the oil industry, "Rex Gaisford, an Amerada Hess executive vice-president, told reporters at the event, held in Rio de Janeiro. "We have chosen as a company to make Brazil a major area of development because we believe in Brazil and the changes they are making to open up."

Agip emerged as the star bidder the first day with a $75million bid for the offshore BM-S-4 Block in the Santos basin, located about 150 kilometres off the Atlantic coast near industrial centre of Sao Paolo.

"It's going really well," mining andenergy minister Rudolfo Tourinho told Reuters, "much better than we expected."

Three onshore blocks and a relatively unknown offshore blockreceived no bids, but the bids on most of the other eight blocks were unexpectedly large. Industry sources and the government had anticipated the two-day auction would net a total of just $10 million.

David Zylbersztajn, chief of ANP, which organised the auction, said Wednesday's bidding would prove even more competitive. He said he expected offers from some of the 29 qualified companies that did not participate on the first day when more of the appealing offshore blocks come under the hammer.

In the run-up to the auctions, the ANP had negotiated with the 38 prospective bidders and managed to get last-minute government reprieve from import duties and other indirect taxes. The government also made other concessions.

Petrobras joined Agip and Argentina's YPF in a $3.4 million winning offer for the BM-C-4 block in the sought-after offshore Campos basin.

Texaco stoodas sole bidder on the BM-C-5 offshore Campos block with a $3.4 million bid, but was left far behind Exxon with a $10.8 million offer for the BM-ES-1 deepwater block in the Espiritu Santo basin.

Texaco came back later in the day with a decisive $16 million winning bid for Santos basin BM-S-2.

Agip's $75 million bid--by far the biggest of the day--topped offers by two competitors--Britain's BG Plc, with a $11 million bid, and a consortium of Kerr McGee and Amerada Hess, with an offer of $5 million.

Some analysts had predicted that bid would be much lower, withinternational oil exploration budgets slashed because of last year's oil price slump.

In the event, the lure of Brazil's massive market and theenormous size of the blocks -- at an average of 4,500 square kilometres, they are equivalent to 225 blocks in the Gulf of Mexico -- proved overpowering, analysts said.