Industry interest in Brazilian E&D waning

June 24, 2002
The bloom seems to be off the rose for Brazilian exploration and development.

By an OGJ correspondent

Rio de Janeiro, June 24–The bloom seems to be off the rose for Brazil's exploration and development scene.

That can be seen in the diminished interest shown by oil and gas companies in the fourth round of licensing for oil and gas exploration last week conducted by Brazil's National Petroleum Agency (ANP). The auction netted only a fifth of the amount bid in the previous sale.

Industry officials cited a shift in focus to onshore licenses from the previous three auctions' emphasis on offshore–and particularly deepwater–acreage. Another factor, they say, is the paucity of significant discoveries on acreage awarded in the previous rounds. And industry executives point to a burdensome fiscal regime as another deterrent to E&D investment in Brazil.

Still, it is early in the game for Brazilian E&D after the demonopolization of the sector; the upstream monopoly of state oil company Petroleo Brasileiro SA effectively ended in 1997, and the first license auction occurred only as recently as 1999. A massive amount of seismic data off Brazil has been garnered in the interim, and an industry downturn also intervened, curbing E&D outlays worldwide.

Sale results
Companies that won licenses for oil and gas exploration at the fourth auction, on June 19-20, will invest $1 billion in the next 9 years to fulfill the minimum exploratory program as established in contracts, said Sebastiao de Rego Barros, ANP general director.

The 88 exploration blocks from the four annual auctions will require in all $4 billion in minimum required investments, added the ANP official.

ANP netted 92.3 million real ($1 = 2.76 real) in the 2-day auction. Of the 54 blocks on offer, 21 were sold. During the third round, in June 2001, ANP raised 524.94 million real and sold 34 of the 56 blocks on offer. Twenty-nine companies qualified for the fourth round.

Analysts say that the fact that the ANP switched the focus, by offering a higher proportion of onshore blocks than in previous rounds, might be the reason for less interest on the part of major companies in the sale and thus less revenues for the ANP.

The "filet mignon" of oil and gas resource prospectivity in Brazil is off Rio de Janeiro state, said Wagner Victer, former Rio de Janeiro state energy secretary.

Of the 18 basins covered by the Round 4 offering, 8 had onshore blocks, covering 15 of the 54 on offer. "This attracted a different type of investor than the deepwater blocks, which require the financial muscle of the oil majors," pointed out Ivan Simoes Filho, ANP's general manager of licensing rounds.

Domestic firms acquired 39% of the exploration areas and 53.8% of the blocks set aside for development.

The highest premium, 7.474%, was paid by Maersk Olie & Gas AS of Denmark. The Danish company paid 15.148 million real for the BM-S-29 shallow-water block.

The other highlight of the round was the debut of a number of foreign companies, notably independents: Australia's BHP Billiton Ltd., Oman's Partex Oil &Gas (Holdings) Corp., and US-based Devon Energy Corp. (Oklahoma City) and Newfield Exploration Co. (Houston).

Petrobras dominance
Once again Petrobras acquired the largest number of licenses in a Brazilian sale: 8 blocks, 4 in partnerships.

Petrobras (operator) entered into a consortium with Unocal Corp. and El Paso EnergyCorp. for Block BM-POT-13 shallow water in the Potiguar basin.

In a combine with El Paso, Petrobras (operator) acquired Block BM-POT-11, also in the Potiguar basin, and Block BT-ES-15, in Espirito Santo state. The latter block has a 277 sq km onshore area and has had 37 exploratory wells drilled and 2D and 3D seismic work undertaken. Petrobras also won the exploration license 100% for BT-POT-8 in the Potiguar basin.

Petrobras joined with Partex for the BM-SEAL-9 block in the Sergipe-Alagoas basin. The BM-SEAL-9 block is located in shallow waters and has had 17 exploration wells drilled, plus 2D and 3D seismic work.

Another license bought by Petrobras was for the BT-SOL-1 block in the Solimoes basin, in Amazonas state. The area of the block is 7,663 sq km. Three exploratory wells were drilled, and 2D and 3D seismic work undertaken.

A partnership was formed between Petrobras and Norway's Statoil ASA in securing Block BM-J-3, in the Jequitinhona basin. The block is off Bahia state, with an 18,556 sq km area in waters 1,000-1,500 m deep.

Shell Brasil
Among the majors, Shell was the only to bid for a license for Block-S-31, in the Santos basin. The block has a 2,118 sq km area in 150-700 m of water. No exploratory drilling has occurred on this block, although some 2D seismic was shot.

Petrobras (operator) and Shell joined in a consortium for the Block BM-C-25 in Campos basin.

By snapping up these two blocks during the fourth round, Shell Brasil now participates in 14 areas for petroleum exploration in Brazil. The company has made two hydrocarbon discoveries and has invested $250 million in exploration in the 14 areas, said Michael Kool, Shell Brasil exploration and production vice-president.

New Brazilian independent
Cementing its participation in Brazil's E&D scene with a successful bid in the fourth round is a new Brazilian independent, Starfish Oil & Gas Co.

Starfish acquired 100% of a fourth exploration block, BT-REC-7, paying a signature bonus of 121,700 reals. Onshore Block BT-REC-7 covers 162 sq km in Bahia state. Fourteen exploratory wells have been drilled on this block, which has undergone 2D seismic surveys. This block includes part of the area of Blocks BREC-11 and BREC-13, relinquished in August 2001.

The exploration phase of the BT-REC-7 block lasts 7 years. The minimum work program requires 100 line-km of 2D seismic or one exploratory well in the first 3 years, followed by two wells in the next 2 years, said Wagner Freire, former E&P director of Petrobras and president of Starfish.

Freire told OGJ that his company has secured $5 million from a European investor to finance its E&D operations in Brazil. Freire declined to name the investor.

Starfish expects to further boost its financial position through an initial public offering of shares on the Sao Paulo stock market during the third quarter of this year. Starfish will offer only ordinary shares with voting rights, and the company has no plans to issue preferred shares, he added.

Starfish's investments will be used primarily to finance the investment required as part of Starfish's 7.5% stake in the Coral and Estrela do Mar fields on two offshore Santos basin development blocks, acquired in the so-called Round Zero, which occurred immediately after demonopolization and entailed a carve-up of much of Perobras's acreage.

Coral is expected to begin production in September this year, Freire said. By 2005, the two blocks are projected to be producing a total 400,000 b/d of oil, Freire said, of which Starfish's equity share would be 30,000 b/d.

Starfish and its partners, led by operator Petrobras, also own the BS-3 block in the Santos basin. A well has been drilled, and the results are under evaluation, Freire said (OGJ Online, Apr. 23, 2001).

Industry officials gave the fourth round mixed reviews.

Shell Brasil's Kool contends that the fourth auction attracted less interest because there were no major oil discoveries in the last 6 years "and most of the discoveries were of heavy crude."

He also said that the tax load in Brazil is too heavy. The so called Valentim law–recently passed by Rio de Janeiro's state legislature and which sets a state tax of 18% on imported equipment for petroleum production–has created apprehension among foreign investors.

After all, the Shell executive pointed out, 80% of Brazil's oil output comes from the Campos basin, off Rio de Janeiro state.

Eduardo Rappel, the president of ONIP, the national association of petroleum industries, however, welcomed the increased commitments to local expenditure, which rose to an average 39% in the exploration phase of the concession contracts, compared with 33% in Round 3. This will result in increased work done in Brazil, he said.