[NGW Magazine] Brazil's Pre-Salt Continues to Shine

This article is featured in NGW Magazine Volume 2, Issue 19

By Sophie Davies

Brazil’s new round of oil and gas auctions has got off to a flying start after US major Exxon Mobil acquired ten blocks, making a return to Brazilian exploration after years of absence.

The interest in Brazil’s pre-salt continues to shine, despite the tarnished reputation of the state operator Petrobras. Analysts say that ExxonMobil’s activity in the September 27 auction signifies a vote of confidence in the region among foreign majors and that it bodes well for another auction that is scheduled to take place later in October. The US major’s blocks, six of which are in partnership with Brazil’s state-run Petrobras, are in the offshore Campos basin, where the Anglo-Dutch major, Shell, is producing from assets acquired when it bought BG. But unlike Repsol, Shell’s bid was this time unsuccessful.

Another two are in partnership with US independent Murphy Oil and Brazil’s Queiroz Galvao, while the firm is developing the final two on its own. Among ExxonMobil’s bids, there was a $704mn bid for one block, which was the highest-ever bid registered in the South American country.

The bids represent an about-turn in the strategy of Exxon, which halted drilling in the Santos basin – which is near the Campos basin – in 2012 after its drilling results were less promising than expected.

The country’s 14th bid round also attracted more than $1.2bn in signature bonuses from energy firms. That was the largest volume ever seen in Brazil, according to the local industry regulator ANP. A total of 20 companies from eight countries took part in the bidding, and 17 firms acquired acreage.

The blocks that were acquired span both onshore and offshore blocks across an area of 25,000 km². However, of the 287 blocks that were up for offer, only a relatively small portion – a total of 37 blocks – was in fact awarded.

Those that attracted the most interest were mainly in the Campos Basin, which is next to Brazil’s rich pre-salt region, boding well for another auction being held in Brazil at the end of October. Brazil’s pre-salt areas, where oil and gas is found under layers of salt trapped beneath the ocean floor, are thought to be some of the world’s most promising reserves.

The oil and gas found there is considered to be of high commercial value and of very good quality. There has been strong international interest in these areas for some time, however economic problems have plagued Brazil over recent years and that – coupled with low oil international oil prices – has exerted pressure on companies’ budgets and dampened interest in oil and gas exploration.

At the upcoming October 27 auction, companies will be able to bid for eight blocks in the pre-salt areas of the Santos and Campos basins. These fields are considered to be Brazil’s most promising, with above-average production from those areas that are already in production. “Brazilian pre-salt is always going to be attractive because of its potential,” a spokesman from Spanish major Repsol told NGW.

“We have to be aware that oil demand is going to be strong at least for the next two decades and E&P companies are getting more efficient in their developments so that leads us to an scenario where Brazil is going to play an important role,” he added.

Those “yet to find reserves in the pre-salt play” are what are still attracting companies to Brazil – both newcomers and those majors that have previously invested in the region, he added. 

“During the last 15 years companies like Repsol have made big investments to set an infrastructure up there and help local industry to boost and become an important competitor in the region. Having a position in Brazil has been always an objective for E&P companies and now they have the opportunity to do so, with the new ANP Bid Round calendar confirmed until 2019.”

The Spanish major was awarded oil blocks in the Espirito Santo basin off the coast of Brazil in last month’s auction. If Brazil can continue to improve the regulatory conditions surrounding the industry, then it will likely see further growth.“Brazil is doing very well and has the attitude to improve conditions for doing business. If they improve regulation – especially to develop opportunities for natural gas potential discoveries – and tax management, and set clear long term rules, the industry is going to grow for sure,” the spokesman told NGW. 

The Brazilian government has made a series of policy changes in the last year to try to attract more international majors to the industry and boost the economy. 

The business-friendly president Michel Temer changed the rules so that foreign companies are less obliged than previously to use local partners, which it hopes will spur greater foreign investment in the sector. The Washington-based Atlantic Council think-tank said earlier this year that Brazil’s oil and gas sector is on the verge of its biggest transformation in decades, with unprecedented opportunities for new entrants to the market.

The contraction of Petrobras and other traditional players has left a gap for new companies that are keen to increase their role in Brazilian E&P, the Atlantic Council said in new research. The heavily indebted state-run firm, which is still reeling from a major corruption scandal, made a 20% cut to its oil and gas reserves in January. In February, Brazil’s Senate also approved legislation that relieves the company of its role as mandatory stakeholder and sole operator in pre-salt deep-water oilfields.

Analysts say the bill ending Petrobras’ mandatory operatorship indicates that the country is more willing to open up to new investors, but warn that political instability could still be a problem going forward and may deter some potential investors.