MercoPress, en Español

Montevideo, November 21st 2017 - 15:43 UTC

Brazil: the return of deepwater oil

Tuesday, October 31st 2017 - 08:30 UTC
Full article 1 comment
Royal Dutch Shell won half of the blocks that were offered, and Shell was already one of Brazil’s largest foreign investors. Royal Dutch Shell won half of the blocks that were offered, and Shell was already one of Brazil’s largest foreign investors.

By Nick Cunningham of Oilprice.com - On a historic auction for deepwater oil assets in Brazil, the oil majors showed up on October 27 and bought several offshore blocks, indicating a high level of interest in the country after a major policy overhaul allowed private investment.

 Royal Dutch Shell won half of the blocks that were offered, and Shell was already one of Brazil’s largest foreign investors. After purchasing BG Group for around US$50 billion, Shell took a large presence in Brazil. The logic behind Shell’s strategy is that the company argues it can breakeven with oil at US$40 per barrel, making Brazil one of the most attractive places to drill offshore in the world.

“These winning bids were submitted after our thorough evaluation and add strategic acreage to our ... global deep-water growth options,” Shell Upstream Director Andy Brown said.

ExxonMobil took one block, expanding its position after winning six offshore blocks a few weeks earlier. BP added two blocks as well.

But what makes the most recent auction different is that it will allow international firms to not only take stakes in offshore projects, but also lead on them. It is the fruit of a major policy overhaul from 2016, which scrapped a law that required Brazil’s state-owned oil company Petrobras to be the operator on all offshore projects in the pre-salt – Brazil’s deepwater reserves located beneath a thick layer of salt. That law also said that Petrobras had to own 30 percent of pre-salt projects.

After that law was repealed in 2016, the oil majors started to express a lot more interest in stepping up investments in Brazil.

Brazil’s President Michel Temer, instrumental in liberalizing the energy sector, said the latest auction would lead to US$30 billion in new investment in Brazil’s oil sector. “We see the government of Brazil being more supportive of foreign companies entering Brazil,” BP Latin America President Felipe Arbelaez said after the latest auction, according to Reuters. “There are high quality assets. We believe that the assets here will be resilient in any price environment.”

“Brazil’s offshore is one of the last major plays out there that’s in its infancy,” said Brian Youngberg, an oil industry analyst at Edward Jones, according to Reuters. “Companies that are still interested in the big elephants out there, like Exxon and Shell, are aggressively pursuing them.”

There is still some political risk for the oil majors in Brazil. President Temer is very much wrapped up in a wide-ranging corruption scandal, and his approval ratings are at an eye-watering 3.4%, according to a September poll. But with no plans to run for reelection, Temer has pushed through some highly controversial pieces of legislation – the 2016 energy reform included.

The Oct. 27 offshore auction was temporarily delayed after a court injunction in response to a complaint from the opposition Workers’ Party, which has criticized the sale of Brazil’s pre-salt assets. ”Fighting against the handing over of pre-salt (reserves) is fighting for the creation of jobs and revenue in Brazil,“ said Carlos Zarattini, a senior Workers' Party lawmaker. The auction proceeded after the short delay.

But former President Lula da Silva is one of the leading candidates for president in the 2018 election, and his return would raise a lot of question marks for the oil sector. He is tremendously more popular than the current president, so the energy liberalization is not guaranteed to last in its current form.

Nevertheless, the oil majors are jumping in with both feet. They seem willing to put up a lot of capital for offshore drilling in a world of US$50-$60 oil, a vote of confidence in Brazil’s pre-salt. Large-scale, expensive megaprojects were an endangered species not too long ago, so the fact that Shell and Exxon are prioritizing offshore Brazil is an indication that they are confident in profitable production.

That is a marked difference from the recent past. Brazil’s oil sector has been plagued by the far-reaching Petrobras corruption scandal, which included a multi-year investigation that upended the political establishment and contributed to the impeachment of former President Dilma Rousseff.

”That feeling of optimism is substantiated, there's a lot happening,“ Horacio Cuenca, an oil industry analyst in Rio with Wood Mackenzie, told Reuters. ”It's like night and day compared to a year ago, when the government changed, and especially compared to the last auctions in 2015, which were a disaster.”

Top Comments

Disclaimer & comment rules
Read all comments

Commenting for this story is now closed.
If you have a Facebook account, become a fan and comment on our Facebook Page!