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Brazilian Auction Echoes Turnaround of Deepwater Markets

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In the view of a 33% uptick of oil prices in 2017, following a collapse from the prior level of over $100 a barrel, oil majors are currently showing interest in deepwater blocks. This is evident from the attendance in the Brazil auction of oil and gas fields located off the country's coast.

The large number of operators and participants from the United States as well as other major European countries attended the auction, which reflected its success. Cumulatively, the auction raked in more than $2.4 billion from deepwater and shallow-water prospects.

Petrobras (PBR - Free Report) , Brazil's state-owned oil company, formed a consortium with major foreign players. About 22 of the 47 offered offshore blocks were picked up in the auction. Since September 2017, this was the third Brazilian offshore sale.

The major international companies included ExxonMobil Corporation (XOM - Free Report) , Chevron Corp (CVX - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) , Norway's Statoil ASA , Germany's Wintershall, and France's TOTALSA (TOT - Free Report) . All the above-mentioned companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Reforms in Brazil’s Oil Sector

A series of regulatory changes have piqued the interest of oil majors for deepwater blocks in Brazil. Earlier, Petrobras had to be selected as the managing company, which is not compulsory anymore. The number of Brazilian machinery and construction material required for exploration and production has been reduced.The changes came into effect when most oil majors were reluctant to invest in offshore blocks amid rigid regulations and price volatility.

Per the International Energy Agency, Brazil is likelyto be the second-biggest contributor, after the United States, to the growing oil supplies outside the Organization of the Petroleum Exporting Countries over the next few years.The majority of the contribution is expected to come from offshore drilling. In a recent report by the agency, Petrobras, along with other international oil companies, will boost global supplies by more than a million barrels a day by 2023, exceeding 1% of the global market.

Top Bidders in the Brazil Auction

ExxonMobil, in particular, was very aggressive in the Brazilian auction. The company is keen on restoring exhausted reserves and boost production. Along with several partners, ExxonMobil won eight bids spread over 640,000 acres of fields. Of which, one bid was valued at $848 million.

Per the current global trend, oil majors were shying away from deepwater activities. BP, Royal Dutch Shell and Germany’s Wintershall went against the current global trend and emerged as the top winners in the auction. Since the oil spill in 2011 off the coast of Rio de Janeiro, Chevron has been discreet in its operation in Brazil. The company won bids for four exploration units.

Repercussions of Oil Price Volatility

In recent years, we have witnessed a drastic fall in oil prices. These forced the oil and gas operators to lower costs and control their spending.

In 2017, global investment in offshore oil and gas operations fell to about $160 billion from a high of $335 billion in 2014. Per Rystad Energy, a Norwegian energy consulting firm, offshore investments are expected to stabilize at $155 billion in 2018, and steadily increase over the next five years.

Is a Recovery Visible?

A lot of money is involved in offshore projects, since they entail drilling and construction ofmassive production platforms. Oil is produced after a gap of another five to 10 years. Currently, prices are hovering around $60 a barrel and we can expect a further hike. The investors wanting to put in dollars in the offshore market also need to keep in mind the ongoing drilling activities in West Texas and a few other American shale fields, where new technologies have made returns rapid and comparatively cheap.

There are other signs of recovery for deepwater exploration. Project developments are in progress in the Gulf of Mexico. ExxonMobil has made a series of large offshore discoveries in Guyana and plans to begin production there in the next few years. Royal Dutch Shell is planning to drill 10 wells in the Mediterranean off Egypt.

Bottom Line

While the pace of recovery cannot be measured, the Brazilian auction has established the fact that the markets for deepwater blocks are in a state of rebound. The auction also raised much required funds for the Brazilian government.

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