Brazil’s oil regulator ANP recently unveiled the results of the fifth pre-salt auction rounds, wherein supermajors including Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) along with state-controlled Petrobras (PBR - Free Report) emerged as big winners.
This round provided a major opportunity for oil companies to secure a stake in Brazil’s coveted pre-salt areas, prior to the presidential election in October, which can transform the rules for future auctions.
The government auctioned off four blocks — namely Saturno, Tita, Pau-Brasil and Sudoeste de Tartaruga Verde — under production sharing agreements (PSAs) in the pre-salt layer of the Campos and Santos basins. All the four blocks were successfully sold off, with the government of President Michel Temer raking in more than $1.71 billion or 6.82 billion reais. Bids were made by pledging a percentage of profit oil to the government and paying a fixed signing bonus.
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.
In Brazil’s fourth Production Sharing Round held in June, ExxonMobil emerged aggressive bidder. Moreover, consortiums comprising BP, Shell, Equinor ASA and Chevron won the rights to explore three blocks in the Santos and Campos basins, besides Petrobras.
Key Takeaways from the Fifth Auction
Chevron and ExxonMobil snapped up the Saturno field, located in Santos Basin, with an offer of 70.2% profit oil. Owning equal stakes each, the oil giants will pay 3.1 billion reais for the field.
ExxonMobil and Qatar Petroleum won the Tita block in Santos Basin, with 23.49% oil pledge to the government at a cost of 3.1 billion reais. Notably, ExxonMobil will hold 64% stake in the Tita block.
A consortium consisting of BP plc (BP - Free Report) , CNOOC Limited (CEO - Free Report) and Ecopetrol won the Pau Brasil block. The companies will pay 500 million reais for the block, offering 63.79% profit oil. Importantly, BP will own 50% stake in the block, and CNOOC and Ecopetrol will possess 30% and 20% each.
Petrobras, notably the only contender in the Campos Basin, clinched Sudoeste de Tartaruga Verde block, bidding 10.1% of profit oil and paying 70 million reais.
Results Reflect Higher Confidence in Deepwater Markets
Notably, a lot of money is involved in offshore projects, since they entail drilling and construction of massive production platforms. Oil is produced after a gap of another five to 10 years. The drastic fall in oil prices had forced the upstream 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.
However, with crude picking strength and hovering around $70 a barrel of late, the companies have begun to improve operational efficiencies and have boosted their investments. In fact, of late, companies are showing an increased inclination toward the deepwater and offshore markets.
While advanced techniques like hydraulic fracturing and horizontal drilling have certainly backed shale drilling, extracting oil from shale rocks through fracking is expensive and demands expertise. Recently, production from a few shale plays, especially the Permian Basin, has exceeded transportation capacities, leading to a pipeline bottleneck situation. Thus, it is clearly the time for oil drillers to focus on the more lucrative deepwater drilling.
There are other signs of recovery for deepwater exploration. Project developments are in progress in the Gulf of Mexico (GoM). Interestingly, the latest auction for offshore drilling rights in GoM, held in August, witnessed stronger results than the last two auctions. Lease sales remain an indicator for the general health of the offshore energy industry. With the operating environment along with other factors contributing to improved results, GoM is also getting back in the game.
Reportedly, deepwater drilling is likely to witness increasing investments in the coming years, emerging as a better alternative amid recovering oil prices compared to domestic shale plays.
Per the International Energy Agency, Brazil is likely to be the second-biggest contributor, after United States, to growing oil supplies outside the Organization of the Petroleum Exporting Countries in the next few years.
In fact, a major portion 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
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