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Exxon To Enter The Most Sought After Oil Play In The World

Offshore

The Wall Street Journal reported that Exxon is looking to jump into Brazil’s offshore sector, one of a few areas of exploration where there are still enormous volumes of known but underdeveloped oil reserves. Brazil’s pre-salt – oil trapped beneath a thick layer of salt – is looking increasingly attractive to international oil companies because of a law change in 2016 that opened up the sector to investment from private companies.

Up until recently, the vast pre-salt was under the domain of Brazil’s state-owned oil company Petrobras. International companies could work as junior partners in a joint venture, but by law, Petrobras had to take the lead on any offshore drilling project and hold at least a 30 percent stake in any project. That requirement was enacted after a handful of truly massive oil discoveries put Brazil’s pre-salt on the map a decade ago. Triple-digit oil prices led Brazilian lawmakers to pass restrictive laws in an effort to capture the bulk of the revenues from the ensuing bonanza for the state.

But after years of disappointing results, rising debt, and a widespread corruption probe that has engulfed Petrobras, the momentum began to shift against state control. Petrobras is the most indebted oil company in the world, holding a debt pile that exceeds $100 billion. That has left the company unable to invest and grow production as it is preoccupied with shedding assets and whittling away at its debt.

Without a state champion to exploit the pre-salt, Brazilian lawmakers pushed for more outside investment. The impeachment of former President Dilma Rousseff and her removal from power last year did away with the last impediment to privatization. The Congress voted in late 2016 on a historic overhaul, scrapping the requirement that Petrobras be the operator on all pre-salt projects and allowing private companies to become operators, which they hope will reduce the burden on Petrobras and lead to greater investment, and ultimately, higher oil production in the years ahead. Related: Saudi Arabia Alters Oil Pricing To Attract European Buyers

That brings us to Exxon, which is late to Brazil – it is only oil major without a large position in Brazil. Some of its competitors have already been there for years, even if they were not allowed to take the lead on the pre-salt.

Royal Dutch Shell, in particular, has been active in Brazil, a presence that grew enormously with the $50 billion purchase of BG Group. Whereas Exxon is considering its options and exploring appetizing offshore assets, Shell is already producing oil in Brazil’s Campos Basin, for example, off the coast of Rio de Janeiro.

And late last year, after the energy reform passed Brazil’s Congress, Shell announced that it would step up investment in the country, promising to spend $10 billion over the next five years. Given that Shell is in the midst of a multi-year $30 billion divestment program in order to raise cash and pay down debt, the sizable spending increase in Brazil says a lot about its priorities. It also says a lot about the interest in Brazil. "This was a good move by the government and it will open up opportunities for more players to invest in Brazil," Shell’s CEO Ben van Beurden said in response to the liberalization of Brazil’s pre-salt.

In fact, even as the oil majors are retrenching and increasingly focusing on comparatively lower-risk and short-cycle shale projects, offshore Brazil remains one of the few places that will still attract wide interest from nearly all of the largest oil companies.

“Everybody wants to get a piece of the pie,” Kjetil Solbraekke, senior vice president for South America at consultancy Rystad Energy, told the WSJ. “These are probably the most prolific, high-returning oil assets available in the world.

Exxon, according to the WSJ, is looking at either partnering with Petrobras in some offshore fields or buying up assets at an auction that is slated for later this year.

The opening up of Brazil’s most prized oil assets echoes the historic energy reform in Mexico, which was passed in 2013. Mexico has conducted several auctions with varying success, but they have succeeded in attracting new investment. Eni recently announced it had successfully drilled a well in Mexico’s shallow waters, which should increase interest from the industry for an upcoming deepwater auction in June.

But there are further parallels between Mexico and Brazil. The liberalization efforts in both countries have been hugely controversial, reversing years of nationalistic energy policy. And both could be subject to political risk in the future if the pendulum swings back in the other direction. Mexico’s President is astonishingly unpopular, in part because of the energy reform and the rise in gasoline prices. A 2018 election could bring in a left-wing party that has pushed back against the privatization. Related: Are Mexico’s Oil Reserves Almost Depleted?

Brazil’s President Michel Temer took power last year under a dark cloud of controversy – critics alleged the removal of the former President was a cynical move to seize power. Temer’s government is also terribly unpopular, plagued by scandal and corruption. Brazil will hold a presidential election next year as well, which could usher in a more left-wing government that might seek a larger regulatory role over the nation’s oil sector.

But that is all speculative at this point. For now, the business-friendly administration is apparently succeeding in attracting more investment. Exxon has so far declined to comment, but the WSJ says it is poised to make a move.

"Considering movements towards a strategic partnership, we have nothing concrete with Exxon, but they have certainly expressed strong interest in the Brazilian pre-salt exploration," Petrobras’ CEO Pedro Parente told reporters after the WSJ article was published.

By Nick Cunningham of Oilprice.com

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