After being caught up in major corruption scandals and suffering from what some have claimed was its worst economic downturn in 100-years, Brazil has pulled itself back from the brink. The economy commenced growing again in 2017 with gross domestic product (GDP) expanding by 1 percent and 2018 GDP growth forecast by the International Monetary Fund (IMF) to be 2.3 percent.
One of the key drivers of Brazil’s improving economic outlook are Brasilia’s plans to launch what could become the biggest oil boom in Latin American history.
You see, Brazil possesses what is rated as being among the top offshore oil assets globally, the massive pre-salt oil fields located in the Atlantic Ocean on the Latin nation’s continental shelf. These fields are thought to contain recoverable oil reserves of a massive 50 billion barrels but in the past, they have proven difficult and costly to extract.
Nonetheless, foreign energy majors flocked to Brazil’s latest oil auction.
It is easy to understand why, the reforms instituted by the Temer government in the wake of the Carwash corruption scandal and impeachment of former president Dilma Rousseff made it more attractive to invest in Brazil. Key among them was removing Petrobras’ right to operate exclusively in the pre-salt area and relaxing local content rules. That not only reduces the regulatory and political risks for foreign energy majors because they are able to better control the assets they acquire and also more effectively manage costs.
A range of analyst and oil company estimates put the breakeven price for pre-salt fields at less than $40 per barrel compared to $45 seven years ago. This can be attributed to improving drilling technology, regulatory changes, labor reforms and significantly improved efficiencies. In many cases pre-salt breakeven prices are even lower than many onshore unconventional U.S. basins. Earlier this year in a Reuters article the majority of shale oil producers confirmed they weren’t breaking even with West Texas Intermediate (WTI) at less than $50 per barrel. Related: Can $80 Oil Be Justified?
These reasons make the pre-salt fields an extremely attractive investment for foreign energy majors which are aggressively seeking to boost oil reserves and production.
For the auction, Brazil’s government offered 47 blocks for sale of which 22 were snapped up in the 29 March 2018 bidding round.
The most popular location by far was the prolific Campos basin which is the oldest and most established pre-salt basin. Of the 22 blocks sold, nine were in the Campos basin with Exxon Mobil and StatOil acquiring shared interests in four blocks each, Chevron in three blocks and Shell one block. These companies are scrambling to find means of accessing low-cost high-quality crude to replace depleted reserves and production in a difficult operating environment where oil prices remain exceptionally volatile.
By the end of the auction Exxon, which has been eagerly snapping up oil assets around the world as it seeks to replace reserves and bolster production, became the single largest acreage holder among international companies operating in Brazil. It invested a considerable but undisclosed sum to win interests in eight deep-water blocks, six of which it owns outright, totaling 640,000 net acres.
Exxon’s top executive in Brazil Carla Lacerda stated: “We are more confident in investment in Brazil, without a doubt,”
The auction saw Brazil’s government scoop-up over $2.4 billion as energy companies opened their wallets to acquire deep and shallow-water offshore projects. If oil’s rally continues for a sustained period, interest in the pre-salt and investment in Brazil’s oil industry from foreign energy companies will grow at a rapid rate. Analysts have forecast that production from the pre-salt alone could make-up up to almost three-quarters of Brazil’s oil output by 2021.
Nevertheless, for that to be achieved Brasilia will need to attract considerable foreign investment, with Petrobras still recovering from the corruption scandal that swamped the company in 2015 and a bloated balance sheet.
The incentive for Brazil’s government is tremendous. It would fill depleted government coffers with much-needed royalty as well as taxation revenue and give an economy weighed down by the prolonged oil slump, corruption and political scandals a leg-up. That only further emphasizes the prize on offer for Brazil if the government can keep reducing risks and costs for oil companies while making the regulatory environment more transparent.
By Matthew Smith for Oilprice.com
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