Use It or Lose It: Big Oil Moves to Drill in Brazil But Not Because Things Improved

By Peter Millard

(Bloomberg) — Major oil producers are beginning to confront the need to develop offshore prospects in Brazil, or lose them.

Total SA and BP Plc are starting to search the market for drilling rigs, helicopters and support vessels for deepwater Brazilian fields even as the industry endures its worst downturn in a generation, three people involved in the projects said.

Forced by requirements that they either drill on the offshore blocks they snapped up during a record $1.4 billion permits sale in 2013 or face fines and the loss of exploration rights, some producers are deciding to move forward, said the people, who asked not to be named because the development plans aren’t public. The license holders also include Royal Dutch Shell Plc, which is taking over a license as part of its BG Group Plc acquisition, and Exxon Mobil Corp.

The activity contrasts with energy projects being put on hold from Australia to the Canadian oil sands, and crude is worth less than a third from when oil majors and smaller players descended on Rio de Janeiro to bid for licenses including blocks off Brazil’s northeastern coast. The producers are betting prices will have eventually rebounded by the time they start output several years from now, the people said.

“It’s very difficult to get out of your commitments as it will cause you to pay a penalty that would be close or equal to the cost of drilling a well,” Kjetil Solbraekke, a Rio-based consultant at Rystad Energy, said by phone. “It all depends on how you like the seismic,” Solbraekke added, referring to the geologic mapping oil companies do when preparing to decide on drilling sites.

Brazil’s oil regulator, known as ANP, said there are no current requests from operators to delay development and no blocks from the 2013 bid round have been returned.

Total, based in Paris, is seeking a rig to start drilling wildcats in the Foz do Amazonas basin, one of the most sought-after regions during the bidding round, as early as in the first quarter of next year, one of the people said. Other operators have been negotiating potential rig-sharing agreements to contain exploration expenses, another of them said.

BP is progressing with plans to fulfill minimum work obligations within the agreed time line, it said in an e-mailed response. Total and state-run Petroleo Brasileiro SA didn’t respond to requests for comment. Shell referred all questions to BG, which said in an e-mail it got a 454-day extension to its licenses and will finish seismic research in the middle of this year. Exxon said it doesn’t comment on future business plans.

Expensive Prospects

Offshore wells can be some of the most expensive ways to get crude oil. Explorers are expected to slash spending on deepwater wells by 20 percent to 25 percent in 2016, compared with a 3 percent to 8 percent overall reduction on all types of fields, Barclays Plc analysts including J. David Anderson wrote in October.

Brazil’s oil industry will welcome any uptick in activity. The number of active offshore rigs fell to 15 in January, the lowest in a decade and nearly half the level of a year ago, according to data compiled by Baker Hughes, an oil services supplier. Spending cuts at Petrobras have contributed to what is projected to be the worst two-year recession in more than a century.

The 142 blocks that await development were awarded in 2013 when oil was trading above $100 a barrel and Brazil hadn’t offered any exploration acreage for five years in a world that was thirsty for more production. Crude has since plunged to as low as $26.05 this month and the industry has cut more than $100 billion of investment and 250,000 jobs. Oil closed at $33.75 in New York on Monday. Brazilian deepwater discoveries need higher prices to work, Ali Moshiri, Chevron Corp.’s president of exploration and production in Latin America and Africa, said Feb. 24 at the at IHS CERAweek conference in Houston.

Hands Full

Petrobras, which has its hands full developing the biggest group of offshore discoveries this century in the so-called pre-salt deposits off the country’s southeast, participated mainly as a minority partner in the 2013 auction, known as Round 11, to stay focused on the oil it had already found.

That means the projects are less exposed to Petrobras’s deteriorating financial health and a sprawling corruption scandal that has resulted in spending cuts and asset sales, Solbrekke said. The biggest producer in deep waters has pushed back major offshore projects amid the oil rout.

“Petrobras, as a minority partner, can’t force the others to postpone drilling or relinquish the license,” Solbrekke said.

© 2016 Bloomberg L.P