Why is Exxon returning to Brazil?

September 20, 2019

In November 2010, Exxon Mobil Corp. sent workers to a rig off the coast of Brazil, hoping to find oil in one of the most anticipated drilling programs in the energy sector. About 2,300 meters below the surface, they drilled the seabed, drilling more than 3 kilometers over almost two months before hitting a duster. It was Exxon’s third dry hole in the area in just over two years. Defeated, the company abandoned exploration in Brazil. Now, seeing the success that others are having in Brazil – and facing problems elsewhere – Exxon’s back.

In a sector shifting to renewable energy, Exxon is betting on Brazil as part of an extraordinarily large seven-year $ 200 billion investment plan focused on fossil fuels. A series of setbacks with projects in Canada, Russia and the US led the company to return to Latin America’s leading oil producing country in an attempt to revive years of stagnant production. Brazil is the least developed among Exxon’s major projects – which also include Guyana, the US Permian Basin and gas terminals in Mozambique and Papua New Guinea – but offers the most substantial potential prize: the country’s deepwater is the location of the largest offshore oil discovery of this century.

“Brazil is basically the main place for oil outside the US,” says Cleveland Jones, consultant and researcher at the National Institute of Oil and Gas in Rio de Janeiro. “If you have $ 5 billion, where will you invest? Nigeria? Senegal? You need to allocate investments according to potential. ”

There are more than 100 billion barrels of recoverable oil trapped under a layer of salt in Brazil’s deep waters, according to a study by Rio de Janeiro State University, or UERJ. The discovery of the reserve in 2006 began to attract foreign interest in Brazil’s energy sector, long dominated by Petrobras. The area has produced some of the world’s major oil wells, spouting over 60,000 barrels a day. This surpasses production in the North Sea and the Gulf of Mexico and rivals the most productive wells in Saudi Arabia and the Caspian Sea.

Brazil has also provided one of the most stable environments for oil companies, despite the country’s frequent political turmoil. The country respected oil contracts even when it was governed by the left-wing Workers Party, and President Jair Bolsonaro promised to open the industry even further for foreign investment. Other parts of the world with giant oil reserves are not always so welcoming. In Saudi Arabia, where drone strikes hit major oil facilities on September 14, the sector is dominated by the national oil company, and is a similar image in much of the Middle East. Russia and Venezuela are surrounded by strict US sanctions, and exploitation on the west coast of Africa is hampered by corruption, theft and harsh fiscal conditions by governments.

European rivals Royal Dutch Shell Plc and Galp Energia SGPS SA bought Brazilian acreage in 2000 and successfully drilled for oil – Brazil has become one of Shell’s main profit drivers. Exxon is making up for lost time: Over the past two years, it has spent 6.8 billion reais ($ 1.7 billion) on exploration rights, making it the leading tenant after Petrobras.

Exxon has had to familiarize itself with the Brazilian oil industry since its return, including contracting hands that operate platforms, mix cement and do seismic, 3D images and soil sample testing, essential to lowering geological targets before start of drilling. The company is preparing for exploration drilling next year in the area where it operates, says spokesman Todd Spitler. “Brazil is the important new conventional oil game for the exploration industry in the last decade and is a key investment in Exxon Mobil’s future,” he says.

Investors will surely have questions about the new program. Exxon’s $ 30 billion a year in oil and gas-focused capital spending stands out as exceptionally large in an oil-flooded world. Rival companies have shrunk their budgets and are returning money to investors through stock repurchases. But not Exxon. Its annual budget, which will reach $ 35 billion in early 2020, is comparable to 2013 and 2014 levels when oil was trading at over $ 100 a barrel. Oil is trading at less than $ 70 a barrel, and that is after the increase of the drone attacks.

While some rivals have gone cold on exploration in favor of renewable energy investment, Exxon remains firm as the model of a traditional oil and gas company at the heart of CEO Darren Woods’ business plan. He is looking to take advantage of building big projects, while others retire and claim to have the best set of opportunities available since the merger of Exxon and Mobil in 1999.

Exxon is “investing aggressively when other companies are not,” says Mark Stoeckle, who manages about $ 2.4 billion, including Exxon shares in the Adams Funds in Boston. Brazil’s returns are far in the future by the mid-2020s, he says. “This has risk, there is no doubt about it. But Brazil fits well: they can invest in scale in a multi-class resource they really need. ”

Guyana, one of northern Brazil’s neighbors, proves just how profitable this exploration can be. Exxon has discovered more than 6 billion barrels of low-cost oil there since 2015 and is building production platforms estimated by energy consultant Wood Mackenzie Ltd. as the most profitable of all major oil companies’ deepwater projects. Guyana and Brazil are now among the top five oil exploration destinations worldwide, according to Wood Mackenzie.

“When you’re talking about Brazil, you’re talking about the most exclusive deepwater producer club, and Exxon wants to be a part of it,” says Schreiner Parker, Latin America Vice President Rystad Energy. “Where they decide to put their economic weight, they can make a big impact, even in a market that attracts all the big players, like the Brazilian offshore.”

Source: O Petroleo

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