March 19, 2020 –
Petro Rio S.A. (“Company” or “PetroRio”) (B3: PRIO3), following best practices in corporate governance, updates its shareholders and the market in general about the results of the 3rd Phase of Polvo’s (“Polvo”, or “Field”) Revitalization Plan and the resulting impact from lower royalty rates incurring on the production of the new wells.
The Company hereby announces that it chose to drill and complete two wells. The first in a carbonate reservoir of the Albian Stage in the Quissamã Formation (“POL-N”), and the second a sandstone reservoir of the Eocene period in the Emboré Formation (“POL-L”).
POL-N Well (Ipanema prospect)
Following the Material Fact of February 3, 2020, the reservoir had revealed better than expected permeability and porosity. However, the oil’s higher than expected viscosity required further study, which was recently concluded. The Company began today injection tests with viscosity reducing agents, to assess the well’s commercial viability.
POL-L Well (Eocene)
PetroRio began production in POL-L and measured initial production at over 2,500 barrels per day, thereby increasing the Field’s production in approximately 30%. The Field has been producing approximately 11,000 barrels per day in the first days of the well’s production.
This additional volume will reduce Polvo’s lifting cost to under US$ 26 per barrel, and the Company’s to under US$ 18 per barrel, when considered 70% working interest in the Frade Field, and excluding any synergies from the Tubarão Martelo tieback.
The Campaign’s success also positively impacted the Company’s reserves. PetroRio estimates that the POL-L well can add up to 3 million barrels of oil reserves. The total cost of the 3rd Phase of Polvo’s Revitalization plan was of approximately US$ 20 million.
PetroRio believes that the success of this first reservoir of the Eocene period opens a new frontier for development in Polvo and Tubarão Martelo, towards prospects of similar characteristics. The Company extends its gratitude with the outcome achieved and by the commitment of its teams..
Lower Royalty Rates
In October 2017, PetroRio petitioned the ANP (National Petroleum Agency) to reduce Polvo’s royalty rate as an incentive to invest in the Field’s revitalization. The request included a reduction in royalty rates from 10% to 5% over production, based on the concession’s contract and the law.
Due to the request, ANP began talks with other government entities and the private sector, which resulted in resolution 749/18, which regulates the royalty rate reduction on incremental production for mature fields. On February 20, 2020, PetroRio was the first company to receive the royalty rate reduction along with the approval of its Development Plan (“DP”) revision.
As such, incremental production from the POL-L and POL-N wells will have their royalty rates reduced to 5%. In addition, any extension to Polvo’s economic life beyond 2030 will have its rate similarly reduced, since it would exceed the current DP’s cutoff. The figure below shows a simulation of incremental production (in green), eligible for the lower royalty rate.
DP Production Curve (ANP) x Polvo’s New Production Estimate
The Drilling Campaign’s success, the approval of the royalty rate reduction and the subsequent reduction in lifting costs are important achievements from our team, especially in light of the recent drop in Brent prices. PetroRio believes that the best hedging strategy against commodity price volatility is more efficiency, safety, and lower unit costs, achieved through discipline and diligence in the selection of its projects.