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Oliver L Campbell :Brazilian oil assets:
reorientation or offloading?



It started last year with Devon Energy which sold its Brazilian deepwater assets to BP. Then. Repsol followed suit by selling a 40% share of its E&P subsidiary to Sinopec. This year, Shell has sold two exploration blocks in the Santos Basin to local investors, Barra Energia and QGEP, to concentrate on the Parque das Conchas area where it already has production. Recently it was announced that Anadarko Petroleum is looking for a buyer of its Brazilian assets in order to focus on its investment in the Gulf of Mexico and Africa, and the latest news is that BG may sell some of its assets to Petrobras, the Brazilian state company.

According to Petrobras' chief executive, Sergio Gabrielli, oil companies are not quitting Brazil but are selling some of their assets to finance the costly offshore development. This is certainly an explanation in the case of Repsol and BG but, with other companies, the more likely explanation is that they are offloading assets because there less costly opportunities elsewhere. What the per-barrel production costs will be is anybody's guess--not all the areas are the same and presumably those closer to shore will be cheaper to develop but, even if that is so, unit costs will depend on the amount of oil that can be recovered from individual fields.

The average production cost, including capital costs, may be as low as $40 per barrel or as high as $60 a barrel--it depends on whom you believe. Petrobras believe it will be at the lower end, but independent analysts say the cost may well be higher. Although the current oil price is around $100 a barrel, oil companies establish their own long-term, planning values and I doubt that will exceed $80 a barrel. The table below shows that, in the best case, the margin to be split between the Brazilian state and the oil company will not exceed $40 a barrel and could well be less.

US$ per Barrel

Planning value

60

60

80

80

Production cost

40

60

40

60

Margin before tax

$20

$ -

$40

$20

It is not surprising the oil companies are being cautious by forming joint ventures to spread the risk and by offloading what they consider is excess acreage. The latter generates a good cash flow and releases them from the commitment to develop the area.

The fact Anadarko Petroleum prefers to invest in the Gulf of Mexico indicates return on investment there is better than in Brazil, probably because production costs are lower. Despite the predictions of experts like Colin Campbell and Jean Laherrère, the exponents of peak oil, that no more large oil provinces were to be found, one offshore discovery has followed another. Oil has been found offshore west Africa and offshore Brazil. I know very little about geology, but I do know the two continents were once joined and that continental drift explains why the oil is so far out to sea. Drilling is taking place offshore Cuba, BP intends to drill offshore Shetland in the Atlantic, and exploration is being carried out offshore south Argentina.

Offshore drilling in deep water is very costly. The Gulf of Mexico has hurricanes and the north and south Atlantic endure violent storms. Drilling offshore Brazil entails going through 7,000 feet of salt and its plasticity creates a major problem. We may not like paying so much for our energy and gasoline, but the fact is only high prices have allowed offshore discoveries to be developed. This is particularly so in the case of Brazil where the euphoria has now abated and the oil companies are taking a hard look at costs and the investment required. The initial negative cash flow is huge and for that reason companies are mitigating its effects by offloading assets to other interested parties.

Oliver L Campbell

24.10.11

 



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Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

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Petroleumworld News 10/25/2011

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