Brazilian Auction Draws Oil Companies Back to Offshore Drilling

On Wednesday, two choice offshore blocks were withdrawn from the auction by a Brazilian court, which argued that they should be granted only under a production sharing model that would benefit the government. But Brazilian officials and energy analysts argued that the auction was a success anyway.

“The diversity of operators and geography was one of the great successes of the auction,” said Décio Oddone, head of the National Petroleum Agency, or ANP. He noted that “not just American companies but practically all of the major countries in Europe were represented.”

Deepwater exploration has fallen out of favor in much of the world over the last four years as oil prices collapsed from levels over $100 a barrel. Offshore projects require billions of dollars for drilling and constructing huge production platforms, and five to 10 years can pass before oil is produced.

With oil prices now around $60 a barrel, potential offshore investment dollars have had to compete with the frenzy of drilling in West Texas and a few other American shale fields, where new technologies have made returns speedy and relatively inexpensive.

The industry’s interest in offshore drilling has been heightened by the 33 percent recovery in oil prices over the last year, but also by a series of Brazilian regulatory changes. They include dropping the requirement that the state company Petrobras be designated the managing company, and lowering the amount of Brazilian machinery and construction material that must be used for exploration and production.


A Royal Dutch Shell representative placing a bid. Shell, Exxon Mobil, BP and Wintershall were among the big winners on Thursday.

Pilar Olivares/Reuters

“Brazil is one of the few international deepwater bright spots,” said Jorge R. Piñon, former president of Amoco Oil Latin America. “Its geology and politics are known to the industry. They know what they are dealing with.”

The International Energy Agency projects that Brazil will make the second-biggest contribution, after the United States, to the growing oil supplies outside the Organization of the Petroleum Exporting Countries over the next few years, and that it will come from offshore drilling. The agency said in a recent report that Petrobras and international oil companies would lift global supplies by more than a million barrels a day by 2023, more than 1 percent of the global market.

There are other signs of recovery for deepwater exploration. Project expansions are underway in the Gulf of Mexico. Exxon Mobil has made a series of large offshore discoveries in Guyana and plans to start production there in the next few years. Royal Dutch Shell is planning to drill 10 wells in the Mediterranean off Egypt.

Shell’s chief executive, Ben van Beurden, said in a recent interview that low oil prices had forced the industry to find ways to cut costs, enabling more offshore projects to go forward.

“In deepwater offshore, I have no projects in our funnel going forward with a break-even price of over $40 a barrel,” he said, referring to the Brent global benchmark. “These are projects I am very comfortable sanctioning.”

In Brazil, the auction results could give at least a modest boost to President Michel Temer, who is facing corruption charges and is widely unpopular. The government has sought to increase privatization of much of its infrastructure, including roads and airports, but has struggled to lure investors. Oil and gas are one exception.

David Fleischer, professor emeritus of political science at the University of Brasília, said the auction was a “sign to investors that the Temer government is functioning normally in spite of the investigations against the president.” He added, “Also, this means a new injection of badly needed funds for the national treasury.”

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