OGX Makes Headway in 3Q10

OGX announced results for the third quarter ended September 30, 2010. The following financial and operating information is presented on a consolidated basis, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB, in reais (R$), unless stated otherwise.

"During the third quarter, we advanced our drilling campaign, identifying new accumulations in the Campos, Santos and Parnaiba basins, as well as drilled appraisal wells and performed drillstem tests which have contributed to a greater understanding of our assets. The recently announced discoveries in the southern reaches of the Campos basin greatly enhanced our understanding of what is expected to be an important new oil-bearing province. As well, our gas discoveries in the first wells drilled in the Santos and Parnaiba basins confirmed the potential of our blocks there," commented Paulo Mendonça, General Executive Officer of OGX.

"It is noteworthy that within the first year of our drilling campaign, which commenced in September 2009, we have achieved significant results, a testament to our team's ability to open and develop new exploratory frontiers. To date, we have reported discoveries in 20 of these wells and four are still in the early stages of drilling," added Mr. Mendonça.

Third Quarter Highlights and Subsequent Events:

  • Commenced the drilling of nine new wells operated by OGX since the beginning of the third quarter in the Campos, Santos and Parnaíba basins, OGX-16 to OGX-24, and one operated by Maersk Oil, MRK-3, in the Campos basin;
  • Revealed the substantial petrolific potential of the Parnaíba basin with the results obtained from well OGX-16 and approximately 20 new mapped prospects, which led the Company to estimate potential resources of approximately 15 trillion cubic feet (Tcf) of natural gas in the area;
  • Increased the estimate of wells to be drilled through 2013 from 79 to 87 due to the positive results from well OGX-16 in the Parnaíba basin;
  • Flow tests conducted in wells OGX-14 and OGX-18, located in the northern blocks of the Campos Basin, confirmed a potential production volume for vertical wells of 3,000 barrels of oil per day for OGX-14 and between 8,000 and 12,000 barrels of oil per day for OGX-18;
  • Significant advances were made in the delineation of the Waimea accumulation with the drilling of well OGX-21D;
  • Important discoveries were made in the Santos basin that confirmed the presence of gas and liquid hydrocarbons in wells OGX-17 and OGX-19;
  • Our sixth semisubmersible rig, Pride Venezuela, provided by Pride International, has arrived and is operating in the Campos basin;
  • Campos basin farm-out process ongoing;

Exploratory Campaign

In the last fourteen months, since beginning our drilling campaign in September of 2009 with well OGX-1, the Vesúvio prospect, we have accelerated the pace of hydrocarbon discoveries through the increased strength of our operating structure combined with our deeper geological knowledge of the region. For example, the Company doubled the number of contracted rigs and increased by five-fold the number of personnel dedicated to OGX's activities, including both employees and outsourced professionals.

Since the beginning of the third quarter 2010, we significantly advanced our drilling campaign in the Campos, Santos and Parnaíba basins, making important discoveries in wells OGX-14 to OGX-21D. Additionally, we made considerable progress in contracting equipment and in the interpretation of seismic data collected in basins not yet drilled, such as Pará-Maranhão and Espírito Santo, preparing us for the initiation of drilling activities in these new areas that can potentially make substantial contributions to our future exploratory success.

Parnaíba Basin

In the Parnaíba basin, we achieved positive results in OGX-16, the first well drilled by OGX Maranhão which resulted in the first onshore gas discovery made in Brazil in the last two decades and the opening of a new exploratory frontier. In the Devonian section, where a relevant gas discovery was made, a drillstem test measured pressure of 1,900 psi and a long flame of 15 meters was identified. The data obtained from this well, combined with seismic data recently acquired for this region and subsequent technical analysis, enabled us to map approximately 20 prospects similar to OGX-16 and to estimate a volume of potential resources of approximately 15 trillion cubic feet (Tcf) of natural gas.

The data and analysis derived from the Parnaíba basin also assisted us in formulating our estimate that the potential volume could correspond to a production capacity of approximately 15 million cubic meters of natural gas per day. This additional information prompted us to reassess our exploratory campaign for the region, increasing the number of wells to be drilled to fifteen from seven, three of which are expected to be initiated during 2010. The drilling of the second well in the region, also located in the PN-T-68 block, commenced on October 23, 2010.

Campos Basin

In the Campos basin, wells OGX-14 and OGX-18 were the first to be drilled by the Company in the block BM-C-40, and they demonstrated excellent production potential in respective cased hole drillstem tests. The success obtained in both tests represents an important step toward the delineation of our discoveries and initiation of production.

The testing of carbonate reservoirs in the Albian section of well OGX-14, the Peró prospect, yielded an estimate of production potential of 3,000 barrels of oil per day by vertical well, which could reach 15,000 barrels per day by horizontal well. At well OGX-18, the Ingá prospect, a test in sandstone reservoirs in the Santonian section yielded an estimate of production potential of between 8,000 and 12,000 barrels of oil per day by vertical well and between 25,000 and 35,000 barrels per day by horizontal well. The tests also indicated that the quality of the oil was approximately 27° API in both prospects.

Data obtained from the drilling of well OGX-15, the Santa Helena prospect, located in the BM-C-41 block, reinforced our hypothesis that the accumulation found in the Albian section was connected to the structure identified between the Pipeline prospect (OGX-2A) and Etna prospect (OGX-6), the possibility of which had been announced previously. The Santa Helena prospect is located 6.41 km northeast of the Pipeline prospect and 1.81km northwest of the Etna prospect.

Another important drilling result was the identification of the presence of oil in the Maastrichtian section of well OGX-20, the Tupungato prospect, similar to what had occurred previously in well OGX-5, where the reservoir also exhibited excellent permo-porosity. The presence of oil was also identified in the Albian and Aptian sections.

Also in the Campos basin, the drilling of well OGX-21D, the first appraisal well targeting the Waimea accumulation, was initiated and we have already detected the presence of oil in carbonate reservoirs in the Albian section, which corresponds to the same identified by the wildcat well OGX-3. The collection of sampling confirmed good porosity and also contributed to a better understanding of the reservoirs. This well will be used as a pilot for a horizontal well in which a cased hole drillstem test will be conducted.

Maersk Oil, OGX's partner in two blocks in the Campos basin, initiated drilling activities in well 1-MRK-3-RJS located in the BM-S-37 block. Maersk Oil, the block's operator, holds a 50% interest and OGX holds the remaining 50%.

Santos Basin

In the Santos basin, at the conclusion of the drilling of wells OGX-17A and OGX-19A, we were able to confirm the presence of two important plays in the Santonian and Albian sections of the region, further validating the ability of our technical team to open new exploratory frontiers.

Using the information previously obtained through the drilling of well OGX-12, we were able to recalibrate our geological model, thereby gaining additional technical insight which led to the drilling of well OGX-17A, Belém prospect, located in the BM-S-56 block, and the subsequent discovery of gas and possible condensate in the Albian section. The well OGX-19A, Aracaju prospect, located in block BM-S-58, confirmed the presence of gas and light hydrocarbons in sandstone reservoirs of good porosity in the Santonian age. These reservoirs had already been identified through the drilling of well OGX-11, Natal prospect. Drilling of two additional wells in the Santos basin is ongoing; wells OGX-23 (Ilhéus prospect) and OGX-24 (Itagi prospect), located in blocks BM-S-58 and BM-S-56, respectively.

Drilling Activity in Progress operated by OGX:

  • 1-OGX-20-RJS: the Tupungato prospect. This well is being drilled by the rig Ocean Ambassador, in the BM-C-41 block in the Campos basin. Drilling was initiated on September 5th and has resulted in the detection of hydrocarbons in the Maastrichtian, Albian and Aptian sections;
  • 3-OGX-21D-RJS: the Waimea prospect. This first appraisal well is being drilled by the rig Sea Explorer, in the BM-C-41 block of the Campos basin. Drilling was initiated on September 28th and has resulted in the detection of hydrocarbons in the Albian section, identified previously in OGX-3;
  • 1-OGX-22-MA: the Fazenda São José prospect. This well is being drilled by the rig QG-1, in the PN-T-68 block of the Parnaíba basin. The well was initiated on October 23rd and is still in the early stages of drilling;
  • 1-OGX-23-RJS: the Ilhéus prospect. This well is being drilled by the rig Ocean Quest, in the BM-S-58 block of the Santos basin. Drilling of the well was initiated on October 25th and is still in the early stages;
  • 1-OGX-24-RJS: the Itagi prospect. This well being drilled by the rig Ocean Star, in the BM-S-56 block of the Santos basin. The well was initiated on October 30st and is still in the early stages of drilling;
  • 1-OGX-25-RJS: the Waikiki prospect. This well will be drilled by the rig Pride Venezuela, in the BM-C-39 block of the Campos basin. Drilling of the well is about to be initiated;

Drilling Activity in Progress operated by partners:

  • 1-MRK-3-RJS: the Carambola prospect. This well is being drilled by the rig Blackford Dolphin, in the BM-C-37 block in the Campos basin. Drilling was initiated on November 3rd and is still in the early stages;


"In preparation for the production phase, which will commence in 2011 in the Waimea prospect, we are continuing to conduct tests and analysis while finalizing the procurement of necessary equipment. It is worth noting that the first FPSO, wet Christmas trees and flexible lines have been secured, and we are on target to meet our schedule. In parallel to these efforts, we will continue with our robust exploratory campaign, completing seismic studies and procuring equipment in preparation for the initiation of drilling in new frontiers, such as the Pará-Maranhão and Espírito Santo basins," commented Paulo Mendonça.

"This new exploratory cycle to be initiated also includes Colombia, where this past June we acquired interests in five onshore blocks, another region in which our exploratory team has valuable experience and differentiated knowledge. Three of our Colombian blocks border Venezuela and share similar geological characteristics with the Maracaibo basin, which has produced more than 30 billion barrels of oil," concluded Mr. Mendonça.

Financial Performance

"The intensification of our exploratory campaign, which has yielded many important discoveries, has created a commensurate increase in expenses for the Company, as expected. However, through efficient cash management, we generated interest revenue of R $155 million with an investment yield of approximately 105% of the Interbank Deposit Rate (CDI). Therefore, we ended the third quarter with R $5.5 billion in cash, equivalent to US $3.3 billion, which we believe places us in a strong financial position and provides us with the resources to finance the exploratory campaign and the initial production development period," said Marcelo Torres, Chief Financial Officer of OGX.

Net Financial Result

The negative net financial result of R $62.9 million in the third quarter was mainly due to interest revenue of R $155.3 million offset by the impact of marked-to-market value of financial instruments used to hedge future commitments in foreign currency (U.S. dollars) of R $196.8 and realized losses of R $30.5 million.

Exploratory Expenses

The increase in exploratory expenses is primarily due to the seismic activities in the Parnaíba and Espiríto Santo basins. Also impacting this account is rent paid to ANP for our exploration blocks, the guaranteed commission for the Minimum Working Program, and to a lesser extent, expenses related to technical, environmental and information technology consulting services associated with the concessions.

General and Administrative Expenses

General and Administrative expenses were primarily driven by the increase in the number of employees from 126 to 212 between 2009 and 2010, which created higher personnel and office related expenses, as well as the other expenses necessary to manage the operations of the Company and its affiliates. In addition, the stock option plan granted by the controlling shareholder impacted this account by R $67.9 million as a result of the Company's move to international standards – IFRS and CPC. This adjustment in accounting standards does not result in the dilution of shareholder interest and does not impact the Company's cash position.

Net Loss

The net loss for the period of R $199.5 million was the result of a net financial loss of R $62.9 million, exploratory expenses of R $15.5 million, general and administrative expenses of R $117.5 million, and income tax and social contribution of R $6.4 million partially offset by a contribution from Minority Interest of R $2.8 million.


Intangible assets represent capitalized costs incurred during the pre-operational period related to concession rights acquisition and well costs incurred during the drilling campaign. The increase in this account of R $1,720.3 million during the first nine months of this year is due to the intensification of the drilling campaign. The Company is currently operating 6 rigs simultaneously drilling wells in the Campos, Santos and Parnaíba basins. In accordance with IFRS, values referred to the Minimum Working Program were excluded from this account.


Consolidated Cash for the Company and its subsidiaries totaled R $5.5 billion, equivalent to US $3.3 billion, sufficient to fund the entire exploratory campaign and initial production development period. These cash resources are invested in a fixed-income fund yielding 104.66% of the Interbank Deposit Rate (CDI), equivalent to R $155.3 million.


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