Repsol Pins Turnaround on Brazil Drilling

Brazilian Basins
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MADRID (Dow Jones Newswires), May 11, 2009

Repsol YPF SA's luck may be turning as promising new Brazilian oil and gas discoveries point to rising future output. But the new offshore developments could pose financing challenges since the output from the new fields is still years away.

The Spain-based oil company has been eclipsed by European rivals in recent years as its production from Argentina has declined. Falling oil prices, meanwhile, have contributed to plunging share prices and profits. The new discoveries could help the company, which makes much of its profit from refining in Europe, boost the development of its crude reserves and both stabilize and build earnings.

Repsol on Friday posted a 57% drop in first-quarter net profit, hit by losses in oil inventories, lower hydrocarbons production and plunging oil prices. Net profit declined to EUR516 million ($690.6 million) from EUR1.21 billion a year earlier. The year-earlier results were lifted by inventory gains.

Monday, Repsol is scheduled to announce a promising new gas find in Brazil's prolific Santos Basin off the southeast coast, its third Brazilian discovery this year. Preliminary test flows at the find, called Panoramix, are big enough to ensure commercial viability, Nemesio Fernandez Cuesta, Repsol's exploration and production director said in an interview.

Repsol, with a 40% stake in the block, operates the portion near the coast of Sao Paulo that contains the discovery. Brazil's state-run oil firm, Petroleo Brasileiro SA, holds a 35% stake in the block, mining giant Cia. Vale do Rio Doce SA owns 12.5% and Australian oil company Woodside Petroleum Ltd. holds 12.5%.

Big oil companies world-wide are keen to shore up their reserves because discoveries have become scarce, and hydrocarbons are getting increasingly difficult to extract. For Repsol new finds are vital for ensuring that it can maintain production.

Repsol's production has declined for years as its fields in Argentina matured and because of contractual changes in Venezuela, Bolivia and Ecuador. The combined oil and gas output at Repsol in the first quarter fell 4.9% from a year earlier to 918,000 barrels of oil equivalent a day.

The performance of Repsol's refining unit partly offset the decline in production, but that is unlikely to continue, as refining margins have collapsed. Refining margins in the second quarter have plunged to around $2 a barrel, down from $8.20 a barrel in the second quarter of last year, said Banco Espanol de Credito SA analyst Robert Jackson.

Access to Brazilian exploration is a key driver of future production, some analysts say, and Mr. Fernandez said Repsol is pinning expectations for its future output growth in great part on its own Brazilian finds. Hydrocarbons from the new fields will start generating cash in 2013 or 2014, he said.

The new Brazilian discoveries require "much effort and high investments," Mr. Fernandez acknowledged.

The recent finds in Brazil could well double Repsol's oil reserves. ING Groep NV estimates Repsol's share of recoverable reserves in the discovery as 333 million barrels of oil equivalent. Adding that to Repsol's other recent Brazilian discoveries, the finds, all of them in the Santos Basin, could add up to 2.2 billion in reserves. At the end of last year, the company estimated it had reserves of 2.2 billion barrels of oil equivalent.

Repsol plans to drill an appraisal well at Panoramix, probably later this year, before announcing a reserve estimate there.

The biggest of Repsol's recent discoveries lies in a block in Brazil's promising subsalt oil region. Oil found there lies further off Brazil's shore, at water depth of about 2,000 meters, and several thousand meters further below a layer of salt, rock and sand.

The block, in which Repsol holds a 25% stake, holds the so-called Guara and Carioca discoveries. Mr. Fernandez estimates it holds as much as six billion barrels of oil equivalent, though the company has made no official estimates.

That would make it one of the largest discoveries in recent years, though topped by the Tupi discovery by Petrobras, BG Group PLC and Galp Energia, which Petrobras in 2007 said is likely hold as much as 8 billion barrels of oil equivalent in recoverable reserves.

"Everyone is aware of how transformational Brazil could be for the company, but production may still be years away," ING analyst Jason Kenney said.

Mr. Fernandez said output is likely to start from one of the early finds in the block of the Carioca and Guara discoveries in 2013 or 2014, and Repsol's initial share will be about 50,000 barrels a day.

Mr. Fernandez said financing the development of the giant fields won't be difficult. Part could be paid for by Repsol's cash generation, or by new debt.  

Copyright (c) 2009 Dow Jones & Company, Inc.


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