OGX Wades in Shallow Waters for Oil Riches

RIO DE JANEIRO (Dow Jones), Feb. 3, 2010

While the majority of the oil industry fawns over Brazil's recent deepwater offshore oil discoveries, Brazilian oil and gas company OGX Petroleo e Gas Participacoes S/A sticks closer to shore.

By focusing on shallow-water exploration concessions in Brazil's prolific Campos Basin -- where more than 85% of the country's crude is produced -- the independent driller has enjoyed a stunning amount of success.

This week alone, OGX has added an estimated 600 million to 1.1 billion barrels of recoverable oil to its portfolio. Perhaps international oil companies focused on Brazil's so-called subsalt oil reserves are looking for love in all the wrong places.

Oil majors, keen to increase faltering production amid limited access to new oil frontiers, have been seduced by the deepwater finds made in recent years. The discoveries were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states.

Development of the fields -- including Tupi, the Western Hemisphere's largest oil discovery since 1976 -- is expected to be pricey and complicated. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

Complicating matters is the Brazilian government's proposals to change the country's regulatory framework for the oil and natural gas industries. The changes will give the government a greater share in the deepwater fields and make state-run energy giant Petroleo Brasileiro S/A (PBR, PETR4.BR) the lead developer.

The government has pledged to honor existing concessions, easing concerns for companies such as OGX with operations already under way. More important, the Campos Basin also contains a little-explored subsalt region that is much closer to shore, not as thick and in the midst of the most-developed oil infrastructure in the country.

The decision to focus on the Campos Basin has paid big dividends for OGX so far, allowing the company to build a large portfolio of projects in a short period.

Billionaire Brazilian businessman Eike Batista formed the company less than three years ago. A then-record initial public offering of 6.7 billion Brazilian reals ($3.66 billion) in June 2008 filled the driller's coffers with enough cash to fund an aggressive drilling campaign.

Initial drilling success caused the company to ramp up its exploration program. Over the next four years, OGX plans to drill 79 wells, with 72 offshore and seven on land.

In 2010, OGX will drill 27 wells. Twenty-six of the wells will be drilled offshore, with a single onshore well planned for the Parnaiba Basin.

The drilling could add to OGX's potential resources, which jumped nearly 40% in November. An analysis by consultants DeGolyer & MacNaughton certified OGX's potential risked resources at 6.7 billion barrels of oil equivalent, or BOE.

The next estimate will likely be driven higher after the recent discoveries. On Monday, analysis of the 1-OGX-4-RJS in the BM-C-42 well led to an estimate for recoverable reserves of between 100 million and 200 million barrels of oil. OGX followed up with Wednesday's release of an estimate for 500 million to 900 million barrels from three reservoirs in the BM-C-41 block.

OGX owns 100% of both blocks.

Investors cheered the Wednesday oil estimate for the Campos Basin's BM-C-41 block, sending OGX shares up 2.5% to BRL18.35 in recent trading on the Sao Paulo Stock Exchange. So far in 2010, OGX shares are up 7.3% versus a 1.9% decline in the Ibovespa stock index.

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