OGX Reports $3.4B in 2Q10

OGX announced results for the second quarter ended June 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 thousands of reais (R$), unless stated otherwise.

"We have made important progress in our exploratory campaign in recent months, highlighted by significant discoveries in the southern part of the Campos Basin, as well as the beginning of a new cycle of drilling activity in three new regions: the northern blocks of the Campos Basin, and the Santos and Parnaíba basins. Our efforts in northern Campos and Santos have already been successful. We have also expanded our exploratory boundaries with the acquisition of five high-potential onshore blocks in Colombia, demonstrating a capacity to pursue opportunities in regions of great potential where we have differentiated knowledge," commented Paulo Mendonça, General Executive Officer of OGX.

First Quarter Highlights and Subsequent Events:

  • Initiated exploration of the Parnaíba Basin with the drilling of the first onshore well, OGX-16, in the BT-PN-08 block through special purpose vehicle OGX Maranhão;
  • Commenced the drilling of seven new wells since the beginning of the second quarter in the Campos and Santos basins: OGX-11D to OGX-15 as well as OGX-17 and OGX-18;
  • Made important advances in the delineation of the Vesuvio accumulation with the conclusion of the drilling of OGX-9DB and OGX-13 wells and the accumulation formed between OGX-2A, OGX-6 and OGX-15 wells;
  • Filed the Environmental Impact Study (EIA) and the respective Report of Environmental Impact (RIMA) with the Brazilian Institute of the Environment and Renewable Resources (IBAMA) in order to obtain a preliminary license for hydrocarbon production in the Campos Basin;
  • Acquired five exploratory blocks in three onshore basins in Colombia: Cesar-Ranchería, Lower Magdalena Valley and Middle Magdalena Valley;
  • Chartered a sixth semi-submersible rig, Pride Venezuela, from Pride International;
  • Chartered a jack-up drilling unit, Ocean Scepter, provided by Diamond Offshore;
  • Joined the Efficient Carbon Index (“ICO2”), an index composed of companies included in the IBrX-50 Index, which tracks the efficiency of member companies' emissions of greenhouse gases;
  • Initiated a process for the sale of a minority participation in the Campos basin's blocks.

Exploratory Campaign

During the second quarter of 2010, we made significant progress in our exploratory campaign and achieved excellent drilling results, highlighted by new discoveries in the Campos Basin that further validated the great petrolific potential of our blocks in this region, as well as the identification of accumulations in areas which had not yet been explored by OGX, such as the northern blocks of the Campos Basin and the Santos Basin.

Since the beginning of our exploratory campaign, in September 2009, through August 2010, the drilling of 12 wells operated by OGX and 1 well operated by Maersk has been concluded and we currently have six rigs operating simultaneously on our behalf (3 in Campos, 2 in Santos and 1 in the Parnaiba Basin). Discoveries were made in 16 of a total of 19 wells completed or in progress so far, not including the wells OGX-16 and OGX-17 that are still in initial stage of drilling. Based on the data obtained from the drilling of the 7 wells (wells OGX-1 to OGX-6 and also OGX-8), we estimate a total recoverable oil volume between 2.6 and 5.5 billion of barrels.

Wells OGX-14 (Peró prospect) and OGX-18 (Ingá) were the first to be drilled in the northern blocks of the Campos Basin, and they provided evidence of the existence of a new province of great importance for OGX. The drilling of OGX-14 was concluded and showed two important accumulations in the Albian section. The drilling of OGX-18, which is still in progress, identified hydrocarbons in the Santonian section as well as in the Albian section. The Albian section of this well was, structurally, 56 meters above the Albian section of OGX-14, signaling a potentially superior column to the one already encountered in this block. These results suggest that a new series of discoveries in the BM-C-40 block, which is adjacent to the Peregrino and Polvo fields, is possible. The rig Ocean Lexington remains active in this block and is dedicated to the drilling of well OGX-18, located 2 km away from the well OGX-14.

Another important discovery for OGX was made in the OGX-15 well (Santa Helena prospect, BM-C-41 block), where the presence of hydrocarbons was detected in the Albian and Aptian sections. The drilling of this well strengthens the previously announced hypothesis that the accumulation encountered in the Albian section of this well is connected to the structure formed between the Pipeline (OGX-2A) and Etna (OGX-6) prospects, whose connectivity had been previously announced. For the Aptian section, pressure tests will be conducted in order to verify possible connectivity between these reservoirs. The Santa Helena prospect is located 6.41 km northeast of the Pipeline prospect and 1.81km northwest of the Etna prospect.

We also concluded the drilling of two appraisal wells in the Vesúvio accumulation, 3-OGX-9DB-RJS and 3-OGX13-RJS. The OGX-9DB well confirmed previously identified sands from well OGX-1, Vesúvio prospect, and detected new sand bodies, suggesting the existence of additional accumulations. The oil-water contact was also identified at deeper levels. In the OGX-13 well, evidence of hydrocarbons was found in sandstone reservoirs in the Eocene section and preliminary information indicates that this well was drilled in one of the structure's boundaries. The identification of the oil-water contact in the OGX-9DB well, as well as the identification of the structure's boundaries in the OGX-13 well, have made an important contribution to the delineation of the Vesúvio accumulation. The OGX-13 well is located approximately 4.25 km away from OGX-1 and 2.15 km from OGX-9DB.

In addition to beginning drilling in the northern blocks of the Campos Basin, we initiated drilling activities in two other regions which had not yet been explored by OGX as an operator: the Santos Basin, through the drilling of wells OGX-11D, OGX-12 and OGX-17, and the Parnaiba Basin with the drilling of the OGX-16 well.

Within the Santos Basin, we highlight the drilling of the Natal prospect (OGX-11D), in the BM-S-59 block, adjacent to the Mexilhão field, in which liquid hydrocarbons and associated gas were discovered in the Santonian section. There the liquid hydrocarbons were revealed to be of high quality, with an API of approximately 41°, suggesting a more attractive project. The drilling of the OGX-11D well, initiated on April 9th, and the drilling of the Belém prospect (OGX-17) in the BM-S-56 block, initiated on July 22nd, are still ongoing.

The drilling of the OGX-12 well (Niteroi prospect, in the BM-S-57 block) has been concluded and it provided valuable information that furthered the calibration of our new geological model for the region. However, hydrocarbons encountered at the well were considered to be of a non-commercial nature.

A Discovery Appraisal Plan was approved by the National Agency of Petroleum, Natural Gas and Biofuels (ANP) for well 1-MRK-2B-SPS operated by Maersk in the BM-S-29 block of the Santos Basin. This plan had been filed in March of this year and contemplates the drilling of a second well in the block as well as the reprocessing of 3D seismic data.

Regarding the expansion of our portfolio, we highlight the acquisition of 5 exploratory blocks in Colombia, during the Open Round Colombia 2010, which represented an important step in the expansion of the Company's exploration beyond Brazil's borders. These blocks are located in the Cesar-Ranchería, Lower Magdalena Valley and Middle Magdalena Valley Basins, and together comprise an area of approximately 12.5 thousand km² in onshore sedimentary basins at different stages of maturity, offering significant exploratory potential. OGX has committed to a total investment of approximately US$125 million over an initial three-year exploratory phase which involves the acquisition of seismic data and the drilling of wells.

Based on excellent results from the first wells drilled, we contracted a sixth semi-submersible drilling rig, Pride Venezuela, from Pride International. The rig will be available to OGX beginning in the third quarter of 2010 for a period of up to one year and will facilitate advancement of the delineation program. At the same time, the rig will allow OGX to continue identifying new exploratory prospects in the Campos and Santos Basins. OGX also secured a jack-up drilling unit, a platform that is ideal for drilling in the water depths that will be encountered in the Pará-Maranhão Basin. The Ocean Scepter, provided by Diamond Offshore, will be made available to OGX as of December 2010 for a period of one year and can be extended for an additional year.

In the coming months, noteworthy events will include the conclusion of the ongoing drilling in the Campos, Santos and Parnaíba basins, as well as initiation of the drilling of 14 more wells through the end of the year. Additional tests and studies will be conducted in order to provide a better understanding of drilled prospects.

Operational Security

Given the recent discussions of offshore petroleum exploration, it was announced that, in addition to complying with all the Brazilian legal requirements related to operational safety, we utilize sophisticated risk management practices to identify, categorize and mitigate possible undesirable events related to drilling operations.

The Company has also fostered a highly collaborative environment, working hand-in-hand with teams of world renowned service and equipment suppliers. In addition, OGX has invested massively in technology and in highly skilled professionals while utilizing best practices in the management and execution of its exploratory campaign.

Included in our security measures are the following practices:

  • Implementation of an Integrated Operational Support Center at our headquarters, uniting renowned companies that monitor local drilling activities in real time, 24 hours per day, 7 days per week, thus minimizing operational risks, accelerating decision-making process and facilitating technical support from other distinguished support centers around the world;
  • Planning the development of well projects using highly standardized operational procedures, culminating in the simulation of all operations to be executed in the wells, through meetings coordinated by OGX, which include representatives of all individual enterprises that will participate in the execution of the project;
  • Hiring of a leading global consulting firm in the offshore well control market to provide engineering expertise, consultancy and technical support in the planning and execution of all operational drilling aspects as well as monitoring of all phases of well drilling in the Santos Basin. OGX provided the firm with the ability to monitor operations in real time from Houston, Texas through the Company's Integrated Operational Support Center;
  • Adoption of a drilling monitoring model which requires one dedicated operations manager per rig to supervise drilling activities from the Company's headquarters. Each operations manager possesses more than 25 years of experience in the oil & gas industry;
  • Tight control of operations, allowing changes in the original drilling program only after written confirmation and with the participation and authorization of all involved parties. Changes in global best practices are quickly evaluated and deployed in the drilling programs where appropriate;
  • Systematic audits by independent teams of well drilling activity, beginning with the initial planning phase and extending through the execution phase on the rig. The latest one, done in June 2010, included representatives of the OGX service provider companies who were not involved in the aforementioned projects, allowing for impartiality and total independence in the recommendations;
  • Usage of oil spill recovery equipment and firefighting systems in all its eight rig support boats, providing greater agility and efficiency in the event of a potential incident.

The Company maintained the following Offshore Insurance Program: Material damages aiming to protect OGX's assets and third parties' assets for which the Company is responsible; Civil Responsibility Liability damage to third parties; and Insurance for well control, which covers the occurrence of accidents such as kick and blowout, eruption of the well due to uncontrolled pressure, which can lead to its abandonment.

During the first half of 2010, OGX and Aon, its Risk Advisor, a leading insurance broker, worked closely to differentiate the Company risks, also demonstrating how the risk management techniques that OGX had developed and implemented during the drilling campaign had delivered high safety standards. OGX carried out a mid-term review of its existing insurance program resulting in US$ 1.5 million estimated savings over the next 12 months. The timing of this review was challenging given the recent impact of the Gulf of Mexico event over the insurance market.

"The favorable terms achieved in our Insurance Program reflect the recognition by the market of an exploratory campaign highly focused on operational excellence and safety," commented Paulo Mendonça, General Executive Officer.


An Environmental Impact Study (EIA) and the respective Report of Environmental Impact (RIMA) necessary for the environmental licensing of the activity of integrated development production and offloading of oil and natural gas in the area of the blocks BM-C-39, BM-C-40, BM-C-41, BM-C-42 and BM-C-43, in the Campos Basin. These studies were filed with the Brazilian Institute of Environment and Renewable Resources (IBAMA) within the legally established time. To date, we are awaiting the response of the General Coordination of Petroleum and Gas Commission of IBAMA.

Financial Performance

"We ended the period with R$6.1 billion in cash, equivalent to US $3.4 billion. The investment of our financial resources in fixed income securities yielded a return of approximately 105% of CDI, generating financial revenues of R$145 million. The intensification of our exploratory campaign has resulted in many important discoveries and contributed to a significant increase in our capitalized expenses. Our financial position remains strong and will support our exploratory activities and initial production development," said Marcelo Torres, Chief Financial Officer of OGX.

Net Financial Result

The net financial result of R$135.5 million in the quarter was impacted by three main factors: interest income of R$145 million, the impact of marking-to-market the fair value results of the financial instruments of R$4 million and net losses on hedging of future commitments in foreign currency (U.S. dollars) of R$13.5 million and others of R$8 million.

Exploratory Expenses

The increase in exploratory expenses is primarily due to the seismic activities in the Espiríto Santo and Parnaíba 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 to the concessions.

Net Profit

Net profit for the period was R$57.8 million resulting from financial results of R$135.5 million plus Minority Interest of R$10 million, partially offset by Exploratory Expenses of R$25.2 million, General and Administrative Expenses of R$57.1 million, and Income Tax and Social Contribution of R$5.4 million. The increase in net profit on a year-over-year basis was due to the decrease in financial expenses to R$15.7 million from R$315.4 in the same period of 2009.


The consolidated cash position of the Company and its subsidiary totaled R$6.1 billion, equivalent to US $3.4 billion, sufficient to fund the entire exploratory campaign and initial production development. These cash resources are invested in a fixed-income fund that has yielded an accumulated gross average return of 105.05% of Interbank Deposit Rate (CDI) equivalent to R$145 million.


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