Santos Dry Hole Highlights Risks of Brazil Offshore Oil

HOUSTON (Dow Jones Newswires), Jul. 8, 2009

Exxon Mobil Corp. has drilled a dry appraisal well in Brazil's alluring Santos basin -- a sign that one of the world's hottest offshore oil provinces still contains many challenges.

Exxon's partner, Hess Corp., said late Tuesday that the Guarani prospect in the companies' BM-S-22 license plot had been completed, and turned up dry. Both Hess and Exxon own 40% of the block, while Brazilian state-run energy giant Petrobras holds the remaining 20%. A spokesman for ExxonMobil, the world's largest publicly traded oil company by market value and the BM-S-22 license operator, confirmed Wednesday that it didn't find oil.

The Guarani well was the second well drilled in the BM-S-22 block. The first well, Azulao, was successful in finding oil, twice. The companies plan on drilling at least one other well, though it won't be this year, said Hess spokesman Jon Pepper.

"It will take us some time to evaluate the data we gathered up to this point," Pepper said.

The dry hole at Guarani underscores the difficulty and great expense international oil companies face in replacing their dwindling oil and gas reserves. These firms are increasingly flocking to difficult-to-exploit areas like deepwater offshore fields or the Canadian oilsands.

Brazil's Santos basin represents well the new challenges faced by the oil business: It contains some of the largest deposits found in the Western Hemisphere in more than three decades, but most of the hydrocarbons lie under thick layers of salt that hamper exploration. The Brazilian government has said that the area Guarani is part of could contain up to 33 billion barrels of oil equivalent.

"They have had a lot of exciting finds, but it's getting to the point that the more the companies drill, the more they realize just how complex that salt layer is," said Tom Liskey, an analyst who covers Brazil for IHS, a consultancy.

The news also comes as the Brazilian government, spurred by the Santos Basin discoveries, seeks an overhaul of oil laws that would give it a greater stake in newly found reserves. Officials argue that the presence of giant oilfields would be enough to lure investors despite a tightening of business terms, but the Guarani dry hole means that there's still significant risk involved in operating there, said Jeremy Martin, director of the Energy Program at the Institute of the Americas in San Diego, Calif.

"It is still, after all, the oil and gas business," Martin said.

Offshore exploration failures are expensive: A typical well in the area can cost between $60 million and $80 million, Liskey said. Guarani had a cost of about $150 million, according to a Deutsche Bank research note. Hess said it will write off its 40% share of the exploration expense during the second quarter.

But analysts covering Hess played down the Guarani setback, and expect drilling to resume in 2010.

"There is clearly still major potential," said a Deutsche Bank research note.

Hess spokesman Pepper said that "it's still too early to give a verdict" on the block. "This is a long process. We knew that going in -- we'll take some time to give it a proper evaluation."

ExxonMobil spokesman Patrick McGinn also said that it is "premature" to speculate on the size and characteristics of the field. The company is still evaluating the results of the drilling program in order to plan the location of a third well, he said.

"We have consistently stated that exploration for oil and gas has considerable risk," McGinn said.

Exxon shares closed at $66.26, down 0.45%. Hess shares traded at $48, down 1.52%.

(Rogerio Jelmayer in Sao Paulo contributed to this story)  

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