Devon's Brazil Success Likely to Drive Up Assets' Price

RIO DE JANEIRO (Dow Jones), Jan. 29, 2010

U.S. oil company Devon Energy struck black gold once again in Brazil, with the latest discovery likely increasing the company's windfall when it sells off the prime offshore assets.

A sidetrack well to the Itaipu prospect in Brazil's prolific Campos Basin tested positive for oil, according to a filing with the country's National Petroleum Agency, or ANP. Devon and partner Anadarko Petroleum Corp. (APC) first announced successful drilling at Itaipu in December.

With Brazil's new oil laws still under debate and generating uncertainties for international oil companies, Devon is sitting on one of the few pieces of promising acreage up for grabs. Government officials have pledged to honor existing contracts despite proposals to change the country's regulatory framework.

The company said last year that it would sell off its international assets -- including stakes in seven blocks in Brazil -- with the sales expected to generate between $4.5 billion and $7.5 billion. Devon expects to complete the sales in 2010, turning its focus toward development of its natural gas assets in the U.S.

The prizes in Devon's Brazilian portfolio are in the BM-C-30 and BM-C-32 blocks in the Campos Basin, where more than 85% of Brazil's crude oil is produced. Itaipu is in the BM-C-32 block, while the BM-C-30 block contains the nearby Wahoo and Wahoo 2 prospects.

Anadarko is a key partner in both blocks, including operating status at BM-C-30. But the company has been emphatic that it isn't interested in increasing its risk beyond the current level. That would open the door for other companies seeking to build on current positions or enter Brazil for the first time.

Devon's seven offshore Brazil blocks hold about 20 prospects, with at least six possible subsalt plays, the company said. Possible resources were estimated at potentially between 2 billion and 4 billion barrels.

The subsalt discoveries were made under a thick layer of salt. 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. The primary subsalt region lies in a cluster of blocks in the Santos Basin, off the coasts of Rio de Janeiro and Sao Paulo states.

But the Campos Basin also sits above a layer of salt similar to the Santos Basin further south. More importantly, the salt layer in Campos isn't as thick -- and the basin already has a massive infrastructure network installed. That reduces investment costs in the region.

Devon Energy and Anadarko have said the Itaipu, Wahoo and Wahoo 2 prospects share similarities with the Jubarte field operated by Brazilian state-run energy company Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras.

Jubarte was the site of Brazil's first subsalt oil production in September 2008, when crude was pumped from the 103A well.

Devon operates the BM-C-32 block with a 40% share, while Anadarko holds a 33.3% stake. SK Energy holds the remaining 26.7% stake. The companies plan further appraisal drilling at Itaipu this year.

Itaipu is about 16 miles north of the Wahoo discovery, which was announced in September 2008. Wahoo is in the Campos Basin's BM-C-30 block. Anadarko is lead operator in the block, with a 30% stake. Devon Energy and EnCana Brasil Petroleo Limitada each hold a 25% share, while SK do Brazil Ltda has a 20% stake.

Anadarko said the consortium was planning a sidetrack at the Wahoo 2 prospect. When the sidetrack is complete, a drillstem test will be conducted at the first Wahoo find. Two additional exploration and appraisal wells are also planned for BM-C-30 in 2010, Anadarko said.

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