New Discoveries Sweeten Brazil's Campos Basin

RIO DE JANEIRO (Dow Jones), Feb. 11, 2010

Brazil's Campos Basin has long been the country's leading region for oil production, but in recent years it has taken a back seat to the Santos Basin in terms of exploration.

A series of recent discoveries, however, could change the way oil companies view Campos. The Campos Basin produces more than 85% of Brazil's crude oil -- a predominantly heavy grade that requires intense processing to turn it into more valuable derivatives.

The Campos Basin's massive oil infrastructure allows companies operating in the region to bring production online more quickly -- and there remains significant exploration left to be done in the prolific region.

Brazilian independent driller OGX Petroleo e Gas Participacoes SA (OGXP3.BR, OGXPY) has led the Campos Basin's recent renaissance. The company has made discoveries in the BM-C-41, BM-C-42 and BM-C-43 blocks.

In early February, OGX pegged recoverable reserves at two finds in the BM-C-41 and BM-C-42 blocks at between 600 million and 1.1 billion barrels.

Some of OGX's acreage previously belonged to Brazilian state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras. But Petrobras returned the blocks to regulators because, at that time, the fields weren't commercially viable. Higher international oil prices have changed that outlook.

Perhaps in light of OGX's success in territory formerly under its control, Petrobras said it had started to intensify exploration efforts near currently producing fields in an effort to reduce costs and bring new production onstream more quickly.

The strategy bore fruit with Thursday's announcement of a discovery in a well drilled near two currently producing fields.

Petrobras estimated recoverable reserves of 25 million barrels at the well, which is near the Pampo and Bicudo fields. The well is expected to start production later this year via connection to platforms at either Pampo or Bicudo, Petrobras said.

The Campos Basin efforts by both OGX and Petrobras highlight the basin's unique -- and now growing -- place in the offshore Brazil phenomenon. Not only is the Campos Basin a proven oil producer, but the area also offers several advantages over the Santos Basin that could make it more attractive to oil companies.

The Campos Basin has extensive infrastructure base already installed, with logistics and pipelines in place to transport crude oil and crews. Oil services companies and suppliers also have built factories at major cities on the coast.

The Santos Basin, meanwhile, has very little installed infrastructure. Oil fields in the Santos Basin also tend to be much further from shore than in its northern counterpart, further complicating logistics and transport issues.

But the global oil industry has so far been seduced by the light sweet crude that sits under a thick layer of salt deep under the Santos Basin seabed.

Development of the so-called subsalt oil 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 are 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 Petrobras the lead developer.

Oil fields already under concession in the Campos Basin, however, should be free from government machinations. That's because the government has pledged to honor the existing contracts.

More important, the Santos Basin isn't alone in subsalt oil reserves. The Campos Basin also contains a little-explored subsalt region that isn't nearly as deep underwater nor as thick as the much-ballyhooed Santos Basin subsalt oil patch.

The renewed shine of the Campos Basin should also pay dividends for U.S. oil company Devon Energy (DVN), which has put prime acreage in the region up for bid.

Devon 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.

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.

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