Exxon fails in oil exploration in Brazil.

HOUSTON (Reuters) - Exxon Mobil Corp has invested billions of dollars in offshore drilling in Brazil, an area it once abandoned and now sees as key to its future.

But five years after its return, the U.S. oil giant has yet to make a major oil discovery as an operator in Brazilian waters and has missed opportunities to buy businesses that are now gushing oil, Reuters has learned.

Exxon drilled two exploratory wells last year in an area located nearly 200 km off the country's southeast coast, the company acknowledged. But the wells in those blocks -- nicknamed Opal and Titan -- did not show sufficient potential to justify the installation of a platform, according to two people familiar with the results.

The drilling license fee alone for the Titan block in the Santos Basin cost the company approximately half a billion dollars, according to Brazilian government records.

Exxon has not moved forward with so-called appraisal wells in these areas, additional drilling that is a prerequisite for understanding the extent and size of any oil accumulation in preparation for production, the sources said.

The company declined to comment on its outlook for Opal and Titan.

There was more bad news from another block -- Uirapuru -- in which Exxon holds a minority stake. Petrobras, the lead operator, notified the National Agency of Petroleum, Natural Gas and Biofuels (ANP) on March 31, 2020, that the oil discoveries were also insufficient to justify further investment.

Exxon told Reuters that hydrocarbons have been found in another block it is exploring in a 50-50 partnership with Petrobras as the main operator in the Campos Basin, Rio de Janeiro. Exxon stated that drilling in a well called Mairarê was completed in August and the data is still being analyzed to determine how to proceed.

These difficulties are common in the oil sector, where the development of major discoveries can take years. But there is pressure for Exxon to succeed in Brazil, one of the three geographic areas on which the company counts for most of its future production. The other two—Guyana and the US shale region—are performing well and developing rapidly.

But the company's strategy in Brazil so far has been disappointing, despite Exxon spending $4 billion with partners on drilling rights over the past five years. During that period, Exxon went from a small player to participating in 28 offshore lease blocks—17 as the main operator—covering 2,5 million acres. This is second only to the offshore territory controlled by Petrobras.

Meanwhile, Exxon rejected deals in other offshore zones in Brazil that are producing very efficiently.

The company twice prepared final contracts to bid on discovered reserves put up for public auction by Brazilian authorities, but these were withdrawn at the last minute, according to four people familiar with the situation.

The first decline occurred in 2019 in a field called Búzios and, more recently, in December in another called Sépia, the people said. Petrobras was already producing in both fields and would have remained the lead operator, with Exxon taking a 45% stake in a larger reservoir, the sources said.

But Exxon refused for fear of overspending on assets where Petrobras would control the size and pace of development, the people said. Together, the two projects would require more than $40 billion, according to the sources.

That's a huge amount of money. Even so, these two blocks are already producing almost 1 million barrels per day of oil and gas. In December, Búzios alone was producing 739 bpd, according to the regulator ANP. That's more than the average for the entire country of Venezuela last year. Petrobras plans to increase production at Búzios to almost 2 million bpd this decade.

"After carefully considering the opportunity, we decided not to participate" in the Búzios and Sépia auctions, spokeswoman Meghan Macdonald said, without giving details.

Publicly, Exxon has been optimistic about Brazil. In its most recent earnings report, it characterized Brazil as one of its "highest quality growth projects".

Last year, it pledged to invest 40% of the $8 billion needed to develop the Bacalhau offshore field, a project led by Norwegian oil company Equinor ASA. This field is expected to deliver Exxon's first oil from Brazil in 2024.

Exxon also registered with the ANP for another drilling lease auction scheduled for April. "We are excited about the future in Brazil," said the head of Exxon Brazil, Juan Lessmann, at an offshore conference last August in Houston.

Some analysts are not convinced.

"What comes next for Exxon in Brazil is a big question mark, but with a negative trend so far," said Marcelo Assis, head of upstream research in Latin America at the energy consultancy Wood Mackenzie. "If Exxon had made a relevant discovery (in its Opal and Titan drilling), they would have already disclosed it."

FAILURE IN EXPLORATION

Exxon's first major foray into Brazil's offshore fields ended last decade with the failure of one of the world's largest oil discoveries this millennium.

In 2005, it was the only major international oil company holding licenses in the so-called pre-salt layer, a vast oil formation beneath a thick layer of salt on the bottom of the Atlantic Ocean. This oil-rich region, twice the size of Manhattan, would have placed Brazil among the world's top 10 oil producers and generated wealth not only for Petrobras but also for foreign companies, including the European Equinor and Shell PLC.

Meanwhile, Exxon studied seismic images for several years, selected promising locations, and spent over $300 million on complex and time-consuming drilling. The result was three dry wells, the first in 2009, followed by two more in 2011.

In 2012, Exxon returned its block to the Brazilian government and attempted a different strategy. It became a minority shareholder in a group of blocks operated by OGX, an oil company founded by Brazilian commodities magnate Eike Batista, who promised to transform it into a "private Petrobras." Within a year, OGX was bankrupt and ceased operations. Batista would later be convicted of market manipulation for selling off his OGX shares before the company's collapse.

Eike Batista could not be reached for comment.

Exxon withdrew after this episode and also after the change in rules that gave Petrobras the initial rights to the pre-salt discoveries.

EXXON'S RETURN

In 2017, however, Exxon was back and on a buying spree, snapping up blocks after a new government made the oil sector more attractive to foreign investors.

Pre-salt fields currently account for 70% of Brazil's total production of 3,7 million barrels per day of oil and gas—the same as Exxon's global production. Around 5,5 million bpd of oil and gas are expected by 2025, according to the ANP (National Agency of Petroleum, Natural Gas and Biofuels).

But nothing is guaranteed in these complicated formations. A year before Exxon started drilling again, signs of trouble emerged in an offshore field.

There, Shell and its partner Chevron Corp. were left with nothing after spending about $800 million on permits and drilling. Shell said it found little more than water, according to a June 2020 filing with the ANP seen by Reuters.

The consortium is analyzing the results of the 2020 exploratory well and has not yet defined the next steps for the project, Shell told Reuters.

The same thing happened with Exxon's Opal and Titan wells. In a November 4 filing with the ANP (Brazilian National Agency of Petroleum, Natural Gas and Biofuels), the company said it had found hydrocarbons, but they were insufficient to justify a drilling rig, according to a person familiar with those results.

Exxon is now awaiting an environmental permit to drill in another frontier area hundreds of kilometers north of the first two wells and outside the pre-salt layer, according to the ANP (National Agency of Petroleum, Natural Gas and Biofuels).

"The era of major pre-salt discoveries is over," ANP's Director-General, Rodolfo Saboia, told Reuters in December.