Falling oil prices could cut investment in exploration in the country by 20%, says specialized consultancy.

Marta Nogueira, Reuters - The collapse in international oil prices could lead to a cut of $300 million to $600 million in planned investments for oil exploration in Brazil in 2020, in addition to delaying or even preventing the long-awaited development of new frontiers in the country, Wood Mackenzie experts told Reuters.

Before the price collapse, the renowned consulting firm predicted investments of $3 billion in exploration in Brazil this year, mainly considering plans by Petrobras, the Anglo-Dutch company Shell, the Norwegian company Equinor, among others.

In its business plan, the Brazilian oil company indicated average investments in exploration of US$2,3 billion per year between 2020 and 2024.

For its calculations, Wood Mackenzie considers a reduction of up to 20% in Petrobras' planned investments for exploration this year, in addition to a similar percentage cut in investments by other oil companies, should oil prices remain around $35 per barrel.

Brent crude oil prices, the global benchmark, have fallen more than 50% this year, closing around $30 a barrel on Monday, impacted by a price war between Russia and Saudi Arabia and compounded by fears of lower demand generated by the new coronavirus.

“I think everyone... is assessing what they can do to save money, our expectation is for capex cuts,” Marcelo de Assis, head of Latin America upstream research at Wood Mackenzie, told Reuters.

The expert highlighted that exploratory activities, such as seismic surveys and drilling, if contracted, have a greater chance of being carried out. But the trend, according to him, is that companies prefer to generate cash rather than commit to new obligations.

Currently, according to the consultancy, companies like Petrobras and Shell—the two largest producers in Brazil—already have drilling contracts or other exploratory activities underway, which can be maintained.

"Petrobras had a very extensive program for exploration in the pre-salt layer this year; we'll see if it will actually be implemented," Assis stated.

Neither company immediately responded to requests for comment.

Meanwhile, the American company Exxon and the French company Total are still awaiting important drilling licenses, which, according to the consultancy, would facilitate the postponement of activities.

In response to Reuters, both companies stated that, to date, there have been no changes to their plans for the country. 

The French company added that it filed a license application in February with Ibama to drill in block CM-541, in the Campos Basin, which it acquired at auction last year for a signing bonus of 4,029 billion reais. Furthermore, it has been conducting a drilling campaign of four wells since June 2019 in the Lapa field, in the Santos Basin, with a rig already contracted.

Norwegian company Equinor, according to Wood Mackenzie, will likely continue important activities for the development of the significant Carcará discovery, whose declaration of commerciality has already been submitted to the regulatory agency ANP.

Equinor told Reuters that it is proceeding with its plans and that "there are currently no changes to the Carcará project or the exploration program."

UNCERTAINTY

The potential deterioration of the investment outlook for exploration comes after Brazil's success in previous years in granting large and promising pre-salt areas for exploration, thereby raising billions of dollars in signature bonuses.

However, these areas still contain unmitigated exploration risks, and future success in their productivity is not guaranteed, Wood Mackenzie experts stressed.

Juliana Miguez, research manager for Latin America in the upstream area, highlighted that two large areas recently granted, Peroba (operated by Petrobras) and Alto de Cabo Frio Oeste (operated by Shell), presented non-operational results after the first drillings.

"There was already an atmosphere of uncertainty, and now it's worsened by the price of oil," said Miguez.

Another negative consequence of the decline in oil prices could be a further delay in the exploration and development of new frontiers in Brazil, something that Brazilian government and industry have been pursuing for many years in regions such as the equatorial margin.

There is an understanding that the exploration of the potential of these areas should already be underway, since several countries have been seeking to stimulate the development of renewable energies and gradually reduce the use of fossil fuels.

“If it takes 10 years from a discovery to the first oil, we're already talking about after 2030. So, imagine what the scenario will be like, in the context of energy transition... there's a real chance that these volumes won't be developed,” Miguez stated.