Offshore Brazil: Viewpoint of a Large U.S.-Based Independent
Authors: Fawthrop Andrew L. 
Published: October 2008

In 1998 Unocal entered the Brazilian oil and gas sector to find commercial E&P opportunities that fit its global operational expertise. Excitement was running high in the industry that a major petroleum province was available to foreign operators for the first time in almost 20 years. In the five years since then, considerable E&P investment by the industry has proven the elements of the petroleum system; although it has been very difficult for both Petrobras and the foreign operators to assemble all of the elements in the same place and generate significant new discoveries. Regulatory issues have caused start up problems. Some of them were resolved with great efficiency and some continue to nag in the background contributing to a perception of commercially challenging exploration and business environment among foreign operators. Citing examples from Unocal's experience, this paper examines the issues and possible solutions from the perspective of a large international independent.

Introduction

Unocal's first investment in Brazil was in 1957 - and one in which the Company continues to maintain an interest today. That first investment was in the mining industry, not offshore oil and gas. Unocal, through its' subsidiary Molycorp Inc., has a 45-percent interest in Campanhia Brasileira de Metalurgia e Mineração, the world's largest producer of niobium, an alloy used in the manufacturing of steel. Located in Araxá, Minas Gerais, the Araxá mine supplies about 60 percent of the western world's niobium requirements.

The reference to this seemingly unrelated investment is important because it contains the ingredients of a successful investment in Brazil from the perspective of a large independent - a good local partner, a safe and profitable operation with growing overseas markets, and a good relationship with the local communities.

Brazil's oil and gas sector has undergone a major transformation in the last six years. Since 1997, Petrobras -the country's state-run oil company - has formed partnerships with international oil companies (IOCs), and a new Petroleum Law has been enacted. The country's National Petroleum Agency (ANP) has opened Brazil's petroleum industry to other domestic and foreign players by offering blocks in four bid rounds held since 1999. By opening the country's oil and gas industry, the government hoped it could bring about oil self sufficiency for Brazil.

ANP set a new world standard for opening acreage to foreign companies. The group was organized and made data available in a timely and very organized fashion. As a result, more than 40 private companies are involved in exploration and production activities, onshore and offshore Brazil. However, the latest licensing round (ANP4) in Brazil showed a dramatic reversal in industry involvement and exposure amounts from the trend of the previous three licensing rounds. Some of the significant changes in industry activity evident from ANP4 are:a general lack of major IOCs participation,a lack of bidding on ultra-deepwater blocks,high interest in mature basin blocks within the Potiguar and Reconcavo basins by small independents, andincreased interest in shallow-water Brazilian blocks.