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Posted on May 17, 2012
Oil & Gas Group is sitting on valuable discoveries but development costs are huge, says
When asked what he most loves about Brazil, the answer from Nelson Silva, head of BG’s operations in the country, is very simple: BM-S-9, BM-S-10, BM-S-11, BM-S-50, BM-S-52.
The series of codes, known as the “big five”, are the names of some of the most coveted oil and gas exploration blocks in Brazil’s Santos basin. Buried deep beneath the ocean floor off the south-east coast, these reserves are set to produce nearly as much as the entire UK North Sea within a decade, helping catapult Brazil into the ranks of the world’s top five oil producers.
For Mr Silva, they are also crucial to the company’s future.
The UK-based oil and gas group is the only foreign company to hold stakes in all five blocks – an offshore portfolio that promises to turn BG into the second biggest oil and gas group in Brazil after state-run Petrobras, but also one that will require potentially crippling levels of investment.
The company has indicated it would need to invest at least $42bn in developing its 6bn barrels of oil reserves, more than the entire gross domestic product of neighbouring Paraguay. Some analysts fear BG has become overexposed to the Brazilian market, with assets in the country worth about $45bn.
BG’s position is largely the result of it being one of the first foreign groups to take an interest in the country, entering in 1994 to help build a $2bn gas pipeline to Bolivia.
At that time, the country was an economic basket case in the eyes of the world, having changed its currency five times in 10 years and having suffered inflation rates of more than 2,000 per cent.
But following almost two decades of economic stability and the discovery of the country’s vast so-called “pre-salt” oil in 2007, Brazil has now attracted at least 36 foreign companies to its upstream market, according to Ernst & Young.
Mr Silva says: “In 1994 BG made a strategic decision to invest in the country and then, after the discovery of the Lula field, Brazil became even more attractive,” .
The Lula field, which ranked as the biggest discovery in the Americas for three decades and holds an estimated 8bn barrels, lies in the BM-S-11 block, where BG owns 25 per cent of the concession.
BG also has a 30 per cent stake in the BM-S-9 block that holds the Carioca field, 25 per cent of BM-S-10, 20 per cent of BM-S-50 and 40 per cent of BM-S-52, which it operated during the exploratory phase.
However, the company is facing increasing competition in the Brazilian market, which is expected to account for more than a third of the group’s total volumes by 2020.
Sinopec, the Chinese oil and petrochemical group, has been moving particularly fast, buying 30 per cent of the Brazilian assets of Portugal’s Galp Energia for $5.2bn last year. The state-owned group had already paid $7.1bn for a 40 per cent stake in the Brazilian assets of Repsol, the Spanish group, in 2010.
In the neighbouring Campos basin, Norway’s Statoil not only holds 60 per cent of the BM-C-7 block that contains the Peregrino field but it is also operator of the area.
However, while BG faces growing competition from newcomers in the industry, its biggest challenge is developing the reserves it already has.
Mr Silva explains: “We are entering a new phase, where growth will increase a lot and so, naturally, investments will also accelerate from now on.”
After investing just over $5bn in Brazil since 1994, BG’s chief executive has indicated the company will pour more than $42bn into its Brazilian operations over the next decade, saying it would cost about $7 a barrel to develop the company’s 6bn barrels of reserves.
Mr Silva told the Financial Times last month that the group also plans to spend an extra $2bn on research and development in an attempt to address a widespread shortage of trained professionals in the industry.
Part of BG’s projected investments is likely to come from the proceeds of a global asset sale, which the company announced last month would include the sale of a 60 per cent stake in Brazil’s largest gas distributor Comgás that it bought in 1999.
Analysts at banks such as Nomura have also advised BG to sell part of its interest in its oil blocks to allow the company to invest more in other regions, but the company has so far shown no signs of backing down from its core business in the country.
“BG announced in February this year that it will sell some assets, worth in total about $5bn,” says Mr Silva. “But the company is very firmly established here in Brazil. We are very happy with the relationship with Petrobras, the government, BNDES [Brazil’s state bank].
“Our focus has been on investing more and more.”