Start-ups tap into Brazil's oil boom

A number of ambitious new companies are seeking leading roles in the country's emergence as a global energy player, writes TOM HENNIGANin São Paulo

SINCE ITS discovery of huge new oil reserves off Brazil’s southeast coast in 2007, local energy giant Petrobras has become a favourite of international investors. Last year, they piled into its stock and helped double the firm’s market capitalisation, valuing it above such stalwarts as BP, Chevron and Royal Dutch Shell.

But Brazil’s gathering oil boom goes beyond limelight-hogging Petrobras. Ambitious new start-ups also seek starring roles in the country’s emergence as a leading energy player, just as traditional oil majors in the US and Europe struggle to replace declining reserves.

The most dramatic new entrant onto the local scene is OGX, set up by billionaire mining magnate Eike Batista. Less than three years old and still to deliver a drop of oil to customers, its market cap was nevertheless $30 billion (€21.9 billion) at the end of last month. OGX strategy has been to recruit top Petrobras executives and explore in Brazil’s shallow offshore waters, now that Petrobras is focusing on tapping its new ultra-deep reserves.

Its first wells have all hit pay dirt, with three alone estimated to hold 1.6-3.1 billion barrels of recoverable oil. In all, OGX estimates its reserves at 6.7 billion barrels, more than one-third those of BP, Europe’s biggest oil firm.

Much drilling still has to be done to turn estimates into proven reserves. But there is confidence in the local market that the former Petrobras executives brought with them the memory of where the old state monopoly had struck oil in the past – but did not tap, whether because of market or technological conditions since rendered obsolete.

“When OGX debuted on the stock market, it already had 22 exploration blocks in regions where oil had already been discovered, and the leadership in place was made up of highly qualified former Petrobras executives,” says Emerson Leite, Credit Suisse energy analyst in São Paulo.

The successful start to drilling partially explains last year’s 337 per cent rise in OGX’s share price. But the government’s decision to favour Petrobras in developing the new ultra-deep reserves, resented by the oil majors though they kept grumbling to a minimum, has also provided a boost. With opportunities curtailed in Brazil’s new ultra-deep frontier, reserve-hungry majors could be tempted if OGX turns estimates into recoverable barrels.

“In our view, OGX is an attractive opportunity for oil majors. Although OGX’s management says control of the company should not be sold, we believe Brazil is a key location for majors, and OGX is an excellent opportunity. However, it is too soon for a transaction, which should occur after 2011, when the company starts oil production,” according to Auro Rozenbaum, Bradesco Corretora energy research analyst in São Paulo.

While OGX is concentrating on shallow offshore prospects, a fellow start-up is focusing instead on another region largely overlooked by Petrobras – the Amazon jungle. Last November, HRT Oil Gas raised $276 million from investors to buy controlling stakes in 21 exploration blocks in the rainforest’s Solimões basin.

The fact that the company is headed up by the man who explored the region for Petrobras in the 1970s gives weight to its claim that the blocks could hold between four and six billion barrels of oil, and 10 and 20 trillion cubic feet of natural gas. If drilling proves such predictions correct, it could have serious implications for Brazil’s poorest neighbour, Bolivia. Gas is its main export, and Brazil its largest customer. Brazil was until recently heavily reliant on Bolivia for its natural gas needs. But ever since the nationalisation of Petrobras investments in the country in 2006, it has sought to lessen its dependence on its Andean neighbour.

New liquefied natural gas terminals for imports and Petrobras bringing gas fields of its own onstream have allowed Brazil to declare itself to be approaching self-sufficiency. Gas imports from Bolivia dropped dramatically last year, though whether due to growing Brazilian self-sufficiency or to a dip in industry as a result of the global recession is unclear. Brazil is contractually obliged to pay Bolivia a minimum each year for gas imports, whether it takes all the gas it pays for or not.

However, the contract expires in 2019, and Bolivia’s nationalisation of the industry has stunted the investment necessary to diversify away from dependence on exports to Brazil, just as Brazil has diversified away from dependency on Bolivian imports.

Brazil is unlikely to abandon Bolivia anytime soon – it is an ally, and its investment in the pipeline from Bolivia’s gas fields to the industrial base of São Paulo will soon be paid off, making imports cheaper. But a massive gas find in its own Amazon before talks on a new contract would only further strengthen Brazil’s formidable hand.