Shell’s $780 Million Dry Hole Dims Outlook for Brazil Oil

(Bloomberg) -- Royal Dutch Shell Plc has just drilled a dry hole in Brazil’s premier offshore region, a sign state-controlled Petrobras may have already grabbed the best oil deposits and left competitors hunting for smaller game.

Shell completed its first well at the high-profile Saturno prospect on June 13 without reporting any discoveries, according to drilling data from the National Petroleum Agency. The regulator’s press office confirmed it was a dry hole, while Shell said it can’t comment during a quiet period ahead of earnings.

Expectations were high from the start. Shell and Chevron Corp. outbid Exxon Mobil Corp. with a $780 million signing bonus for the prospect in 2018, and the following year Colombia’s Ecopetrol bought a 10% stake in the license for an undisclosed amount.

The results add to a string of exploration setbacks outside the initial cluster of monster fields that turned Brazil into Latin America’s biggest producer and a global hotspot for exploration.

Last year Petrobras and BP Plc struck out at the Peroba prospect. Then Shell discovered oil at the Alto de Cabo Frio Oeste and Petrobras at Uirapuru, but preliminary information indicates that both prospects may not pass economic hurdles, said Marcelo de Assis, the head of Latin American upstream research at Wood Mackenzie Ltd.

“If you eliminate all these prospects, future production linked to exploratory activities will go down significantly,” he said. “It will reduce interest in future bid rounds and increase pressure in more favorable fiscal terms.”

Petrobras is doing technical work at Peroba and studying rock samples at Uirapuru to evaluate the block’s potential, the Rio de Janeiro-based producer said in a response to questions.

Petrobras’s initial success rate of 100% in the pre-salt drove interest in exploration rounds during the past decade. Shell turned the country into one if its primary growth markets when it bought BG Group Plc in 2015, giving it access to Brazil’s early pre-salt discoveries that are now its biggest producers.

Existing pre-salt fields are economic even at current oil prices, and majors including Exxon, Total SA and Equinor ASA have exploration acreage in the region. Exxon has a block adjacent to Shell’s Saturno, and Brazil’s offshore industry will be watching closely when it start drilling.

“There is a risk that the best fields have already been discovered. The pre-salt polygon is a huge area and can be quite heterogeneous from a geologic standpoint,” Assis said.

Petrobras’s most recent development wells at pre-salt fields already declared commercial have confirmed expectations, the company said. It also has a program to completely eliminate dry holes by using artificial intelligence to harness its accumulated exploration data, and to reduce the amount of time it takes to start commercial production.

©2020 Bloomberg L.P.