Petrobras, the state oil company of Brazil, received approval to acquire Anadarko Corp‘s (NYSE:APC) 30% stake in the ES-M-661 offshore block located in the Espirito Santo basin. The approval was given by Brazil’s National Petroleum Agency, or ANP, at a board meeting last week. The information regarding the same was provided in a statement on ANP’s website today. Anadarko said that it had relinquished its interest in the block approximately six months ago. ((Petrobras Gets Approval to Acquire Anadarko Stake in Brazil, Bloomberg Businessweek))
Petrobras operates the offshore exploration area with a 40% stake. Closely held firm IBV, an equal joint venture of Bharat Petroleum and Videocon Industries, holds the remaining 30%. Anadarko, however, retained its interest in the ES-M-588 and ES-M-663 blocks that are a part of the broader BM-ES-24 concession. 
In July, Petrobras said that it had discovered a reservoir of heavy oil in the Grana Padano well drilled in the ES-M-661 block. The well was drilled 64 km from Petrobras’ Golfinho field, located in the offshore Espirito Santo Basin.
Interested Parties Kept At Bay Initially
Anadarko said last year that it was looking to sell its shares in Brazilian offshore blocks to help pay off debt. The company had a long-term debt of approximately $13 billion on its balance sheet on June 30, 2012.
Demand for Brazilian exploration assets had previously been increasing over the past two years because the Brazilian government hadn’t sold any new exploration licenses since 2008. Also, assets looked attractive. The Santos, Espirito Santos, and Campos basins, lie in a region known as the “pre-salt”, which is estimated to hold about 50 billion barrels of oil. Anadarko has licenses for about 1 million gross acres in Brazil, some of them in these prolific pre-salt fields. Therefore, when it put its Brazilian business on sale in January earlier this year, Anadarko had been expecting a valuation of anywhere between $3-4 billion. France’s Total, the Norwegian state-controlled energy group Statoil, and Denmark’s Maersk Oil initially showed interest in purchasing Anadarko’s business. However, Anadarko wasn’t satisfied with the price being offered. The enthusiasm for Brazilian assets had somewhat waned by then. As a result, Anadarko announced that it was putting the sale on hold. 
So, Why Did The Initial Euphoria Fade All Of A Sudden?
There were two main factors which were responsible for this.
The first was the Brazilian government’s insistence that companies should incorporate a high degree of local content in new offshore drilling rigs and production facilities. This increased the cost of doing business in Brazil. The second culprit was the increasing Brazilian political interference in the oil sector, with politicians adopting nationalist rhetoric. We believe that this would have made companies uncomfortable about the stability of the policy environment, and thus increased political risk for operations. Taken together, these two factors must have led companies to conclude that there were more economically viable and politically stable areas around the world where they could deploy capital to generate better returns. 
In That Case, How Did This Deal Get Struck Six Months Back?
Firstly, we should state upfront that the terms of the deal have not been disclosed yet. One can only guess or speculate based on past history and application of logic, as to how this deal happened to take place when general enthusiasm was low.
Petrobras, being a Brazilian state-owned firm, is unencumbered by problems being faced by western majors. It has politicians rooting for it, and generating maximum return on investment may not always be its top priority. The potential in these oil fields is undoubtedly huge and we think that Petrobras would have jumped at the chance to acquire a greater stake in assets of national strategic importance. Moreover, it may have got itself a relatively sweet deal since western majors hadn’t been too keen on paying a high premium for these assets. We may never learn if there was also an element of political cajoling, if not coercion, involved. After all, politicians in resource-rich countries have had a history of trying to arm-twist foreign companies into giving up their ownership of key resource assets.
Anadarko said that it is now focusing on its assets in the Campos Basin, where Wahoo and Itaipu are its biggest discoveries. Itaipu is believed to contain up to 300 million barrels of oil. Also, Anadarko has had a string of exploration discoveries, including off the coast of west Africa, which has left it with the challenge of developing a string of big projects on time and on budget. It may have been keen to focus on developing these assets, as compared to those in Brazil, which may have influenced its decision to sell.
Anadarko may have preferred to retain Campos over Espirito Santos for three reasons. While the Campos sub-salt prospects do not match the size of the discoveries in the adjacent Santos Basin, there are several counterbalancing factors in their favor. Firstly, the Campos prospects are located closer to shore. Secondly, the Campos sub-salt play is much shallower. Thirdly, the Campos prospects benefit from a highly developed network of production and processing infrastructure, both on and offshore Rio de Janeiro state, the country’s dominant producing basin. All of these factors mean the risks and costs of developing the sub-salt Campos fields are significantly lower than those for Santos. 
We recently revised our price estimate for Anadarko to $88, which is 25% ahead of the market price.Notes: