Petrobras’ New Gas Discovery Increases Its Potential In The Sergipe-Alagoas Basin

Petrobras’ (NYSE:PBR) exploration program in Brazil has been a huge success for the past few years. The company’s exploration success ratio in the domestic market has increased from just 59% in 2011 to 75% in 2013. Recently, Petrobras announced that it found natural gas while drilling an extension well in the Discovery Evaluation Plan area of Poco Verde, which is located in the BM-SEAL-4 block in the Sergipe-Alagoas Basin’s ultra-deep waters off the coast of the Brazil’s northeastern state of Sergipe. The company operates the BM-SEAL-4 concession with a 75% stake in partnership with India-based Oil and Natural Gas Corporation (ONGC) that holds the remaining 25% stake.

The new discovery is expected to boost Petrobras’ net proved hydrocarbon reserves, which stood at 16.6 billion barrels of oil equivalent at the end of last year. To give some perspective on these numbers, Petrobras held enough hydrocarbon reserves at the end of 2013 to produce oil and gas for the next 20 years at last year’s production rates. ^[1]

Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily oil production in Brazil was 1,931.4 thousand barrels per day (MBD), an estimated 90.9% of Brazil’s total oil production. We currently have a $21/share price estimate for Petrobras, which values it at almost 10x our 2014 diluted EPS estimate of $2.1 for the company.

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Petrobras has made a string of oil and gas discoveries in the Sergipe-Alagoas Basin off Brazil’s northeast coast over the past few years. Although the company has been operating in the basin for decades, it only started exploratory drilling in deepwater areas of the basin in 2008 and has been very successful so far. Petrobras has struck crude oil, condensate or natural gas in 17 of the 25 exploratory and appraisal wells drilled in the region so far. Although the company has not provided an estimate of the reserve potential of the region, the Brazilian government and some industry officials expect the deepwater portion of the Sergipe-Alagoas Basin to hold more than 1 billion barrels of crude oil-equivalent recoverable hydrocarbons reserves. ^[2]

This could make it the country’s biggest new oil and gas region since the first discovery of pre-salt reserves in 2007. The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and are located in ultra-deep waters in a large portion of the Brazilian coast. It is called pre-salt because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre” is used because these rocks were deposited before the salt layer. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. On the other hand, deepwater reserves in the Sergipe-Alagoas Basin are not as deep and their extraction does not require expensive drilling through a layer of shifting salt. Therefore, these recent discoveries could potentially be more lucrative for Petrobras to develop than the pre-salt reserves it is primarily focusing on currently. The company plans to install a single production platform capable of producing 100 thousand barrels per day (MBD) from the Sergipe-Alagoas Basin ultra-deep waters in 2018, followed by a second platform of the same size in 2020.

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1. New Well Confirms Sergipe-Alagoas Basin Potential, investidorpetrobras.com [↩]
2. Brazil’s Petrobras Confirms New Oil Fields Near Northeast Coast, wsj.com [↩]