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Offshore drillers look to Brazil, Guyana for more favorable breakeven costs

Offshore oil and gas drillers struggling to find work are looking to the pre-salt Brazil and deepwater Guyana markets for hope, as economics remain favorable for large project sanctioning, analysts said.

"The two regions have a number of sizable projects with robust economics that could contribute to a substantial workload for the offshore drillers," Oddmund Føre, vice president of energy services research at industry consultancy Rystad Energy, said in an Oct. 14 email. Additional opportunities to grow backlog exist as interest in exploration blocks in the same regions will result in projects needed to increase production, he said.

Brazil and Guyana have been able to attract exploration and production dollars as economics remain favorable in the current $40 per barrel WTI crude oil market, analysts said. S&P Global Ratings said in a September report that the breakeven costs for onshore oil and gas exploration are below $50/b, compared with shallow water programs that could breakeven at $45/b to $50/b.

Bernstein analyst Nicholas Green said projects offshore Brazil and Guyana break even below $35/b.

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In Guyana, Exxon Mobil Corp. is the sole operator of most projects with partners Hess Corp. and China's CNOOC Ltd. London-based Tullow Oil PLC also has a relatively small stake in the region. In Brazil, Petróleo Brasileiro SA, known as Petrobras, dominates the market with Royal Dutch Shell PLC and Total SE also having some substantial stakes.

Rystad expects operators to spend around $90 billion in Brazil and around $10 billion in Guyana over the years 2020, 2021 and 2022.

However, the COVID-19 pandemic impacted producers' plans, resulting in a push back to 2021 for the bulk of projects slated for 2020, according to Marcelo de Assis, head of Latin America upstream research at Wood Mackenzie. Petrobras will be the only company exploring Brazil this year, concentrating its efforts on the Buzios project in the Santos Basin, de Assis said in an Oct. 14 phone interview

Brazil project postponements and cancellations are disruptive for large offshore drillers Diamond Offshore Drilling Inc., Transocean Ltd. and Seadrill Ltd., the biggest rig companies in the region, in addition to the local Ocyan SA and Constellation Oil Services Holding S.A., Føre said. Similarly, Guyana's work stoppages impact Noble Corp. PLC and Stena Drilling Ltd, which are the only drillers operating there, he said.

But Green said Petrobras and Exxon have committed to large multi-phase investments, including at least three additional floating production storage and offloading systems, or FPSOs, in Guyana, and at least four in Brazil.

"Net, investors can be confident there are many years of investment remaining in these basins," Green said.

Poised to take advantage of the opportunities, equipment and services provider SBM Offshore NV, which on June 30 held a guaranteed order book of $20.1 billion, is 70% exposed to Brazil and Petrobras and 16% exposed to Guyana and Exxon, Green said.

De Assis said SBM Offshore is a dominant player in Guyana. In Brazil, SBM's primary competitor, Tokyo-based MODEC Inc., looks to win a large tender for an FPSO from Equinor ASA for its Bacalhau project, he said.

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Day rates for high-specification rigs in the harsh waters offshore Brazil and Guyana remain depressed.
Source: Repsol

Local companies, including Constellation, dominate the market on the drilling rig side, said Leslie Cook, Wood Mackenzie's principal analyst of upstream supply chain.

"They hold the majority of the Petrobras contracts actually," she said on the Oct. 14 call. In Guyana and Suriname, Exxon has Noble Corp. on a preferred agreement, and Denmark-based Maersk Drilling Holding A/S has made some impact into the region, Cook said.

She said rigs contracted in these harsh offshore environments are high-specification, very new vintage, seventh-generation rigs contracted at low rates of between $180,000 to $220,000 per day.

Cook said she sees little near-term support for pricing.

However, rig owners are going through a restructuring phase and pricing leverage could turn around, Føre said. Substantial consolidation of industry players and retirements of less capable units should lead to "a high-grading of the fleet and more pricing power as we start on the rebound," he said.

"We believe that the rig owners will benefit from increasing rig rates in Brazil and Guyana going into 2022," Føre said.