Oil Giant BG Santos Test Falls Flat

By Sarah Coursey, Editor

RIO DE JANEIRO – The second confirmation of a dry well in the Santos Basin pre-salt area was announced by BG Group PLC this week, causing share prices to drop for the company.

There were no traces of hydrocarbons following a probe on Corcovado-2 in Block BM-S-52. The announcement follows a July no-show for oil in the second well drilled in the nearby Block BM-S-22 by ExxonMobil, pre-salt’s first disappointment since exploration began in the area.

The pre-salt area has been touted as a veritable money tree with low-risk prospects and giant reserves protected by a natural layer of salt that has created the perfect environmental conditions for hydrocarbons to flourish. Foreign companies have been heavily investing capital and resources here, and these first two misses may create market tension in firms yet to complete test drills. In the case of BG, there were traces of natural gas confirmed in earlier examinations, which led to further testing in August.

ExxonMobil’s less than stellar test results in the Block BM-S-22 first brought the risks of Brazilian offshore oil drilling to the world’s attention. In what could be a hit-or-miss scenario, the first hole drilled by the world’s largest publicly traded oil company came up with oil twice. What seemed like a certainty based on the initial assessment has now turned sour, and the next well isn’t expected to be drilled until 2010. The block is owned forty percent by ExxonMobil, forty percent by Shell and twenty percent by Petrobras.

BG Group is following in the footsteps of many international companies that have acted on the Brazilian government’s claims of zero-risk oil drilling beneath the pre-salt layer. In combination with the government’s current move to change the goalposts for external investors, proposing that the country be better compensated for oil found in its waters, the dry wells can only further detract from foreign investment. In Brazil’s favor are the established players in the area still drilling for oil, and the relatively dwindling resources worldwide for oil exploitation.

November will mark the two-year anniversary of the discovery of oil in the Tupi field of the Santos basin. It was found by Petrobras, and has an expected BOE (barrels of oil equivalent) of between five billion and eight billion barrels. It is the largest find in the Western Hemisphere in the last thirty years, and has given Brazil the upper hand in dealing with international investors.

The current pre-salt law proposals could pass the financial responsibility from the government’s to Petrobras’s shoulders, if they are indeed made the operating body to handle exploration requests. The state-owned oil concern already owns more than sixty percent of the exploration acreage. It does however put the company in a precarious position, as it will further depend upon market fluctuations and investor’s commercial decisions, with capital freezes potentially affecting their credit rating.