Does upside exist in the Bahia Terra and Urucu Cluster?

In 2017, Petroleo Brasileiro S.A. (Petrobras) announced that it would undertake a divestment process aimed at selling non-core assets to focus on deepwater oil exploration and reduce its debt. Petrobras' divestment program has been successful to date. In the first half of 2023 alone, the state-owned company completed divestments valued at a combined US$3.5 billion from the sale of its interests in Albacora Leste, Norte Capixaba Cluster and the Potiguar Cluster to Prio, Seacrest Petroleo and 3R Petroleum, respectively. In September 2023, after concluding a broad revision of its divestment processes and considering the strategic adherence to its portfolio and, their profitability profile, Petrobras announced the termination of the divestment processes for Urucu Cluster, Bahia Terra Cluster, Manati Field and Petrobras Operaciones S.A. (subsidiary in Argentina).

The Bahia Terra and Urucu Clusters are onshore assets located in the Reconcavo and Solimoes basins, respectively. Bahia Terra is composed of 28 onshore concessions, and included among them are Aracas, Buracica, Massape, and Taquipe. The Urucu Cluster is comprised of 7 producing concessions, the most significant being Arara Azul, Leste do Urucu and Rio Urucu. Concessions within Bahia Terra are primarily oil fields, having reached over 790 million barrels of oil equivalent (boe) of cumulative production through the end of 2022. After peaking at almost 68 thousand boe per day (boe/d) in 1973, Bahia Terra production has declined at an average annual rate of over 4.5%, falling to just 5 thousand boe/d as of October 2023. <span/>S&P Global estimated remaining oil equivalent volumes in Bahia Terra are over 119 million boe.

The Urucu Cluster consists of oil and gas producing fields, reaching over 480 million boe of cumulative production through the end of 2022. After peaking at over 114 thousand boe/d in 2019, Urucu production has declined at an average annual rate of 2.4%, falling to just 98 thousand boe/d as of October 2023. S&P Global estimated remaining oil equivalent volumes in Urucu are over 240 million boe.

Key aspects that could contribute to value creation to any company holding interest in any of these two Clusters is directly related to new investments, taking advantage of existing production facilities and infrastructure, and reduced royalty rates on incremental production.

Investments in the mature concessions of Bahia Terra may seek to optimize existing production facilities, potentially identify and shut-in the poorest performing wells while targeting the highest potential wells for re-completions and workovers. Compared to other onshore opportunities in Petrobras's divestment program, the Bahia Terra Cluster offers lighter oil than either of the Carmopolis or Norte Capixaba Clusters and produces far more natural gas. According to the ANP's public deliberations and approvals of re-development plan and revisions, total expected investments over the next 10 years in the approved re-development plans in Bahia Terra are over US$600 million and call for a large number of well re-completions. The Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis (ANP) has approved 13 contract extension within the Bahia Terra Cluster, expiring between 2035 and 2052. Likewise, it has approved the reduction of royalty rates on incremental production from 10% to 5% in 9 of the 28 concessions.

In a Point Forward valuation of Bahia Terra considering a 10% discount rate for a Base Brent price of US$84/bbl, the Cluster is positioned to generate around US$3.9 billion of After-Tax Cash Flow (AT Cash Flow) and more than US$1.7 billion of After-Tax Net Present Value (AT NPV). Performing a sensitivity analysis on oil price by considering a Low scenario of US$54/bbl, the asset continues to generate value, obtaining an AT NPV of US$832 million.

In the Urucu Cluster additional investments will be needed to increase the oil recovery factor and slow production declines. According to the ANP's public deliberations and approvals of re-development plan and revisions, total expected investments over the next 10 years in the approved re-development plans in Urucu are over US$300 million and may lead to drilling new wells, recompletions, and new production facilities. As oil production declines, the Urucu Cluster is expected to become increasingly dependent on natural gas sales. The ANP has approved 2 contract extension within the Urucu Cluster, expiring between 2037 and 2042. It also approved the reduction of royalty rates on incremental production from 10% to 5% in 2 of the 7 concessions.

Under same valuation assumptions, Urucu is positioned to generate around US$2.8 billion of After-Tax Cash Flow and more than US$1.4 billion of AT NPV. Performing a similar sensitivity analysis on oil price, under a Low scenario, Urucu generates a positive AT NPV of US$900 million.

Over the past 3 years, companies who have invested in onshore assets are already starting to see positive effects in production volumes. 3R Petroleum has committed more than US$30 million in the Macau Cluster, which has reflected in an additional 800 bbl/d, representing around a 20% production increase from 2021 to 2022. PetroReconcavo has committed an approximate of US$80 million in the Riacho da Forquilha Cluster, gaining an additional 1,200 bbl/d, which represents an 16% increase from 2021 to 2022. Similar upsides are expected out of Bahia Terra and Urucu if Petrobras decides to commit investments for these assets. Being an oil focused mature asset, Bahia Terra is sensitive to new investments and incremental production. The NPV is positively impacted and increases from US$1.7 billion to US$1.9 billion when there is a 10% increase in Capex and liquids production. This represents approximately 12% appreciation to the value of the asset.

As oil production declines and GOR increases, the Urucu Cluster is expected to become increasingly dependent on natural gas production. Valuation of Urucu is sensitive new investments and incremental liquid production, the NPV is positively impacted and increases from US$1.4 billion to US$1.6 billion when there is a 10% increase in Capex and liquids production. This represents approximately 14% appreciation to the value of the asset.

Capital investment (Capex) and Operational expenditure (Opex) per boe in Bahia Terra are higher compared to Urucu due to operational challenges at the cluster's old infrastructure and high number of poor performing wells. Despite having greater remaining oil equivalent resources, Urucu is expected to become increasingly dependent on natural gas sales due to the high Gas Oil Ratio (GOR) that is developing.

Under current conditions, and despite its particularities, the Bahia Terra and Urucu Clusters are still attractive and able to generate value even under difficult market conditions. As observed on the different valuation scenarios, relevant upsides are expected out of these two assets, which could be beneficial to any companies who holds them on their portfolio. Significant investments, the use of current infrastructure and favorable fiscal conditions (reduced royalty rates) seem to be the drivers for value creation in producing and mature onshore fields with significant remaining oil equivalent resources.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.