Private Equity Hunts for Brazil’s Next Big Oil Startup

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Photographer: Dado Galdieri/Bloomberg

A woman sunbathes on Copacabana beach while cargo ships and oil tankers wait to dock at Guanabara Bay in Rio de Janeiro, Brazil.

Brazil’s plan to sell offshore oil licenses for the first time in six years is sending private-equity investors on a search for startups to compete with global producers including Royal Dutch Shell Plc (RDSA) and BP Plc. (BP/)

Denham Capital Management LP, the Boston-based energy investor overseeing $7.3 billion, is among funds in talks with startups before a government auction, said Victor Munoz, Denham’s head for Latin America. Ouro Preto Oleo & Gas, a Brazilian explorer financed by Rio de Janeiro-based fund Turim, is seeking to attract investors, said Dirceu Abrahao, the startup’s ventures director. Agua Grande Petroleo, backed by Toronto-based Forbes & Manhattan, is also looking for additional private funding, Chief Executive Officer Peter Boot said.

“We’re exploring opportunities,” Munoz said in an interview from Sao Paulo. “The life of an exploration company is access to more concessions.”

President Dilma Rousseff’s plan to auction 172 blocks in May means producers can expand in Brazilian waters, six years after the world’s largest oil discoveries since 2000 were made in a region that may hold more than 50 billion barrels of oil. The sale will attract private equity-backed ventures looking to replicate the success of Barra Energia Petroleo & Gas, the oil startup that owns 10 percent of one of the country’s biggest fields, KPMG adviser Manuel Fernandes said.

‘Newcomers’

“The sources of capital would come from these private-equity funds, and folks that are looking for some opportunities to maximize returns, like Ouro Preto,” Fernandes, head of oil and gas at the advisory and auditing firm in Rio, said by phone. “I see more space for these newcomers.”

Brazil has repeatedly postponed the sale of exploration areas since state-run producer Petroleo Brasileiro SA discovered the giant offshore Lula field in a region known as the pre-salt, leaving Exxon Mobil Corp. (XOM) and other producers shut out of an area that holds at least $5 trillion of oil.

Since then, Brazil has only auctioned onshore tracts. The delays in selling offshore licenses prompted producers to look elsewhere for oil discoveries. Total SA (FP) accelerated exploration off the coast of West Africa, and billionaire Eike Batista’s OGX Petroleo & Gas Participacoes SA is in Colombia.

Pent-Up Demand

The lack of bidding opportunities since 2008 created pent-up demand from both small companies and major oil producers looking to buy areas that haven’t been explored, said Wagner Freire, who helped set up Rio-based Agua Grande in 2011 and is a former exploration and production director at Petrobras. Buying into existing projects normally costs more because sellers have already invested in exploration, he said.

Ouro Preto is searching for funding from private-equity investors in Brazil and abroad, Abrahao said in an interview from Rio. Agua Grande is also considering partnering with established oil companies for the auction, said its CEO, also speaking from Rio.

“The oil game is a game where you’re always willing to have partners -- you don’t play it alone,” Boot said.

U.S.-based First Reserve Corp. and Riverstone Holdings LLC contributed $1 billion to fund Barra, which acquired Brazilian tracts in 2010, including an offshore stake in the Carcara area that it bought from Shell. Petrobras, which operates the block in the Santos Basin, said in August it found good-quality oil at Carcara that’s thicker than the layer at Lula, Brazil’s largest field with an estimated 6.5 billion barrels of reserves.

‘Same Model’

“Other investment funds will probably follow the same model,” Clovis Meurer, head of the Brazilian Private Equity & Venture Capital Association, said in an interview from Porto Alegre, Brazil. “Sovereign funds could be looking for big oil and gas projects.”

While the auction, known as Round 11, won’t include any pre-salt areas, it will offer blocks along Brazil’s equatorial margin where the geology mirrors recent discoveries near the coast of Africa.

Petrobras has found high-quality oil in the Ceara and Sergipe basins where new blocks will be offered in the bid round. OGX has found commercial volumes of natural gas in the on-shore Parnaiba basin, also near acreage up for sale.

“The equatorial margin is one of the exploration hot spots globally right now,” Ruaraidh Montgomery, a senior analyst at oil and gas researcher Wood Mackenzie, said by phone from Houston. “There’s huge attention now on the South American side.”

Exploration Risks

The high cost and risk of dry holes in areas with no proven reserves may discourage some private-equity investors, said Montgomery, who expects most of the bidders to be majors including Exxon and Shell, as well as small exploration companies including Tullow Oil Plc (TLW) and Brazilian explorers that already have acreage elsewhere.

“My guess is this will predominantly be a round for the big boys,” Montgomery said. “It’s still very much frontier areas. There will still be a time lag between discovery and first oil.”

Apart from Petrobras, Brazil’s three other publicly traded oil companies -- OGX, QGEP Participacoes SA (QGEP3) and HRT Participacoes em Petroleo SA -- will need additional cash to compete in the auction because most of their money is tied up in existing projects, said Ford Tanner, an analyst at PFC Energy, an energy strategist to companies and governments.

Available Cash

HRT, which is exploring in Brazil’s Amazon and off the coast of Namibia, has no sales revenue or commercial production. At the end of the third quarter QGEP had 926 million reais ($454 million) in cash, HRT had 1.2 billion reais, and OGX had 5.1 billion reais. Last year QGEP fell 20 percent, HRT fell 58 percent and OGX fell 68 percent.

OGX fell 3.3 percent to close at 4.77 reais in Sao Paulo, while HRT dropped 0.4 percent to 4.61 reais and QGEP rose 1.9 percent to 13.90 reais.

TNK-BP, HRT’s partner in the Amazon, will likely help finance HRT’s bids, Lucas Brendler, who helps manage about 6 billion reais at Banco Geracao Futuro de Investimentos, said in a telephone interview from Porto Alegre. OGX will probably exercise an option to sell $1 billion shares to its controlling shareholder to participate, he said.

QGEP plans to actively participate in Round 11 and doesn’t need any additional funding, the company said in an e-mailed response to questions. OGX and HRT are studying the blocks up for auction and declined to comment on the need for additional financing in e-mailed responses to questions.

“In the whole equatorial margin there is good potential,” said Freire, the former Petrobras executive who helped set up Agua Grande. “New companies trying to organize themselves have been waiting for this round.”

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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