Nilo Chagas de Azambuja Filho, HRT, Brazil
Nilo Chagas de Azambuja Filho discusses HRT Participacoes’ endeavors to restore its position as a forerunner in the Brazilian oil and gas sector. Despite struggling with a number of dry wells, the company’s new strategy has seen the acquisition of producing assets and a growth in revenue flowing into the company.
The Polvo field just shipped its first commercial oil today. What does this mean for HRT; is it the first step on the road to recovery?
The Polvo field is part of HRT’s diversification strategy and will allow HRT to move from being a non-operational company to a fully-fledged operational. Becoming an operational is essential because it grants revenue to the company. It is not possible to simply spend. With revenue, one can better manage expenses and strengthen the company’s ability to operate strategically. With Polvo, the first tasks undertaken will be to drill further wells, increasing productivity and longevity of extraction on site. HRT’s is currently studying the field, and the company’s view is that it is possible to significantly lengthen the lifespan of the field. The revenue from this asset will facilitate the company’s further exploration efforts, or indeed allow us to acquire further assets.
Acquiring assets already producing is a costly, but low-risk strategy, particularly when compared to straight up exploration. The latter, however, is far cheaper. Both exploration and production are important, and a company must manage its human resources to balance these two interests. Working in one’s backyard, in unfamiliar territory, particularly when it comes to exploration is another way in which risk increases. As existing resources have already been extensively surveyed, this risk-return divergence between the two strategies is further exacerbated.
Since the beginning of HRT, our company’s expertise was in Brazil, Latin America and the South Atlantic. Our geoscientists have worked across this area previously.
Polvo makes HRT the fifth largest oil producer in Brazil. What does this fact do with regard to allowing HRT to access further capital to reinvest in the company’s priority projects?
The main point about Polvo is the fact it produces revenue for HRT. As the company has several ventures in exploration currently, we have fiscal credits that can be deducted from taxes due to the government. In this way, exploration adds value to the fiscal balance the company receives from our production rests.
BW offshore has expressed their intent to purchase half of HRT’s 60 percent share of Polvo. Is working together with partners part of HRT’s risk reduction strategy?
To reduce risk as well as to optimize operations are the two primary motivations for this move. As BW is the operator of FPSOs, the company offers HRT synergies that can reduce costs. As two entities working together, streamlining production processes is vital to maximize operations. In a mature field, efficient working practices are particularly important to maximize profit.
A further opportunity from having a partner is it allows more aggressive drilling of wells in the field, by reducing risk and sharing further investment. This is towards the aim of increasing production.
As an operator you are focusing on HRT’s key original aim: to produce oil. As you center on this objective, HRT is running a divestment program that has shed assets superfluous to this aim, such as a helicopter company. What are the implications of this move for HRT as a whole?
To explain why HRT originally built its helicopter wing, the purpose was to serve the company’s Solimões Basin operation. This was to provide all the services HRT needed, including planes to transport over 1,000 people to four rigs drilling simultaneously. Additionally, heavy lift helicopters were required to transport rigs.
As the operation progressed, the market evolved and it has become apparent that the helicopter company is surplus to requirements for HRT as an oil and gas company. HRT spun off the company, which mitigated some of HRT’s unnecessary exposure.
Commonly, the media talks of HRT and OGP (formerly OGX) as a pair. However, there are some fundamental differences between the two companies, including the fact that HRT does not have debt. What would you tell investors about what sets your company apart from OGP?
That is a principle difference—HRT does not have debt. HRT had, at the end of 2013, around 88 million USD in ready capital. In addition, HRT has purchased Polvo, and whilst some of this money will be redirected to pay for the field, some will be reinvested in the business. Establishing our enterprise as an operator makes a clear difference.
In the two companies’ production model too, the X Group owns its own vessels and FPSOs producing oil. This is very expensive. Working with BW offshore, our business operates at a lower cost. The cost per barrel for OGP must be far higher.
There are similarities between the companies, including the fact they have both been seeking to produce in Brazil’s frontier areas—HRT in the Solimões, for example. There the six discoveries of hydrocarbons happened after a campaigning of 11 wells. The return in these more risky areas is a matter of the likelihood of striking a resource. However, now with Polvo, HRT has the ability to sustain, or to weather the risk in drilling in frontier basins.
Last year, 2013 was a year of significant developments, with the first bidding rounds for five years offshore. But this was not the sole change of huge effect over the industry. With regard to HRT, a significant portion of your company’s board left in September. Does this mean there is an impending change of strategy for HRT?
HRT has a general assembly scheduled for March 19th, when a new board will be elected. At the moment the company is in a period of transition. After this new assembly new strategies will be defined for our portfolio. Until this new board is elected, HRT will continue to work as normal.
What, at the moment, is the state of HRT’s exploration efforts?
Exploration is a long-term game, and planning before any acquisition of data can take up to a year. After a data acquisition sweep, information must also go through processing. Following this, rigs must be obtained. The whole journey can take five years.
Presently, HRT has three main assets. Solimões, Namibia, and Polvo. The strategy for the former is already ongoing. Rosneft is our new partner and we are moving forward with them and Petrobras seeking to monetize the discoveries in the Solimões Basin.
In Namibia, our company has just completed three exploratory wells and is in the process of integrating the data. This will inform our future strategy there. HRT is confident that this country retains significant potential for oil and gas.
Tools and technologies for exploration are improving a great deal. However, further training is required to ensure that there are enough staff to operate these tools.
What key lessons did you take from your previous positions coordinating exploration for Petrobras and HRT that are of use now?
Lessons from the past are important. One example is that having partners adds a great deal of intellectual power to any exploration drive; having partners ensures that the final result will be achieved more easily, and give more reliable results.
As a sedimentologist, where do you think the next great frontier for producing oil in Brazil lies?
The main challenge in petroleum exploration is finding good source rocks. Without these source rocks, one cannot have attractive oil reserves. In the US, the shale boom is because of the presence of appropriate source rocks. In Brazil, all the basins need to be carefully examined for source rocks.
Brazil is still a virgin country—these source rocks have not as yet been fully discovered, and the resources inherent in them are still there to be accessed.