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Interview

with Paulo Mendonça, OGX

01.04.2010 / Energyboardroom

We won’t go too much into OGX’s history as it is quite short and well known here in Brazil. Nevertheless we can see that the Brazilian oil and gas industry picked up again in 1997, and OGX was created ten years later. Why wait until 2006-7 to create your company when the opportunity was already there ten years before?

Paulo Mendonça: Everything is driven by people, and to do the right thing you need the right people. It is only in 2007 that Eike Batista felt ready to face the risk that this market represented. I retired in 2007 from Petrobras, and Reinaldo Belotti, our Production Development Director, retired in 2008. When I met Mr. Batista in 2007, the first thing I told him was to keep in mind that Brazil is not a country with oil, but it is a petrolific country, such as Venezuela or Mexico. He immediately understood what it took others such a long time to understand. Brazil has a monopoly culture, where Petrobras had been very successful in the central portion of the Campos basin, which is why it did not occur to anyone to discuss their achievements. However there are a lot of other basins that have never been exploited in Brazil. When I left Petrobras the main discussion was about the pre-salt for example.
Oil is never discovered alone, and our team from Petrobras discovered between twelve and twenty billion barrels of oil, even in the new oil province named pre-salt. And this team is now working for OGX! This is a very special moment for Brazil, and we were lucky to be able to bring these people from Petrobras to work with us.
What is going on in Campos is a great surprise for us, and every day brings us more discoveries than the day before. I am sure that we are over a big oil carbonate province which is completely new for Brazil. Our history in Brazil is mainly linked with sandstone, but with the pre-salts we get acquainted with the carbonate world. We have also a big carbonate potential in the post-salt section. All the sections we drilled discovered oil, and from my understanding we surpass the expectations for the region. The official calculations say that we have 6.7 billion barrels oil for all our basins, but I believe that Campos itself has more oil than this. I think that Santos basin represents the same potentials as the North Sea fifty years ago.
To launch an oil company you must have money, courage, entrepreneurship and the right people. It was a right combination at the right time! Discovering oil is the hardest part, but it doesn’t mean much until we start producing.

What is the new proposition that OGX brings to the existing oil and gas paradigm in Brazil?

Paulo Mendonça: We bring the understanding of a basin and how to discover oil. We broke the geological code, but also did it because Petrobras did it in the first place! We are also bringing a capacity to work at a faster pace and develop things quickly.

Reinaldo Belotti: OGX has the management of an IOC, with the assets of a NOC. We are very quick in our decisions, and all the managers meet every day. We have one of the best teams in the world in terms of geological knowledge of Brazil, and are using the best technology one can use, with a state-of-the-art 3D room in house and a center that monitors 24×7 the activities in our rigs. OGX is the first company that started in Brazil on its own, the majors entered Brazil with Petrobras. Brazil is not understood well by foreigners, and they do not understand the rules we work with, which is why most of the companies entered the market with Petrobras. OGX proved its success after starting its operations, and, by the end of our exploratory campaign, we will have drilled more wells than all other companies together, excluding Petrobras.

Paulo Mendonça: This is feasible because we know Brazil, its rules and logistics, and have a team of geologists that knows the most about Brazil in the world. In addition to that, we were lucky enough to be founded by Mr. Eike Batista who believe in this project and decided to fund it from his personal money.

Under your leadership, Petrobras had an exploratory success rate of more than 60% in deepwater and 50% in shallow water and onshore exploration. How do you intend to replicate the success you had in Petrobras within OGX?

Paulo Mendonça: After acquiring the blocks, we spent 100 million USD in seismic to do interpretation, and we faced very risky prospects. There is no other way but to take risks in order to find big prospects. It is part of our work to take risks on a daily basis, and you need adrenaline to do well in our field. We had the same knowledge as Petrobras on these fields, but the NOC did not go for it as they were “company makers”, and they did not need them. That is why it is necessary to have 3 to 5 companies like OGX in the country competing with each other. In the coming years we will discover other areas such as Santos, where we did a nice job having the best guys in Brazil.

Over fifteen wells that you drilled, you discovered one dry well earlier this year. How is this discovery going to impact OGX’s geological model?

Paulo Mendonça: We decided to test it even if it was very risky as it was extremely necessary. We did not get any commercial discovery but got the post salt reservoirs in excellent conditions and discovered rocks in the pre-salt section. It gave us a better understanding of the reservoir and the area. Of course I prefer to drill oil wells rather than getting a dry well and learn, but sometimes it is necessary to face such discoveries in order to later drill more oil.

Reinaldo Belotti: The difference between OGX and other companies is that you would ask others about the oil that they found, when you ask us about the first dry well after fifteen successful wells.

OGX has found the oil and has the money, what is your roadmap towards reaching production?

Paulo Mendonça: After drilling fifteen wells and completing a lot of rigs, we still have 3.6 billion dollar in cash. OSX that you interviewed acquired their first FPSO, and as of today we have determines the first two fields where we will start production early 2011. We might need to build or acquire one more rig FPSO. OSX was created in order to comply with the local content rule. This is a very important tool that the government has. I don’t know how so many companies can reach up to 80-90% local content without having a shipyard. IT is very important for Brazil and makes sense. I am sure that our shipyard will be a success and we are confident in this model. Perhaps we will need more FPSO than they can build, and Mr. Batista will have to build another shipyard!
We expect to start production early next year, depending on the availability of our new FPSOs. We have done many discoveries and they are ready to be on production as soon as we want. We want to stay in Brazil and our model is to develop a new generation of people in the country, combining experienced former Petrobras, with young graduates that we bring in. Today we have 180 employees, and we do not want to have more than four hundred guys when at the peak of production, as we won’t be able to control it as well with too many resources.

What is OGX’s strategy to cope with the uncertainties linked with the regulatory framework and timeframe in Brazil, and what are your main concerns?

Paulo Mendonça: Our main concern is on future areas. We must increase our portfolio to grow the company, and after such an aggressive exploratory campaign, it will be very hard for us to develop more fields if the ANP does not offer more blocks. We took our first step to reduce the dependency on legislation by going to Colombia where we got five blocks.

Reinaldo Belotti: The future is not so clear because of this new regulatory framework under discussion at the congress. However these discussions are mostly on the pre-salt areas, and our portfolio is focused in shallow waters where we have more assets.

Paulo Mendonça: After the accident of BP in the Gulf of Mexico, all governments are being careful when legislating. However with a company like us, mostly positioned in the shallow waters, there is much less risks. Of course a spill is a spill, whether it is offshore or onshore, but the way to appreciate it will be different. We went to the shallow waters because of the great opportunities it represented, but we want to show that we can discover oil anywhere, even outside of Brazil.

What are the prerequisites that make of a country potential investment destinations for OGX?

Paulo Mendonça: First of all our team must have a specific geological knowledge in the country, and operational experience. We have knowledge in South America and West Africa, and why not go to Sierra Leone and Liberia. However we prefer offshore Brazil which, with its two million barrels a day of production, is a virgin area compared to the five million barrels a day produced offshore West Africa. This proves that there are things to develop in Brazil!

You are Latin America’s most expensive stock, with a market value of 52.7 billion reals ($29.5 billion), yet you do not produce any oil. How come investors trust that much OGX?

Paulo Mendonça: Our value is still very low compared to what we expect! When working in the oil and gas industry, the hardest part is to find the oil, as with the team we have production will not be easy but feasible without any major troubles. If we had drilled five to ten dry wells that would be a different story.

Reinaldo Belotti: Look at our history: when we started OGX, people were asking us how come we could get 1.3 billion USD if we had not even started the company yet, and it was still at the state of “a dream”. Then when we launched our IPO, the same question arose with raising 4.1 billion dollars without having a drop of oil, and no rig to drill. We were seen as crazy people, and they said it would be impossible to rent a rig, seimic crew etc. However we got five rigs, now have eight! I think that we have a short history, got our first well in September last year, but we have a great future! Investors trust us because we deliver what we promised and beyond.

In a nutshell, what are the keys to OGX’s success ?

Paulo Mendonça: The right technical knowledge, will make you earn respect and leadership that will enable you to be a good manager. Reinaldo Belotti: We are a pure E&P company, and know what we are talking about.

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