Brazil geologist seeks his 'destiny' in the Amazon

Thirty years after he first visited Brazil’s Amazon to observe natural gas seeps, geologist Marcio Mello is back to fulfil what he gleefully calls his “destiny”—to lead a rush for the region’s oil.

Mello, chief executive of the recently listed firm HRT, has convinced a range of investors—including one of Russia’s top energy firms—that the vast and remote rain forest is a promising source for oil despite decades of production there and enormous environmental challenges.

With the development of Brazil’s most prolific offshore reserves currently on hold and concerns growing about political intervention at state-led Petrobras, HRT has become a new avenue for investors to tap into Brazil’s oil boom.

“We found so much gas in the Amazon that it stayed in my DNA. Since then it’s been in my DNA that I had to come back here—I’ve found my destiny!” said Mello (57) who speaks about sedimentary basins and rock formations with an exuberant, almost preacher-like fervour.

After a 24-year career with state oil company Petrobras, Mello went on to create several petroleum geology consulting firms including HRT, which later bought rights to develop oil in the Amazon region known as the Solimoes Basin.

It is also exploring for oil off the coast of Namibia, an area Mello says is geologically similar to Brazil’s Santos Basin that is home to the country’s biggest crude discoveries.

HRT’s shares are up around 13% since it went public in October 2010, compared to a drop of more than 10% in Brazil’s benchmark Bovespa index over the same period.

Complex and expensive
Geologists have for years known about the oil potential of the Brazilian Amazon. But Petrobras did little to expand in the area after its first foray in the 1980s, focusing instead on offshore production that now provides the lion’s share of Brazil’s oil.

Petrobras’ dominance of the country’s exploration and production sector meant it was the only oil firm with significant output in Brazil’s Amazon. That will change this year, when HRT and its partner company Petra begin their first output.

The biggest challenge for HRT, experts say, will be the logistics of pumping oil from an isolated jungle region without harming the sensitive environment.

“The Amazon is a complex and expensive place to work. Everything that we take to the site we have to take back out. But our oil is the best oil in the Southern Hemisphere,” Mello said during an event last week in the Amazon city of Manaus, referring to the high-value light oil held in the area.

To reduce the impact on the forest, rigs have to be separated into more than 500 pieces and flown by helicopter to drilling sites. Every time a rig moves to a new place, that process starts again.

Flexible pipelines, which wind as much as 20km around hills and through vegetation, transport crude from the wells onto river barges.

Environment challenge
HRT says the operations will not spark the problems created in other parts of the Amazon such as Peru, where indigenous groups have protested against gas drilling, or in Ecuador, where oil production sparked a long-running legal battle.

This is in part because Petrobras operations have had a relatively small ecological impact, and because HRT has partnered with a local conservation group to help fund forest protection and create jobs in the area.

Despite its potential for damage, environmentalists do not consider the oil industry a primary threat to Brazil’s Amazon—most instead focus on ranching, logging and agriculture that fuel deforestation.

“But if we get a major oil spill, it’ll be a very different story,” said Philip Fearnside, an ecologist at the National Institute for Research in the Amazon.

He noted, however, that a spill in Petrobras’ deep-water operations that pump crude from fields buried 7km below the ocean’s surface—reserves that will provide much of Brazil’s future oil output—could cause even more serious problems.

Petrobras has been producing oil and gas in the Solimoes Basin since the late 1980s and in April pumped 106 000 barrels per day of oil equivalent there. It is now mainly focused on deep water fields in the region known as the sub-salt.

Investors have grown worried about political intervention at Petrobras following last year’s $70-billion share offering that critics called overly favourable to the government.

An interesting play
HRT says its 55% stake in the 21 Amazon blocks, partly owned by partner company Petra, gives it resources of 430-million barrels of oil equivalent—a figure that also includes natural gas. It says its blocks in Namibia could potentially hold up to 5.6-billion barrels of oil equivalent.

The company raised $1.50-billion in its 2010 IPO and has drawn the interest of Russia’s third-largest oil producer TNK-BP, half-owned by BP, which is seeking to buy out Petra’s stake in the Amazon blocks.

HRT is part of a crop of independent oil companies that includes OGX, controlled by Brazil’s richest man Eike Batista, and QGEP, part of the Queiroz Galvao construction group, that have emerged as investment alternatives to Petrobras.

Neither HRT nor OGX have started producing oil, while QGEP is only producing natural gas.

HRT’s focus on a region that is largely off Petrobras’ radar screen will provide it with an advantage, said Francois Moreau, an independent oil consultant who 15 years ago did preliminary research for a gas project in the area.

“If you’re a small company in Brazil, you have to find a niche for yourself where Petrobras is not dominant,” said Moreau. “The Solimoes Basin is far away from everything, but it’s an interesting play and the team [Mello] has assembled is very sharp.”—Reuters



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