Exxon stops drilling in Brazil after a failed oil discovery

Exxon Mobil Corp. left a multibillion-dollar bet it was making on finding oil in the deep waters of Brazil after a series of disappointing wells left it with nothing to show for over five years' worth of labor that had been put into the effort.

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In light of the fact that the Texas oil giant failed to locate commercially viable quantities of crude there for the third time last year, the firm has shifted its engineers and geologists to other countries, including Guyana, Angola, and Canada, where they will be working on the offshore acreage that was purchased with partners for $4 billion in 2017.

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After its last active rig contract expired in April 2022, Exxon has not put out tenders to drilling contractors to do exploratory work in that area during the past year, analysts have said, and it missed Brazil's latest offshore auction in December.

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Darren Woods, CEO of ExxonMobil, spoke at a conference last December to outline Brazil as one of the company's major "growth opportunities" that will be part of its portfolio of low-cost supply developments, along with Guyana, the Permian Basin of West Texas, and New Mexico, and the export of liquefied natural gas.

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The decision by Exxon to suspend its recent drilling campaign in Brazil marks a major setback for a company that has promoted Brazil as a vital source of growth for years. 

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There is no indication that Exxon has ruled out future projects in Brazil, according to people familiar with the matter. In a statement, the company's spokeswoman, Michelle Gray, confirmed that Exxon is still engaged in Brazil and continues to explore the country for oil and gas resources.

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"The initial drilling program we initiated in Brazil for exploration has now been completed," according to Ms. Gray. "We are still working with our co-venturers to evaluate the potential for future exploration activities in those blocks based on the data acquired from the extensive drilling program we have undertaken with them."

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Exxon, a Texas-based company, re-entered Brazil six years ago with high hopes that it would be able to achieve the same success other drillers had decades ago in Brazil's offshore geological formations. Brazil is now one of the very few places in the world where major oil corporations still spend money in order to find oil, which is one of the rapidly declining trends worldwide. There has been a recent challenge for some companies to find oil in Brazil; however, the government-owned Petrobras is currently the leading offshore drilling rig manufacturer in Brazil, despite recent challenges to find oil there.

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There are numerous reports that Exxon executives internally overestimated their chances of drilling successful wells in unproven areas, according to people who are familiar with the matter. It has been difficult for companies to interpret seismic images used in exploration off Brazil, because there are thick salt layers atop the oil and natural gas reserves that make interpretation difficult, and because environmental regulations have limited the use of substandard equipment by companies, according to the companies.

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In the coming year, Exxon is planning to spend most of the company's $25 billion capital budget in the Americas, including Brazil, which reflects the company's priority of growing shareholder returns and cutting costly frontier drilling projects. It is expected that the company will focus on the Western Hemisphere and spend most of its capital budget there.  

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Exxon is a minority shareholder in a separate offshore project in Brazil called Bacalhau, which is being led by Equinor. The project is in progress and Exxon has a minority stake in it. The first phase of the project was approved in 2021 by the companies, and it is expected to come online in 2025, pumping approximately 220,000 barrels a day when it is operational. 

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FactSet reports that in 2018, Exxon sold or proposed to sell assets in Chad, Cameroon, Egypt, Iraq, and Nigeria, as well as some legacy assets in the U.S. and Canada, marking the company's biggest number of such sales since 2018. Since the start of 2018, the company has planned, in order to reduce its global footprint and focus on its most valuable assets, to sell at least $15 billion worth of assets.

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Two wells were drilled by Exxon in the Campos and Santos basins of Brazil in 2021. A third well was drilled last year in the Sergipe-Alagoas basin as part of this project. There was not enough oil in any of the three wells in Brazil for them to be economically viable.

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Nevertheless, it stands out as a contrast to its success in Guyana, one of Brazil's neighbors, where it has found decades' worth of oil in the last few years. Analysts predict that Exxon will be able to pick up more contracts in Guyana within the next few months after having six drilling rigs working there already.

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In addition, Exxon also deployed a drilling ship to Angola last year, and it is working on a two-year contract for that rig, marking Exxon's first exploration efforts in the West African country since 2018, according to drilling rig tracker RigLogix, which tracks drilling rigs around the world. Following the drilling of an underperforming well in Brazil by Exxon, the drillship began work a few months later. 

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"There was a great deal of hope for Brazil as it could have been. However, Exxon is not doing well with its multiple noncommercial wells," according to Schreiner Parker, an analyst at Rystad Energy. He said it must ask itself: "Do we want to continue throwing good money at bad?"

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It is estimated that the cost of drilling those deep-water wells off Brazil will range between $100 million and $150 million, on average, according to Wood Mackenzie, an energy consultant. There are no exploratory wells in the Sergipe-Alagoas region scheduled for 2023 by Exxon and its partners in that region, according to one of the partners, Enauta Participacoes SA, which is a Brazilian oil company. 

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Although other Western oil companies have also had trouble making commercial discoveries in recent years, Exxon's peers Shell PLC, BP PLC, and TotalEnergies SE are all continuing to drill in Brazil, according to Marcelo de Assis, an analyst at Wood Mackenzie. 

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"In fact, Exxon, like most of the [integrated oil companies] entering Brazil, had very high expectations when it entered the country," he said. "There have been a number of companies that have had poor results when it comes to exploration." 

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Currently, Exxon has not had any active drilling rigs working in Brazil since last year, according to RigLogix, and has not put out any tenders for exploratory drilling work. There is a possibility that it might be able to add a rig in Brazil by the end of 2024, according to Terry Childs, the head of RigLogix, which is a subsidiary of the Westwood Global Energy Group.

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Even so, according to people familiar with the matter, Exxon may be willing to consider drilling in the northern Brazil equatorial margin, far from the leases the company holds further south. A Brazilian environmental regulator, which has been holding up drilling permits in the region for years, is currently waiting to give Petrobras permission to drill in the region -- which is considered an environmentally sensitive area. 

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It is expected that Exxon is going to continue focusing on Guyana and the Permian Basin for the foreseeable future.