Brazil’s oil and gas sector is expected to see a wave of merger and acquisition activity (M&A) as players with mature assets nearing the end of production seek to bolster their longer-term outlook.
According to Wood Mackenzie analysts, amid the rise of independent oil and gas operators in Brazil, the country's peak production is expected to reach 485,000 barrels of oil per day in 2027 at which point asset maturity is expected to outpace development, resulting in a decline in output.
Ahead of this tipping point and in response to declining oil prices, junior oils are turning to M&A to gain scale, diversify their assets and reap the benefits of operational synergies.
Operators will invest US$10 billion in capital investments over the next decade in a bid to grow production, Wood Mackenzie’s analysts project.
Under Brazil’s previous administration, the primary source of portfolio expansion was through the purchase of oil and gas assets from Brazil’s state-run oil company Petrobras (NYSE:PBR).
But Petrobras (NYSE:PBR) has since revised its divestment strategy under the administration of President Luiz Inacio Lula da Silva ("Lula"). The oil giant announced in September 2023 that it had decided to halt the sale of key asset which were expected to be made available to the market.
Petro-Victory Energy Corp. (TSX-V:VRY) CEO Richard Gonzalez told Proactive that he believes the consolidation of junior oil companies in Brazil is “imminent” for juniors to achieve economies of scale and efficiency and for reserve replacement, among other reasons.
“The juniors that have purchased mature assets will need to purchase reserve replacements through M&A with other juniors,” Gonzalez said.
A recently proposed merger between 3R Petroleum and PetroReconcavo has also signalled the upcoming consolidation in the Brazilian onshore segment.
The merger was proposed by Sweden’s Maha Energy, which holds a 5% stake in 3R Petroleum, an oil and gas firm focused on the redevelopment of mature fields both onshore and offshore.
“We believe the Brazilian market is ready for a second M&A wave, driven by the optimization of asset portfolios, capture of synergies, and formation of players who will lead the industry in the coming years,” Maha Energy said in a statement released on January 17 announcing the acquisition of its stake in 3R Petroleum.
In tandem with the acquisition announcement, Maha Energy proposed the merger between 3R Petroleum and PetroReconcavo, noting synergies between the two companies related to their existing fields in Rio Grande do Norte and Bahia and associated infrastructure. It expects these synergies could result in cost savings of about $1 billion.
“In the Brazilian context, particularly following Petrobras (NYSE:PBR)' divestment program, consolidation emerges as an even more compelling and essential trajectory,” Maha Energy said.
During this transformative phase for Brazil’s oil and gas market, Petro-Victory holds a strong position among onshore juniors due to its significant growth potential.
Unlike other exploration, development, and production (E&P) companies in Brazil which have more mature assets in secondary recovery with depletion, Petro-Victory has assets in primary recovery with the potential to develop and increase production.
It entered Brazil’s oil and gas sector in 2016 and now holds a 100% interest in 38 licenses encompassing 257,604 acres across two producing basins.
CEO Gonzalez highlighted the company’s holdings in the Potiguar Basin, the most prolific onshore basin in Brazil, in proximity to 3R Petroleum and PetroReconcavo’s assets.
“Billions of dollars have been committed to work programs across onshore Brazil,” he told Proactive.
“With a world-class royalty regime of 5% to 7.5% and selling oil at Brent prices along with strong government support in the world’s largest economy and 7th largest producer of oil in the world, Brazil onshore oil and gas is poised for significant growth and M&A.”
