Interview with the CEO ain BNAmerica

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Karoon CEO: ‘Brazil is our core focus, our heartland’ BnamericasPublished: Wednesday, July 14, 2021 Deepwater Shallow waters Offshore U no pstream Company Exploration / Drillingshow 8 more Karoon Energy’s history as an oil producing company began in Brazil at the end of 2020, when it made its first shipment from the Baúna Santos basin shallow water field. The Australian firm is now working to increase its local output by developing the license’s Patola discovery as well as the Neon and Goiá projects, also off Brazil’s southeast coast. Growth could also come via the acquisition of new assets being divested by federal oil company Petrobras or through bidding rounds held by regulator ANP, Karoon’s CEO Julian Fowles tells BNamericas in this interview. The executive talked about the current situation and outlook for its Brazilian offshore undertakings, potential partnerships, oil sales, regulations and the energy transition.BNamericas: How do you see Brazil’s business environment amid the COVID pandemic crisis?Fowles: I think the business environment in Brazil for Karoon is good, it’s quite progressive. There’s a stable fiscal regime around oil and gas, different to some other jurisdictions where we see a lot more instability. I think in Brazil there's a lot of encouragement for investment in oil and gas and in upstream, especially where we operate. The government is planning the 17th bidding round a little later this year, clearly looking for more foreign direct investment into the E&P sector. There's a whole variety of different types of assets that are potentially available from bid rounds and open acreage to assets that other companies are divesting. We have just moved, as you know, from exploration into production, earning some cash flow with Baúna. We want to continue to grow in Brazil and to invest more. We've got a local team of really excellent professionals. Technical people, legal, financial, the whole spectrum, very well trained people, a really good workforce, and it's great for a company like ours, which, as I said, wants to grow. And we have plans in place to grow, of course. BNamericas: What are the main challenges in Brazil? Are their regulatory bottlenecks? Fowles: Like any jurisdiction, there are bottlenecks in parts of the process. In Brazil there are different agencies who deal with different aspects of the sector, and those agencies operate in many ways very independently. That's good for companies like us because then we can engage with the people there. We can make sure that they've got the information they need. And they're always keen to engage with us, they want to know how we're going… ANP is a great example. And it's great to have that level of interest from the regulatory bodies. Like any jurisdiction, there are areas that I'm sure can improve, be streamlined. But from our perspective, seeing how we went with the Baúna transaction... that went pretty smoothly for us in the end, once we came to agreements with Petrobras over how we would transact. Then there are processes in place with the regulatory agencies, and you just have to follow the process. And that has all gone according to how it should work.BNamericas: In June Karoon made the final investment decision on the Patola project, which is part of the same concession of Baúna. What are the next steps there?Fowles: That was a really exciting time for us, just seven months after taking on the new asset. The first step was the acquisition. The second was making sure that we were committed to do the intervention programs or workovers. And then the third step was reaching this final investment decision with Patola. It's not a huge field, but sits within the production license, very close to the FPSO, about 5km from it. So it's really like an add-on to the existing producing fields, a very convenient first development for us. We've already got in place contracts for long lead items. We put some of those in place at the very early part of this year. We've signed up some of the biggest contracts: Maersk will supply the drilling rig, the Maersk developer. And we've signed up TechnipFMC to do the subsea work. And we're really pleased with those relationships that we're building. They're good, really international organizations. And they've worked really well with us over the last six or eight months to get to the point where we're all committed with a common goal. So next steps are more contracts. We've got some of the smaller scale contracts to do in terms of some of the other activities. We'll do the downhole: there's the drilling activity, which is already contracted with the rig, but we've got more work to do around that. Wellheads are one of the big things, getting those constructed for Patola, and the subsea equipment itself, the umbilicals and flowlines. So that work is all going ahead, and we'll keep very close monitoring of how that work progresses over the next few months. The next really big thing will really be when we have a good indication of exactly when the rig can be mobilized. It is currently operating in the Caribbean, in Suriname, and the operators there had quite a bit of success. So they may be keen to keep the rig for as long as they can, but we're expecting in the second quarter next year that we'll see that rig mobilized into Brazil. Getting the firm timing on that will really be the next big announcement around the start of the intervention program. But we've got quite a lot of things happening before then, of course, in terms of reporting our results and some other things that are going on with the restructure that we've put in place. BNamericas: How has Baúna developed so far? What are the main lessons learned and expectations there? Fowles: The asset is working really well. We've taken some time to make sure that the FPSO operated by Altera-Ocyan [formerly Teekay Offshore-Ocyan] is as good as it can be. And that meant that we've had a few more days of outage than just the normal planned outages that you would do every year. So we spend a few more days making sure that that maintenance work is all going ahead properly. But the way we want it done is also the way that it's happening on board the FPSO. So we've done a number of safety, equipment and maintenance audits on the platform. And they've highlighted areas which I think quite naturally will need more attention. We're working in an offshore environment. It's marine, salty air. We've got steel, obviously, and it's really important that that steel maintains its integrity, that pipelines have to be good and solid. And if we see any rust, we have to deal with it effectively. So that's got a lot of what our work has been involved in over the last six or eight months. The operations team has really focused on ensuring that the equipment we have is really fit for another decade. We want the equipment to last as long as we can, because we see quite a long life in the field. We've had some operations that we've done offshore. We've replaced some floating hoses that sit on a big reel on the FPSO. And every time we bring a tanker up to offload, we unreel the floating hose and connect that up to the tanker. It usually gets replaced every five or six years. So that operation just went ahead one or two weeks ago without any incidents. The result of that is that our production has been maintained. In the first quarter of this calendar year, on a daily basis, we were still producing over 14,000b. The average was a bit lower because we had some outages. But on a daily basis, we were over such a level. Editor's note: Karoon foresees investments of US$300mn to double production in the Baúna area by early 2023. Of this amount, between US$110mn and US$130mn will be invested in the Baúna intervention program, and between US$175mn and US$195mn are planned for the Patola development project.BNamericas: What about the Neon and Goiá field projects? Fowles: That's a great success early on with some discoveries. They've always struggled a little bit because they're more complicated than Baúna. Baúna is a sort of a flat pancake with some dimples and a relatively simple structure. Regarding Neon and Goiá, they sit around a salt dome and are a little bit more inclined. That means that they're a little bit more complicated geologically. They tend to have some folding which can be sometimes difficult to see and to predict, especially when close to the salt. So I've asked the guys to go back and take another really close look at Neon and Goiá. We've tried to farm those assets out in the past and we haven't been successful with that. So I want to understand what led to that and what work we need to do to ultimately bring them into development. That's what I'd like to see. They are really interesting assets, but you've got to be confident about assets like that before you want to invest, because, being a little smaller than some of the bigger fields around, it's easy to over invest and end up not making the best decisions. Therefore, we're looking at the subsurface and regionally to understand everything we possibly can about that area so we can predict the geology of it better. And we're also looking at what's the best plan for development in terms of how we drill wells and how many should those be horizontal, what lengths should the horizontal sections be and what's the best timing. And even before that, there's a question which is what more data we need to acquire to develop the fields. This means that we’ll look at drilling a control well into the Neon field. We've negotiated with Maersk that we've got an additional slot at the end of the drilling sequence for a particular well. And if we want to, we can do one more well, which could be the control well into Neon. We're trying to lighten things up so we get a good sequence of activities.BNamericas: But you did get an approval from the ANP for the project development of Neon and Goiá. So there is probably a deadline for you to make your final investment decision. What date is that?Fowles: We are in the process of putting together some materials that we can discuss with the ANP and that'll be around the current plans and the types of uncertainties and risks that we see. I've really asked the team to step back and take another view, put some fresh eyes on it. And we've got some really capable people working in Brazil and here in Melbourne on having a look with fresh eyes on how best to develop those fields. The last thing the ANP wants is for companies to go ahead with developments that then don't work, so we want to be absolutely sure that that will work, and there’ll be discussions that we need to have with the ANP once we’ve got those plans in place. We're not ready at the moment to make that final investment decision. That'll be really dependent on the work that's going ahead and on discussions that we’ll have with the regulator. [We’ll take the FID] once we've taken this fresh look at the asset and we feel we've got a more robust plan to develop the fields, and that'll take place over the next six months or so.Editor's note: According to the ANP, firm investment commitments to develop Neon and Goiá are estimated at US$484mn. BNamericas: Is Karoon eyeing new potential acquisitions in Brazil either via mergers and acquisitions or ANP tenders? I have just learned that you’re analyzing the acquisition of the Albacora and Albacora Leste fields from Petrobras. These are deepwater assets, a new step for the group, right?Fowles: We've got a bit of time where we need to really secure our reputation as a safe and reliable production company and operator. I think we're in the process of doing that [with Baúna]. With a few more quarters of production and discussion with the market, I think we'll be really developing a good reputation. Without that sort of reputation, it's difficult to convince other companies – whether those are companies we would partner with or whether they’re companies that are selling assets – that we could be a good purchaser of those assets, especially where the assets are of a significant size or where there's going to be a further step in Karoon’s developments. We are absolutely interested in looking at other assets, especially in what we would call the core basins in Brazil: Campos, Santos and Espírito Santo. Those are basins that we feel we know a little bit about the geology. And we're getting more information on that as we continue to operate our fields. Petrobras continues to have processes of divestment, and Karoon is always keen to get involved in those. I can't say too much about Albacora and Albacora Leste, but it would be difficult for Karoon to do that on our own, something of such a scale. We would need to do that with partners.BNamericas: There are pre-salt prospects in Albacora and Albacora Leste. So they really are a more complex type of project.Fowles: There's a big redevelopment that would need to take place there. I believe that's already in Petrobras’ plans. I can't say much about them, there's obviously a lot of confidentiality around those processes. There are a lot of rumors about other companies involved and Karoon as well. If we were to take on something in deep or ultra-deep waters, we would certainly want a partnership with companies that have experience in those sorts of water depths already. We're interested in expanding our business. Our core areas are the Santos, Campos and Espírito Santo, so anything that’s put onto the chopping block there by other companies, we're keen to take a look.BNamericas: Do you also consider the possibility of acquiring assets through ANP bidding rounds?Fowles: We’re mostly focused on offshore oil assets. That's where we think our capabilities and opportunities lie. Over the next few years, there's still quite a bit of demand and some demand growth in the oil markets. And supplies are not growing quite as fast as might be required to meet some of that demand. Brazil is our core focus, our heartland. BNamericas: What's the plan for the production of oil and gas in Brazil? Is it going to be traded here and/or exported?Fowles: [Baúna’s oil] is a beautiful light, clean, low sulfur oil, very similar in many ways to the pre-salt oil sold by Petrobras. So we found that there's a very good market for that overseas. We sell about 500,000 barrels every five or six weeks and we sell that through a marketing contract that we have with Shell to overseas refineries. So we've sold some to China and into Europe. And we've also been looking at selling it to other parts of South America as well. We'll sell to the highest bidder for oil. Essentially, it's an open traded commodity, and, depending on if the price is right, when it comes to selling it, that's how it will go. BNamericas: What are Karoon’s energy transition strategies in Brazil, if there are any? Fowles: The really important thing around that from the point of view of the planet is that we're able to understand the sustainability of [the oil market growth] and how to offset carbon and to mitigate the carbon footprint that that we have and that we’ll develop in the future. We're actually undertaking a broad strategic review of all of our business at the moment, reviewing the strategy that we have had in terms of how to grow. But a key part of that strategy is looking at ESG [environmental, social and corporate governance] and at the current carbon footprint that we have. It also looks at social programs and at how the company is governed. But with respect to the climate and carbon part of it, we're in the process of understanding what steps we can take, first of all, to remove carbon from our systems altogether and reduce our CO2 emissions, essentially. And a part of that, of course, is to look at our energy use and how we would do that in the future. We're currently screening all the sorts of opportunities that we see in Brazil from the perspective of our strategic plans, and we'll be able to say more about it really as we get into the fourth quarter of this year. We see it as a big issue for the planet, and we absolutely will not be left behind in that. We’ll be part of that transition for sure.