Hunt for partners coming soon as Brazilian oil project’s cost estimates reach up to $1.2B

Australia’s oil and gas company Karoon Energy has set its cap on finding a partner ahead of making a final investment decision (FID) for an oil field discovery in the Santos Basin off the coast of Brazil. The firm is moving forward with the next stage of development, which includes the entry into the front-end engineering design (FEED) stage.

Karoon claims to have done extensive technical and commercial work on a possible development of the Neon field in Block S-M-1037, 75 kilometers northeast of the Baúna project in the Santos Basin. This work is said to have improved the estimated economics for the asset, leading the operator to conclude that a Neon standalone development has the potential to be “an attractive, value accretive growth opportunity.”

As a result, Neon has passed Decision Gate 2 and progressed into the ‘Define’ phase, entailing work to further mature the Neon field toward a possible FID, including the confirmation of final well numbers and phasing, location and design; the securing of an appropriate FPSO unit for redeployment; the definition of subsea infrastructure needed, and any modifications required to the vessel.

In addition, there is also the need to engage with the market for key supply and service contracts, such as a drilling rig; reduce capex uncertainty and optimize the value of the development; and undertake a farm-down process. The firm has divided its next phase activities into three stages to mitigate capital exposure before farm-out, providing intermediate review stages, with progression into the next stage dependent on technical and commercial progress and market conditions.

Dr Julian Fowles, Karoon’s CEO and Managing Director, emphasized: “Over the past year, the team has progressed Neon through a number of important steps. This has involved fully reprocessing the existing 3D seismic data, recalibrated with the Neon-1 and 2 well data, and rebuilding the geological models with these data and updated petrophysical evaluations. The result is a full bottoms-up reevaluation of the Neon resource, certified by independent experts Miller and Lents Ltd. We have also validated the preferred concept as a standalone development, enabling a better constrained and more robust Neon development.

“This has led to improved economics and has demonstrated that Neon has the potential to be an attractive growth opportunity for Karoon that, based on a US$65/bbl long term oil price, would substantially exceed our mid-teens post tax hurdle rate of return. If it proceeds, the Neon development would significantly increase Karoon’s booked Reserves at FID and production towards the end of this decade, more than offsetting Baúna project production decline and creating material long-term value for shareholders.”

The first phase targets 60-70 MMbbl of the total contingent resource, and subsequent phases are expected to develop additional recoverable volumes. The Neon and Neon West prospective resources are described as representing low-risk exploration upside with similar seismic direct hydrocarbon indicators as the proven Neon accumulation. Karoon underlines that the Neon ‘Define’ phase capital costs will be committed on a staged basis, with board approval required to move through each stage.

The initial stage capex is anticipated to reach $7–10 million to be spent over the next six months, at which time the project economics and market conditions will be reassessed. If the project progresses through the various stages, total costs for this phase are expected to be around $25-30 million up to the FID, targeted for mid-2026.

Fowles underscored: “A number of infill opportunities have been identified as part of DG-2, and further development phases could extend the economic life of a potential Neon development well into the 2040s. Neon could also become a hub for developing the existing discovered 27 MMbbl of 2U contingent resources at Goiá3 and prospective resources in the nearby Neon West prospect. Given the recent volatility in global markets and oil prices, the Karoon board has taken a measured approach to investing further in Neon, with only the first stage of Define activities currently endorsed.

“The initial commitment of US$7 – 10 million, for FPSO and surface facility FEED activities, optimising the phasing of development drilling, and undertaking various surveys, will be funded from our existing cash, which at the end of March 2025 was more than US$190 million. The status will be reassessed in the third quarter of 2025, at which point the next phase of Define capital spend will be approved if the results and market conditions continue to be supportive.”

Moreover, the Neon contingent resource estimates are deemed to have materially improved, with 1C up 59% to 59.8 MMbbl, 2C up 44% to 86.5 MMbbl, and 3C up 21% to 108.0 MMbbl, alongside prospective resources of 6.7 MMbbl on a 2U basis being recognized for the first time. In light of current market volatility, the ‘Define’ phase will take place in three stages to allow for reassessment by the firm’s board as each stage gets completed.

The firm’s 2025 capital expenditure related to Neon, including $1 million spent on the concept select phase this year, is forecast to be $22–$25 million. The company expects to open a data room during the third quarter of 2025 and begin a farm-down for its 100% owned Neon project to secure a suitable partner to balance the risk and capital demands and share the upside.

According to Karoon’s CEO, the Neon development concept encapsulates a standalone development using a redeployed FPSO with a capacity of approximately 50,000 bopd, capable of accommodating Neon field peak production rates as well as future infill and nearby tie-back opportunities; an initial phase of development drilling, comprising four subsea production wells and one gas disposal well, and constructing the necessary in-field subsea infrastructure, with potential for a second phase of infill production wells to follow at a later date.

The farm-down process to secure a partner, which is a prerequisite to taking the FID, is set to kick off during 2Q 2025. The revised Phase 1 concept capital costs are currently estimated at $0.9–$1.2 billion, with first oil targeted for early 2029 and an estimated peak production rate of 40,000–50,000 bopd. The mid-case payback period is estimated at approximately two years, and IRR above 20%, at a long-term Brent oil price of $65/bbl.

Fowles concluded: “Development of additional infield and nearby resources could enhance these preliminary economics further. Our funding plan assumes the farm-down of a 30 – 50% interest in the potential development. While marketing has not yet commenced, several potential farminees have already indicated interest.”

The move to the next stage of the Neon development comes shortly after Karoon made progress in the acquisition of an FPSO, which is working on another of its projects in Brazilian waters.