Craig Fagan • Buenos Aires
New activity spells new future in Brazil's offshore sector
With President Luiz Inacio "Lula" da Silva firmly entrenched and the Middle East relatively calmed, Petroleo Brasileiro SA (Petrobras) exploration and offshore operations are looking up.
It is hard to imagine an upside for Brazilian offshore activities following last year's declining production, leadership uncertainties, and pending international conflict coloring operations at Petrobras, but international expectations for Petrobras have been renewed by one major force, a surprise wave of oil finds. Within the first five months, major discoveries in three basins have prompted the company to reconfigure production forecasts. At the end of 1Q 2003, recently appointed CFO Sergio Gabrielli released new company targets and pledged that by 2007 Petrobras would reach daily production of 2.2 MMbbl of crude and natural gas liquids (NGL).
This goal seems all the more attainable after Petrobras, calculating its output in Brazil and from abroad, topped 2.1 MMb/d on May 13 to set a new company record. The company has entered into the select group of non-OPEC oil players – among them Norway, Russia, and the US – producing above 2 MMb/d. Apart from the momentum of increased output, the completed acquisition of Argentine-based Pecom in May, which added 147,000 b/d to the overall numbers, boosted Petrobras production.
Revisions could continue as better than expected finds materialize in traditionally oil rich fields such as the Campos basin. This area's estimated reserves nearly doubled to 1.5 Bbbl after a third oil find in its BC-60 block in May 2002.
Straddling the coast of Rio de Janeiro state, the basin has been a treasure trove for successful strikes and drilling activities – its waters covering a seabed where over 80% of Brazil's oil reserves lie.
A discovery at the basin's 9-MLL-3 well in January is estimated to have reserves of 270 MMbbl and should come onstream in 2006. An additional 600 MMbbl could also come from I-ESS-121, 1,330 m below water about 84 km off the coast of Espirito Santo state, which was uncovered in May. Meanwhile, the Jubarte field in BC-60, discovered in October 2002 and potentially holding 600 MMbbl in reserves, has initiated a long-term production test with output peaking at 25,000 b/d.
New drilling activity also has been recorded in the Santos basin in the southeast and the Sergipe-Alagoas basin in the northeast. In May, well 7-CRL-4D, part of the Coral field in the Santos basin about 180 km off Parana state, began an initial run of 10,000 b/d. Its oil, found 150 m below the sea, has been graded at 41°API – considerably lighter and of higher quality than what is normally found in these Brazilian waters. Coplex Petroleo do Brasil Limitada, a subsidiary of Vancouver-based Naftex Energy Corp., has a 27.5% interest in the Coral field that Petrobras operates.
In the same month, a strike at the Santos basin uncovered the largest reserve of natural gas on Brazil's continental shelf. Preliminary reserve estimates put it at 70 bcm, or 440 MMboe, and expect the discovery to increase Brazil's natural gas reserves by 30%. The 1-SPS-35 well sits in 485 m of water in block BS-400 in the Santos basin. Flow tests showed roughly 700,000 cu m/d of gas and 600 b/d of condensate, suggesting a potential 3 MMcm/d upside in production.
Significant finds in the Sergipe-Alagoas basin also have bolstered Petrobras output projections, although the extent of reserves has not been verified. State petroleum agency ANP, which oversees Petrobras and all Brazilian oil and gas activity, originally announced that 1.9 Bboe, or 370 MMbbl in reserves, was discovered in well SEAL-100 of block zero lying off Brazil's northeastern coast.
However, Petrobras has confirmed that the find was 1-SES-149 and was of the light crude variety with a grade between 44° and 46° API. The existence of oil in this basin was already known following a previous discovery at 1-SES-147. Both wells are part of an offshore field spanning 4,067 sq km and in 2,000 m water depth. The block borders BM-SEAL-4 and BM-SEAL-9, two areas operated by Petrobras along with Amereda Hess 40% and Partex 15%.
Industry experts say that these new discoveries – combined with the moving of known fields into production and the conclusion of the fifth licensing round – will mandate greater international participation in 2003 and the coming years.
Increased drilling activities
The ratcheting up of licensing activities means that over the next two years, larger gas and oil operators will see constant drilling work off the Brazilian coast, with logistics companies being the main beneficiary. Expectations are for this market to double by the end of 2004 and for it to continue growing as new discoveries are developed. Logistics suppliers – from drilling fluids to cement and piping – are set to provide about $200 million in services to offshore facilities.
According to Organização Nacional da Ind-ústria do Petróleo, the logistics market in Brazil is going to boom through the supply of related upstream services. Already the sector has witnessed a quickening in these activities as partnerships and investments between international interests and Brazilian companies are solidified.
At Brasco, a venture between Scottish company Asco and locally-owned Wilson & Sons, expectations are for profits to jump 40% this year, up from $4 million in 2002. The company is set to refurbish an old sardine factory in the port city of Niteroi, Rio de Janeiro state, to better serve the brisk demand from offshore customers in the Campos basin. Shell has already tapped Vitoria Offshore Logistic to support Shell's exploration activities in the Bijupirá-Salema field off Espiritu Santo state.
However, a new policy environment for the sector could check international interest in expanding operational activities in tandem with Petrobras' growing activities.
The entrance of populist-backed Pres-ident da Silva, nicknamed Lula, undoubtedly created a shake up at Petrobras that saw pro-market company pillars such as President Francisco Gros, CFO João Nogueira Batista, and four other top directors exit from the scene. Lula's handpicked cadre of unknowns like José Eduardo Dutra, a member of Lula's Workers' Party (PT), and Sergio Gabrielli, CFOand a former professor with no petroleum experience, took the reigns among investor concerns that Petrobras could be hijacked for political ends.
While markets have since quieted following this internal power shift, there is once again concern over the government's pledge to give preferential treatment to domestic companies and international subsidiaries operating in Brazil. As part of the policy, such firms would be favored over foreign players in bidding competitions if both had similar cost advantages and technological capacities.
These changes have colored the conditions framing the upcoming licensing round. ANP has restructured stipulations regarding local participation to scale up its share and profile in the process. The minimum level set for the exploration phase of deepwater auctioned blocks will be 30%, while land licenses will require at least 70% participation by local firms.
The objective of the ANP under the Lula administration notably diverges from the policies of previous President Fernando Henrique Cardoso. It has promised to foster the growth of in-country technology and a network of domestic suppliers to service the oil and gas sector, and is expected to generate 141,000 jobs through 2007.
ANP also has stated that it would provide Braz-ilian-based companies with investment credits to offset the lower interest rates that global players can access in international markets. The idea is to create an equal, competitive playing field while compensating for the conditions local companies face once other license qualifiers are met.
Participation policy change
Being Brazilian seems like a secondary condition for successful bidding. The recent licensing round for the $280 million construction of two gas ducts set similar participation requirements. The Ministry of Mines and Energy adopted a measure mandating contracts be granted only to companies that had at least 75% of their suppliers locally based (either Brazilian companies, consortiums, or foreign-owned subsidiaries). Petrobras launched the project in an attempt to link offshore natural gas deposits in the Campos basin and the Camamu-Almada field to consumers in the cities of Campinas and Fortaleza, respectively.
This new participation policy will also affect the development of the P-51 and P-52 platform projects in the Campos basin that had been planned before Lula took office. In September 2002, Petrobras started construction of the production stationary units Petrobras 51 (UEP P-51) and Petrobras 52 (UEP P-52) for development in Module 2 in the Marlim Sul field and Module A1, Phase 2 in the Roncador field. Work on the platforms should begin in August 2004 and finish by 2008.
National participation minimums have been set at 65% on the projects to reverse the former Cardoso government policy of tax credits that had favored the importation of rig equipment. Contracts will be granted for constructing the processing plant, the compression module, and the power generation facility.
Petrobras already has received proposals for the platforms from international offshore players – Dresser-Rand Co., Man Turbo-machinen AGG HH Borsig, GE-Nuovo Pignone SPA-Firenze, and Siemens AG Power Gener-ation Industrial Applications – suggesting policy realignments have prompted a mild response from investors.
This international backing will be essential if Petrobras hopes to make its investment strategy viable. The company is in the process of spending $7.2 billion in oil exploration this year, tapping into 21% of its investment budget of $34 billion earmarked through 2007. This renewed push for investments could mitigate current slowdowns in bringing offshore projects onstream. Recent delays forced a downward revision in company output estimates for 2005 by 4% to 1.8 MMb/d.
To reach its new investment goal, Petrobras will be coughing up 85% of the funding and relying on global markets for the rest. In line with Petrobras policy under Lula's government, 65% of these funds must be spent on inputs produced by local or foreign-owned companies operating in Brazil.
Petrobras has promised to target 85% of its investment abroad to exploration and production activities, with Argentina and Nigeria being the favored beneficiaries. The purchase of Pecom, the privately-held Argentine energy interest, by Petrobras for $1 billion in October 2002 and completed in May is part of bulking up this strategy.
Another $2 billion has been targeted for investing in other international activities, possibly in the US and the Gulf of Mexico. The company has promised to boost international output to 300,000 b/d by 2005 from around 177,000 b/d (following the recent Pecom acquisition). There also has been interest in acquiring foreign refineries since the 10 facilities Petrobras owns in Brazil are already running at 85% capacity.
Apart from international backing, Petrobras will be counting on profitable operations to fund this investment strategy. Expenditures for new projects already were up 44% in 1Q 2003 from the same period in 2002.
However, if 1Q 2003 is taken as the benchmark for company performance, it would seem Petrobras will be able to generate the cash flow required through increased production.
Oil and gas production was up 5% from 1Q 2002 and reached 1.9 MMboe/d (see monthly production graph). Most of this growth came from new drilling in the Marlim (P-35, P-37) and South Marlim (P-38, P-40) fields in the northeastern part of Campos basin, about 110 km off Rio de Janeiro state and in waters ranging from 650-1,050 m. The Marlim reserve, discovered in 1985, has an oil-in-place volume of about 9 Bbbl.
Recent figures show the positive production trend underway deepening. New drilling activity helped the company record its highest monthly output of oil last February after production at Petrobras topped 1.6 MMb/d. In April, monthly production again rose, ticking up 5% from the same month in the previous year and hitting 1.6 MMb/d. If NGL is included in the total, operations at home and abroad actually were 1.8 MMb/d.
Petrobras' emphasis on priming production is tied to its medium-term target of achieving oil self-sufficiency by 2007. The company has set 1.58 MMb/d as its mark, the level required to meet 100% of projected domestic demand and still have another 640,000 b/d available for export.
International firms will undoubtedly be tapped to assist Petrobras in this drive toward becoming a net oil exporter. The challenge, however, is reconfiguring their role within the new performance profile and political context of the Brazilian oil goliath.