Deepwater Brazil stands at the crossroads

Initial interest in deepwater exploration drilling in Brazil has been disappointing as a result of the lack of recent commercial discoveries, according to industry analysts Wood Mackenzie. With the opening up of its upstream sector to foreign investment in the late 1990s, Brazil rapidly emerged as one of the hottest new exploration plays in the world.

Initial interest in deepwater exploration drilling in Brazil has been disappointing as a result of the lack of recent commercial discoveries, according to industry analysts Wood Mackenzie.

With the opening up of its upstream sector to foreign investment in the late 1990s, Brazil rapidly emerged as one of the hottest new exploration plays in the world.

Interest in deepwater Brazil was particularly high as Petrobras had made a number of significant discoveries in the Campos Basin, including the 1.9 Bbbl Roncador field, discovered in 1996. In addition, at the time when more Roncador-like fields were expected to be discovered, the Brazilian fiscal regime was considered to be relatively attractive.

However, initial enthusiasm for deepwater Brazil has quickly worn off, according to consultants at Wood Mackenzie.

"International oil companies have now drilled 32 deepwater wildcat wells but to no avail," said Matthew Shaw, senior consultant at Wood Mackenzie. "We estimate that only seven of the wells that have found oil offer any chance of development. However, at present they are all considered noncommercial for more or less the same reasons: reserves are small, the oil is heavy, and water depths are extreme. Petrobras too has been inflicted with the same lack of exploration success. The company remains the driving force in Brazilian deepwater exploration but, despite drilling 113 wildcats since finding Roncador, commercial discoveries have only been made in one block – BC-60 in the Campos basin."

BC-60 has had six discoveries but they all have heavy oil and only two are large enough to be developed alone.

The lack of recent commercial discoveries in deepwater Brazil will have a significant impact on medium to longer-term oil production in the country, Wood Mackenzie says. Production is set to rise substantially in the near term, but this is masking the bad news that it will enter a steep decline post 2007. If a solution can be found to help make recent discoveries economically more viable, then this would ultimately result in hugely increased revenues to the government.

To this end, an improvement in fiscal terms may be required to render these discoveries commercial. Wood Mackenzie has examined the economics of two model fields, typical of recent discoveries made in Brazil. A high case scenario is based on reserves of 600 MMbbl, reflecting that of the largest discovery in Jubarte block BC-60. The base case scenario has been devised to represent more typically what has been found by the industry ¿ it has reserves of 270 MMbbl.

"We have run a number of sensitivities on the fiscal terms to demonstrate how these recent discoveries could become more economically viable," said Geddes.

Both the high and base case scenarios are uneconomic under the present fiscal terms, assuming that a hurdle rate of return of 15% is required. Relatively modest changes to the terms could render the larger field economic but far more radical changes will be required to enable the exploitation of the base case field.

Moreover, Wood Mackenzie has run the economics of the two model fields under the fiscal terms of Brazil's key international competitors in the deepwater exploration and production arena, namely Angola, Nigeria, and the US Gulf of Mexico. The results demonstrate that Brazil's terms are relatively harsh.

06/17/03

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