Brazilian politics upstage technology, but for a good reason

Outside investment needed to reach self-sufficiency

George Hawrylyshyn
Contributing Editor - Brazil

The political changes in Brazil are upstaging the technical progress in oil and gas exploration and development. Not that the deepwater innovations and experiments, for which Petrobras is known, have been relegated to a secondary role, but because unprecedented political/economic reorganization measures are underway, which will change the Brazilian oil scenario forever.

Petrobras, the Brazilian national oil company, continues probing deeper into the ocean and testing new methods, such as:

Ultra-deepwater horizontal and other trees
Rigid, J-lay risers
Drill-tubing risers for production floaters
Electrical submersible pump
Multiphase pumping systems.

All these systems are in great depths with more being tested. In the process, Petrobras continues setting a string of unprecedented water depth records, which in the past have earned it the OTC Technological Award for Companies. As if to show it is not neglecting its pursuit of technological innovations and breakthroughs, a record-setting development project is programmed for yearend.

The start of production in the Roncador field, the most recent giant field discovery in Campos Basin, will set world water depth records for completion, host unit installation, and production. Some innovations will be introduced.

Antonio Carlos Agostini, Petrobras' Director of Exploration & Production, stressed that all these developments are occurring during a period of very special circumstances, in which the Brazilian economy in general is opening up, and also oil markets.

The transition to a free market economy started two years ago. Agostini pointed out that "Petrobras has continued with its gradual but steady policy of setting goals and making every effort to meet them. Even as we are preparing for a different role in the future, we don't neglect our ongoing plans and the way to implement them. For instance, last year we set a goal of bringing onstream the Marlim South Well No.3 in 1,709 meters of water. We accomplished that successfully and it remains the deepest-water producing well in the world. That was a fast track development project. This year we are doing the same with the first Roncador well, which is deeper, at 1,854 meters (a new world record).

"But for us at Petrobras, both the Marlim and the Roncador wells, are, first of all, commercial producers of oil and a test case for determining the characteristics of that particular reservoir. The fact that both are world records is a consequence and not an objective for us. Our intention is to continue working even as the changes are introduced, and I believe that we will benefit from the changes."

Petrobras' Presi dent, Joel Mendes Renno, goes even further. He welcomes the opening, convinced that Petrobras has the capacity to compete with all comers, especially in the segment of deepwater and offshore in general. Aside from the obvious long-standing leadership in deepwater, he complements his argument with some solid statistics which place 45-year old Petrobras among the top ranks in the oil industry:

15th largest oil company in the world (PIW)
US $27 billion annual turnover
16 billion bbl total reserves
1 million b/d of daily production
700,000 b/d in imports (Petrobras has a captive domestic market to that amount, which is a strong incentive to obtain financing and partnerships)
29 sedimentary basins, covering more than 6 million sq kilometers, most hardly touched by seismic or drilling crews
Open credit on the world financial market
Politically and economically stable.

Winds of change

At the age of 45 (anniversary on Oct. 3), Petrobras gets a new lease on life. Company President Renno puts it this way: "We are on the threshold of a new period in the history for Petrobras. With the new oil law, other companies are now coming here bringing their experience, interesting technology, and financial resources. Brazil stands to gain from all this. When Petrobras was founded (1953), the circumstances were different and it was the right moment for such a move. Up until 1953, Brazil was open for companies to invest in our geology, but at the time none did. But now, 45 years later, these are other times and the new model for the oil industry will bring a spurt of energy for the country.

"Petrobras was founded at the height of the post-WW II wave of nationalism which swept the world. It was given a "Constitutional Mandate" to administer the oil sector for the Federal government. In essence, the Brazilian national oil company held a monopoly on all aspects of the oil and gas industries, upstream and downstream, except for the distribution of products and in a very few case, refining. Starting from scratch, it grew to reach high ranking in the industry and worldwide recognition for its pioneering efforts in oil technology, especially offshore."

But times changed and the 1990s heralded a new wave of privatizations and free market economies swept the world, including Brazil. The election of Brazil's neo-liberal president, Fernando Henrique Cardoso, allowed the start of the always controversial debate on the question of privatizing Petrobras, or at least taking away its monopoly. It was a tough struggle. Petrobras has long been a symbol of nationalism and anything said against it was taken as treason by the more radical factions. In the end, what won was simple economics and political compromise. The government managed to convince public opinion that for all its efficiency and experience, Petrobras alone didn't have the financial capacity nor the manpower to keep up with the demand for oil products, which was growing at an annual rate of 6%. Petrobras now produces 1 million b/d, but Brazilians consume almost l.8 million b/d.

It took about three years to clear the way for the changes and involved a political compromise. Congress approved the Constitutional Amendment ending the Petrobras monopoly mandate, but the President promised not to privatize Petrobras in his term in office.

Guidelines

The Constitutional Amendment was followed by an oil regulation, which created the following guidelines for the new oil scenario here:

Petrobras is to remain a mixed-capital company with the federal government holding a minimum of 50% plus one voting share.
A National Petroleum Agency (ANP) would be created to establish and monitor the rules and regulations of the new scenario. In general terms, the ANP has a mandate to gradually introduce free market rules, for all upstream and downstream segments, by the year 2000.
Petrobras would retain all of its producing facilities and would have a chance to claim other areas that have "good prospects," either ready for development or additional exploration. The firm would have to relinquish the remaining areas of the Brazilian sedimentary basins to the ANP.
The ANP is to offer these relinguished areas for rounds of open bids for E&P concessions, in which Petrobras would have no special privileges and would have to participate on equal bases with all comers.
Petrobras is free to enter partnerships or farm-ins that it thinks best for its concessions, having only to obtain approval from the ANP.
The ANP, with the approval of the Ministry of Mines and Energy and other Ministries and governmental organs, is to issue a series of decrees, regulations, by-laws, contract models and other documents which will as guidelines for operating in the oil industry under the new conditions.

Unique joint ventures

Once Petrobras realized the changes were inevitable, it came up with what even competing companies admit was a very good move. The state company offered private and other state companies joint ventures and farm-ins (called partnerships) to develop and further explore concession areas, which Petrobras asked for and eventually obtained from the ANP.

This was presented as a short cut for companies interested in entering the Brazilian upstream market. Instead of having to wait for the ANP to call for concession bids in the future, these companies could do so right away, in association with Petrobras. The venture is a good way to obtain an introduction to Brazilian geology and local ways of doing oil business. As a bonus, there is no bidding bonus to be paid at this stage. These areas consist of the Constitutional settlement with Petrobras and are exempt from the bonus.

There are benefits for Petrobras as well. First by taking partners, Petrobras was able to claim from ANP a bigger area than it could have claimed without partners. That's because in order to obtain the concession, Petrobras had to prove that it had the financial capacity, technical capacity, and manpower to determine the commerciality of exploratory blocks claimed, all within a three-year period. Petrobras also had to prove that it had the capacity to bring the development areas onstream.

Saturated with its own E&P program and seeking capital, manpower, and technology, Petrobras offered its partners operatorships, something unheard of in Brazil. But it required the partners to come up with all the investment funds necessary to obtain an equity share while keeping a 30-40% share of each project.

100 Wells for JVs

Renno announced the partnership offers at the 1997 OTC in Houston. This resulted in a rush of oil operators to Petrobras headquarters in Rio de Janeiro. More than 500 companies have since talked to Petrobras officials. Almost 200 companies expressed an initial interest in partnerships with more than 100 signing the Memorandum of Understanding to get the Petrobras "Partnership Portfolio" data package.

Sixty companies presented specific proposals, and, as of August 1997, 31 had signed the so-called "Moments of the Meeting (MOM)," a form of a letter of intent to go ahead with specific partnership projects. These projects are pending the definition of an acceptable "government take" and some other contract conditions.

The partnership contracts as they stand now, will require the drilling of more than 100 wells and more than 50,000 km of seismic lines. By far most of this is offshore. The program is to be done within the next three years, and all of it is in addition to what Petrobras will continue doing on its own. The required investments for exploration are estimated at US$1.0 billion. Investment for development projects is estimated at $3.5 billion, and will result in an additional 300,000 b/d.

Partners rush in

Of the total 37 Petrobras partnership projects immediately available for exploration and development of production work, 25 have an MOM pre-contract ready, six are in the advanced stages of negotiation and six others are being revisited. The formal contract, at least for the first 25, depends now entirely on the terms of the concession contracts and the fiscal terms. As expected, the most interest was in the Campos basin, where the biggest and most expensive projects are located. There are 25 known MOMs: 6 for the Campos Basin, 2 in Santos Basin, 2 in Espirito Santo Basin, 2 in the Amazon River mouth, 3 offshore Bahia, 1 at the Cear Basin, 1 in Pelotas Basin, 1 in the Sao Francisco River mouth, 4 in the Potiguar Basin, and 3 in Sergipe/Alagoas.

Revisiting partnerships are for marginal fields with projects for rejuvenating existing fields. The Petrobras partners include: Amerada Hess, BP, Elf, Enterprise, Exxon, Louisiana Land & Oil, Pennzoil, Petrobras, Ranger Oil, Santa Fe, Shell, Suncor, Union Pacific, and YPF.

Roncador, Marlim action continues

Even as it negotiates with ANP for concessions and with prospective partners for joint ventures, Petrobras assures that it will continue with its own already programmed projects. The biggest and most challenging project, because of the new location and ultra- deepwater, is the Roncador field. But, Marlim is not far behind and at least a dozen heavy-duty floating production systems are on order. Six such units were recently installed and include semi-based FPS, FPSOs, FSOs and likely Brazil's first TLP and SPAR. The six systems already installed are IHC-owned FPSO II and Petrobras-owned P-19, P-26, P-31, P-32 and P-34.

The combined production capacity of all these units surpasses the one million b/d mark. The recently installed unit helped boosted the country's production from 700,000 b/d booked three years ago to the present one million b/d mark. Brazil's consumption is growing rapidly. At 6% per year demand now stands at around 1.8 million boe/d. In order to keep up with the demand growth Petrobras has placed all these orders and programmed sufficient development projects to boost production to 1.5 million b/d by year 2000. This particular goal is based on already discovered reserves, most in very deep waters, and does not count on production resulting from partnerships. Meanwhile Petrobras is working on the next goal: to produce 2,000 b/d by 2002 and in this time frame the partners are expected to contribute at least 250,000 b/d.