Brazil’s pre-salt discoveries a magnet for oil companies

Bird’s-eye view of FPSO with supply boat along side offshore Brazil. Photo courtesy of Stéferson Favia/Agência Petrobras.

Brazil’s pre-salt area became one of the world’s foremost new oil frontiers, since Petrobras last November said it estimated Tupi field in the Santos pre-salt area to contain reserves of up to 8 Bboe.

The odds of success in pre-salt exploration are high. Of 16 probes sunk so far, all found oil. This 100% success rate compares with the 10-15% typical of new areas in Brazil, according to Nilo Azambuja, a former Petrobras executive now working at High Resolution Technology, a geology and geochemistry service provider.

The conference portion of the event was divided into five parts:

1. Exploration & Production – This segment included discussion of the geology and deepwater exploration tools as well as the recent discoveries. It also covered reservoir management technologies plus drilling and production issues

2. Supply – This track involved distribution, logistics, and transportation plus downstream activities

3. Natural Gas & Energy – The third block looked at infrastructure, power generation, gas transportation, and related topics including natural gas use as vehicle fuel

4. Socio-Environmental Responsibility

5. Legal & Economic Perspectives.

Strong US presence

Under coordination of the US Department of Commerce, 59 American oil companies from Texas, Louisiana, Oklahoma, Pennsylvania, and other states were represented in two Rio Oil & Gas 2008 pavilions occupying 425 sq m (4,575 sq ft).

In addition, several other large US companies had their own stands for a total of at least 70 American businesses present at the largest oil fair in Latin America.

US ambassador to Brazil Clifford Sobel told the press that his country is very interested in the new oil discoveries in Brazil. He added that, with the pre-salt reserves, Brazil may become one of the main oil suppliers to the US in the future.

“Our interest is not only limited to the pre-salt discoveries, but also extended to other land and offshore opportunities. The Brazilian oil industry brings us quite a few opportunities,” he said. “In the next decade, the Brazil-US partnership may grow significantly in the energy and oil industries.”

When asked about whether Brazil might make new rules about developing the pre-salt oil fields, Sobel said companies expected the rules to remain unchanged, but it was up to the Brazilian government to make a final decision.

In response to demand from American companies for Brazilian partners in the supply of equipment and services in the oil sector, a partnership between the US Commercial Service and the Brazilian Agency for the Promotion of Exports (APEX), organized opportunities to discuss possible agreements and points for cooperation.

Norway to invest $3 billion per year

A record 53 Norwegian companies were at the Rio Oil & Gas -- a clear sign of Norway’s growing hunger to invest in Brazil’s oil and gas sector.

Another 11 Norwegian companies (Anchor Contracting, Remoura, Marintek, Aibel, SPT Group, Aquateam, FPSOcean, SN Power, Bjorge Naxys, NBCC, and Intsok) were in the incubator of Innovation Norway, Norway’s trade arm. These companies reportedly intend to invest $3 billion per year in Brazil until 2010.

The pilot production plan for Tupi as described by Petrobras. Image courtesy of Petroleo Brasileiro SA (Petrobras).

During his closing remarks at the Rio Oil & Gas 2008, Petrobras President Jose Sergio Gabrielli said that “the current installed capacity of the global industry that provides goods and services to the oil and gas sector will not suffice to meet the future demand Petrobras will have for its pre-salt projects.

According to Gabrielli, it will be necessary to boost capacity not only in Brazil, but all over the world, and Petrobras will use its buying power to help the country attract investments to host the industry’s global expansion.

“Petrobras will have to anticipate agreements, support strategic suppliers who are interested in enhancing their capacity, raise funds, and attract new entrants. This is a challenge for partners and suppliers, who have a big opportunity to grow,” he said.

Signing long-term agreements with suppliers and launching an aggressive invitation for bidding program are also strategies Petrobras has been using to face the upcoming supply challenges.

By 2015, 175 invitations for bids will be made, and 55 drilling rigs ordered (28 of which to be made in Brazil).

In the pre-salt province, 62% is not under concessions yet and Petrobras participates in 31% of the area that has been granted. This means that Petrobras has some 35,000 sq km (13,514 sq mi) in an area estimated to cover more than 112,000 sq km (43,243 sq mi).

Gabrielli made it clear that although it is legitimate for the government to decide what to do with the areas that are not yet under concession, it is important to keep in mind that in the current moment of the global economy, the strategic importance of oil and gas is even bigger.

“Major discoveries have become scarcer in the world since 2000,” he said. “The increase in the global reserves derived much more from access to technology, which improved the recovery rates, than from new discoveries. The cost of discovery and development has risen since 1995 due to a series of factors, among which higher input prices. Offshore drilling rig prices, for example, do not stop growing.”

After Petrobras announced the discovery of the first giant field in the pre-salt, offshore Santos basin, Tupi, Brazil President Luis Inácio Lula da Silva told the press that that Brazil would join the Organization of Petroleum Exporting Countries (OPEC) when it started exporting.

Later, Lula changed his mind. The Brazilian government recently declined an invitation from Saudi Arabia to join OPEC, citing plans to refine crude oil from its recently discovered pre-salt reserves to add value rather than to export as crude.

Minister Lobão said Brazil is determined that it doesn’t need the cartel because it plans to add value to oil income by refining crude into products like gasoline for export.

For Lula, the pre-salt finds not only proves that God is Brazilian but also indicates that He is now living in Brazil.

Heard at the show

Petrobras’ plans

Asked by Offshore magazine about the creation of a second state-owned oil company to manage the pre-salt areas, Mines and Energy Minister Edison Lobão said the question was being evaluated by a group of ministers. “I am in favor, but I only have one vote,” he said.

The government also is considering changing the concession agreement to a profit sharing agreement for the pre-salt areas, said Jose Sergio Gabrielli, Petrobras’ president, who added that “we don’t want to hand over a winning lottery ticket to companies working in the pre-salt where there are practically no risks in finding crude.”

Under orders from President Luis Inácio Lula da Silva, a commission of government ministers is examining possible changes in the nation’s oil law. President Lula insists profits from the new oil discoveries be used to fight poverty and improve education.

Under the concessions model introduced in 1997, oil companies buy rights to explore geographical blocks of Brazilian territory, on land or at sea. Petrobras – usually but not always as leader – has formed consortia with several international oil companies to buy concessions. Concession holders accept the risk of finding no oil, make the necessary investments, and are rewarded with rights over whatever is discovered. They pay royalties to the government on what they produce.

In the next nine years, Petrobras expects to increase domestic oil production by almost 60%, just with output from the pre-salt areas in Santos basin, reported Marco Tavares of the consultancy Gas Energy. By 2017, output in the region will reach some 1.1 MMb/d of oil while today’s total production in Brazil ranges at some 1.85 MMb/d.

Attendance at the 2008 Rio Oil & Gas Conference exceeded that of 2006 with the attraction of Brazil’s pre-salt discoveries. Photos courtesy Rio Oil & Gas.

Petrobras will rent two units to process 100,000 b/d by 2014, and will build eight others to process up to 120,000 b/d by 2016, according to a company statement. Petrobras said it awarded contracts to build 10 new FPSOs to develop its new fields. A cost estimate by the Swiss bank UBS to develop the pre-salt fields is $600 billion during the next 30 years.

ExxonMobil first foreign company in the pre-salt

In October, ExxonMobil (40% stake) will become the first non-Petrobras operator to drill a pre-salt oil evaluation well. Drilling is scheduled at block BM-S-22 offshore Santos basin. Partners are Hess Brasil (40%) and Petrobras (20%).

The BM-S-22 prospect, known as Ogum, was acquired during the 2003 National Petroleum Agency (ANP) licensing round. In the Brazilian African religion the warrior entity is called “Ogum.”

The West Polaris drillship, chartered by ExxonMobil to drill in the BM-S-22 block, left the Samsung Shipyard in Korea on Aug. 16 and is able to drill wells of up to 10,000 m (32,808 ft) in water depths to 3,000 m (9,842 ft).

Construction of the drillship began in 2005 and required $490 million investments paid by Seadrill. West Polaris was chartered to Exxon for three years. The exploratory program of the block requires the drilling of two wells by 2009.

Concession holders in the neighboring BM-S-8, BM-S-9, and BM-S-21 blocks all have announced discoveries of light crude in recent months.

Royal Dutch Shell pre-salt potential

Shell has decided to allocate heavy resources to boosting production in Brazil said CFO Peter Voser.

Shell soon will drill in acreage it holds in Brazil’s pre-salt strata, in prospects such as Bem-Te-Vi, Santos basin. “We also have a number of other blocks with pre-salt potential,” Voser said. Shell has 13 areas under exploration or evaluation in Campos, Santos, and Espirito Santos basins.

Shell awaits delivery from Keppel Shipyard in Singapore of a converted FPSO. The SBM Offshore floater will be used on Shell’s BC-10 field in the Campos basin, where it plans to begin production of heavy oil in early 2009 and eventually ramp up to 100,000 b/d of crude.

Shell also is evaluating another heavy oil field, in the B-S-4 block, Santos basin. A feasibility study is due by year-end.

“Brazil is a key area where we want to boost production,” Voser told reporters on the sidelines of Rio Oil & Gas. “We want to work closely with Petrobras.”

Shell could also help Petrobras install one or more floating liquefaction plants to allow the Brazilian operator to convert gas from pre-salt fields to LNG on site, later exporting the gas or shipping it by tanker to the local market, Voser suggested.

StatoilHydro expands

“Both StatoilHydro and Petrobras have created innovative deep and ultra deep water technology, capacity to produce heavy oil, and add natural gas value,” said Helge Lund, StatoilHydro’s CEO. He believes that the Norwegian oil and gas model may be of some value to Brazil.

Petrobras is state-controlled by a majority of voting shares while a large chunk of preferential shares are in private hands. That is the same case for StatoilHydro which is also listed in stock markets.

Currently, a group of Brazilian ministers are evaluating Norway’s Petoro, which does not produce oil. It is an equity company that manages the State’s Direct Financial Interest (SDFI) in Norway’s oil and gas sector.

Aware that oil is a finite resource, Petoro was set up by the Norwegian government as a social instrument to assure continuous prosperity.

A few weeks ago, President Lula and other top government officials have expressed interest in setting up a company like Petoro in Brazil that would be adapted to Brazilian reality so as to invest mainly in health and education. Brazil’s private sector is not very happy with the idea.

At the beginning of the next decade, StatoilHydro is poised to become the second largest oil producer in Brazil after Petrobras. By 2010, the company plans to produce oil at Peregrino field in Campos basin with an FPSO capable of processing 100,000 b/d.

According to StatoilHydro, Peregrino field’s expected recoverable reserves of heavy oil are estimated at 500 MMbbl. “Peregrino is a gigantic field in the BM-C-7 block. So far StatoilHydro plans to install two fixed platforms at Peregrino by 2010 and one FPSO,” said Lund.

Peregrino will be developed with two wellhead platforms connected to the FPSO. The platforms are being built by Kiewit Offshore in Texas. In October, Keppel Shipyard (Singapore) is scheduled to start the conversion of the FPSO from a new oil tanker.

The vessel is supplied and will be operated by Danish contractor Maersk. If the field proves to be bigger, the company may install additional production units, say company officials.

StatoilHydro plans to drill a well in the adjacent BM-C-47 block between next year and 2011. During the next four years the company plans to drill wells in six of the 11 exploration blocks where it has a participation in Brazil. This also includes drilling a well off the coast of northeastern Bahia state in 2009 or 2010, in the BM-CAL-10 block, Camamu-Almada basin, where it is an operator with a 60% stake. In the same period, StatoilHydro plans to participate in the drilling of a second well in the BM-CAL-7 area, where it has a 40% stake and Petrobras is the operator with 60%.

The Norwegian company also plans to join Petrobras this year to drill two wells in the BM-J-3 block, Jequitinhona basin, where Petrobras has a 60% operating stake and StatoilHydro holds 40%.

StatoilHydro further plans to drill a well this year or next in the BM-C-33 block in deep waters in the Campos basin, a 50/50 partnership operated by Spanish energy firm Repsol YPF.

The company’s most interesting blocks, however, may lie further south, in the promising pre-salt area of Brazil’s Santos basin. Statoil won a 40% operating stake in the S-M-1233 block and has stakes in two other pre-salt blocks where Petrobras and Repsol are lead operators.