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Brazil: Increased state control could deter investment

PETROBRAS made a second discovery in the Santos basin's BM-S-11 block, offshore Rio de Janeiro, in September, writes Robert Cauclanis. The Iara field, the operator claims, holds 3bn-4bn barrels of recoverable reserves, of mostly light oil. The block's other discovery is the 5bn-8bn barrels of oil equivalent (boe) Tupi discovery.

In total, Petrobras and its partners – BG Group and Galp Energia – appear to have identified 8bn-12bn boe in BM-S-11, as much as doubling Brazil's proved reserves.

But if the estimates of Brazilian government ministers and Petrobras sources prove correct, the country's pre-salt bounty is many times larger. Tentative figures range from 30bn-80bn boe of recoverable reserves, suggesting the country may have discovered an oil play equal to, or larger than, the North Sea before development began there.

"We can be one of the largest oil producers in the world in a decade," Petrobras' chief executive, Jose Sergio Gabrielli, said at September's Rio Oil & Gas conference.

Offshore potential

State-controlled Petrobras is by far the biggest shareholder in the licensed pre-salt blocks. But there are also hundreds of square miles of potentially oil-rich offshore territory that have not been licensed. Seismic imaging indicates that Brazil's pre-salt oil straddles more than one concession block, extending into areas under state control. The government expects drawn-out unitisation talks to take place before Petrobras' areas begin to generate revenues from oil sales, around the middle of the next decade. Among the private-sector companies with direct concession stakes in potential pre-salt areas are Shell, ExxonMobil, Hess, Partex and Repsol YPF.

Petrobras' discoveries – in blocks around 240 km offshore, at water depths of 2,000 metres or more and total depths of 8,000 metres in many cases – are some of the largest worldwide in recent decades. But while they may be highly lucrative, development costs will be high. UBS recently estimated Brazil would require $0.6 trillion to tap its pre-salt play over the next few decades.

Petrobras says the job can be done more cheaply and that the pre-salt oil could be profitable as long as oil prices remain above $35 a barrel. But development costs will be very high. According to energy minister Edison Lobão, orders of oilfield equipment for use offshore are likely to outpace orders in the US over the next decade (see p14). Local press reports, citing anonymous energy officials, claim Petrobras may announce domestic spending plans to 2020 worth as much as $0.5 trillion.

But what model will the country adopt for future pre-salt developments? Since the late 1990s, when Brazil opened its upstream to foreign competition, a concession model has prevailed; companies, including Petrobras, pay modest royalties in taxes – the total state take being less than 50% of profits.

Small changes, such as a slight increase in royalty levels, could be ordered by presidential decree and would be simple to put into effect. Far-reaching changes to the fiscal structure would be subject to a legal reform requiring congressional passage, which could take years. But it appears increasingly likely that Brazil will choose the latter route: at the end of September, a panel of several government ministers was preparing a report for President Luiz Inácio Lula da Silva recommending that the government seek to make profound changes to oil regulations.

That prospect worries private-sector investors. "It's not up to us to decide the model; but we want to boost our participation in Brazil, including in the pre-salt," Peter Voser, Shell's chief financial officer, told reporters at last month's conference in Rio de Janeiro. "We are hoping for a much closer relations with Petrobras."

The Brazilian Petroleum Institute, an industry group that represents foreign investors, has said private-sector oil companies are prepared to pay higher royalty levels on oil output, but that attempts to phase out the concession system or nationalise oil assets could deter upstream investment.

Lobão supports the creation of a fully state-owned entity to control future pre-salt discoveries, offering production-sharing contracts to companies that develop the fields. Lula has said Brazil should seek to "strengthen our beloved Petrobras and use Brazil's oil to eradicate poverty". He has also said that Brazil should never allow private investors to choose who runs Petrobras and that the country must boost spending on its navy, with the acquisition of a nuclear-powered submarine to protect its reserves.

An alternative to creating a second national oil company, according to government sources familiar with the panel discussions, would involve increasing the state's shareholding of Petrobras by adding large oil prospects that are, at present, under state control to Petrobras' books. Unlicensed areas include potentially valuable acreage contiguous to Tupi. It remains unknown how much of Petrobras the government wants under state ownership – beyond its existing 38% holding – although officials, including Lula, have said they would not seek to buy out private shareholders or delist the company from stock exchanges.

Any industry or government plan will have to address how Petrobras may raise the billions in capital it needs to carry out pre-salt oilfield development and foreign investors are eager to play a role.

There are, however, alternatives. For example, according to labour minister Carlos Lupi, Petrobras should raise funds by selling more shares to Brazilian workers, who should be allowed to tap their social security funds for the purpose. The last Petrobras share sale, in 2000, allowed foreigners to invest in the company's American Depositary Receipts, traded in New York. The sale was worth $4.1bn, but Petrobras' shares have risen more than sixfold since then.

Petrobras sees 1.3m b/d of new pre-salt oil by 2017

PETROBRAS and its partners say they can produce around 1.26m barrels a day (b/d) of light oil from Brazil's pre-salt reservoirs by 2017. At present, oil production – mostly composed of heavy oil from post-salt fields – amounts to 1.9m b/d.

The plans call for Petrobras to install 11 pre-salt production systems by 2017, according to Jose Formigli, head of pre-salt development for Petrobras: eight would utilise floating production, storage and offloading facilities, each capable of producing around 120,000 b/d; and three pilot production systems may pump 100,000 b/d each. Although Petrobras is not sure which fields will be tapped first, Formigli told last month's Rio Oil & Gas conference, that the company is reasonably confident it can meet its production targets.

Commercial pre-salt production in Brazil will start at the Tupi field, a find shared by Petrobras (65%), BG Group (25%) and Galp Energia (10%); a 100,000 b/d pilot production system is scheduled to come on stream in December 2010.

Petrobras plans to provide more details on its pre-salt developments within two months, including production estimates and investment estimates through 2020, Formigli said. He added that Petrobras may eventually produce 120m cubic metres a day of gas from its pre-salt prospects.



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