Made in Brazil
PRESIDENT Luiz Inácio Lula da Silva has put four laws before Congress that will give Petrobras a controlling position in Brazil's coveted pre-salt acreage and significantly reduce the private-sector's role. Some politicians and media commentators have criticised the proposed legislative changes, likening them to the counter-productive form of resource nationalism that has occurred in some parts of the world.
But this is a simplistic view. There's good resource nationalism and bad. The bad type deprives its country of practical economic or technological solutions for developing its resources (Venezuela, for example). And it sets down a political marker that makes companies wary of future investment offers (Russia, for example). The good type balances the country's need for money and technology from outside with the government's duty to generate maximum value from its resources.
Brazil's government has struck a sensible balance. High-risk exploration acreage has already been converted into extensive high-reward property, but the government has resisted the temptation to force investors to renegotiate contracts to the state's advantage, as Venezuela has done in the recent past: existing pre-salt licences will not be affected by the changes. That is excellent news for the handful of companies – notably Repsol and BG – with pre-salt licences and reserves to develop. But it also enhances Brazil's growing reputation for political stability and should encourage long-term investment.
Second, Petrobras' technology and project-development skills make it more capable than any other national oil company (NOC) of developing offshore resources. Gazprom, for example, also wants to exploit its offshore potential, but, unlike Petrobras, doesn't have the technology: as a result, the Russian company is turning once again to foreign investors, hoping they will overlook Russia's negotiable stance on contract sanctity (see p20). Similarly, Venezuela can't rely on its NOC in the same way Brazil can. The sacking of 19,000 PdV employees in 2002 has prevented Venezuelan oil production from rising as the government would like.
Petrobras has always had political objectives to accomplish – creating employment, stimulating economic growth and supplying energy to the local market, for instance. But mostly it has been left alone to get on with the job – and hasn't had the social-funding commitments of, say, PdV or Mexico's Pemex.
There is plenty of evidence that Petrobras can, as it has repeatedly claimed, develop Brazil's pre-salt reserves itself. When it was founded, in 1953, Brazil was oil deficient. The government granted Petrobras production of 2,700 barrels a day (b/d) and reserves of 15m barrels, but domestic consumption amounted to 137,000 b/d. It hoped to reduce the deficit through onshore exploration. When that aim proved unrealistic, it built an offshore industry from scratch. Petrobras – helped, certainly, by contributions from international oil companies (IOCs) since the upstream liberalisation of the late 1990s – is now producing nearly 2m b/d of crude and is a net exporter of oil.
While IOCs have excelled offshore west Africa – particularly in Angola – their record in Brazil's deep waters is no match for Petrobras'. The company established the existence of the pre-salt frontier and produced first oil from a pre-salt zone. It discovered the Tupi field, with reserves of 5bn-8bn barrels of oil equivalent (boe). It also found Guará, Iara, Jubarte, Carioca and numerous other fields. While the Brazilian firm has found hydrocarbons with all 11 wells it has drilled so far in the Santos basin, ExxonMobil's Guarani sub-salt exploration well, estimated to have cost $140m, came up dry (Petrobras was among the partners, but not operator).
Petrobras has also proved resourceful at raising financing. Earlier this year, for example, it signed an agreement with China Development Bank under which it will receive a 10-year loan worth $10bn in exchange for the promise of future oil supplies. In conjunction with the rise in oil prices since the depths of the recession, the government's plan to recapitalise Petrobras, increasing its shareholding in the process, will alleviate immediate funding concerns. But should private-sector investment dry up, China and India will be willing to step in.
If a state-controlled entity can develop Brazil's oil itself, then outsourcing the job would not make sense. In this respect, Brazil has another advantage over many other resource-rich countries: the oil sector is important, but not excessively so. It accounts for 10% of Brazil's GDP and 6.5% of exports. Slowing down oil development, which is what the government is effectively doing by handing such a central role to a single company, will not destablise the economy as it might in, say, Venezuela, where oil accounts for more than three-quarters of export revenues, half of total government revenues, and a third of GDP.
Yet even with Petrobras controlling Brazil's pre-salt areas, upstream growth is set to be quick. Within a decade – based on exploration results to date – Petrobras expects to be producing 1.8m b/d from pre-salt areas, almost doubling domestic production. Its main risk will be coping with such a heavy workload, sourcing enough well-trained people to manage the projects and develop its technology.
Follow the bear
Events in Brazil show that, although the easy oil might have mostly gone, there's still plenty of it about. In addition to Petrobras' latest pre-salt discovery, Abaré Oeste, BP has made a large discovery – perhaps amounting to in-place reserves of 3bn-4bn barrels of oil equivalent – in a relatively unexplored geological horizon of the US Gulf of Mexico; it could lead to a significantly more optimistic assessment of the region's potential (see p26).
The US' Anadarko, meanwhile, has made a discovery off the west African coast, in Sierra Leone's waters. This discovery, Venus, and the 1.8bn barrel Jubilee field, offshore Ghana, establish "bookends spanning around 1,100 km across two of the most exciting and highly prospective basins in the world", the company says (see p26).
Big discoveries in areas that are generally considered politically stable are good news for long-term oil supply. Russia is a riskier play, but its decision to welcome back foreign investors could add significantly to global upstream growth. Iran says it has found a field containing 8.8bn barrels of oil in the southwest of the country.
The long-term outlook for supply may not, therefore, be as tight as feared, especially if consumption remains subdued. And it might: economic recovery won't necessarily equate to a rapid resumption of oil-demand growth. Oil consumption has typically taken several years to recover following past collapses and this is likely to be repeated; a recovery to pre-recession growth rates may take even longer this time because of the implementation of efficiency measures following 2008's price inflation and growing investment in non-fossil-fuel energy.