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Pre-salt laws put Petrobras centre stage

Petrobras says it's capable of developing Brazil's pre-salt oil and gas resources. The government is giving it the chance, writes Tom Nicholls

THE GOVERNMENT is to give Petrobras privileged access to Brazil's coveted pre-salt areas. Under laws being considered by Congress – and likely to be enacted in March or April, according to Petrobras' chief executive, José Sergio Gabrielli – Brazil will adopt a production-sharing model for unlicensed pre-salt blocks and other "strategic" areas, abandoning its concession system.

Petrobras will be granted full ownership of some pre-salt acreage and will be guaranteed a minimum 30% share of any pre-salt areas the government decides to tender in licensing rounds. In all cases, the state-controlled oil company will be sole operator, overseen by a newly created regulator for pre-salt areas, Petro-sal (ANP will continue to oversee other parts of the upstream).

The state will benefit directly from this favouritism: it already owns 32% of the company (and a majority of the voting shares), but its stake is set to grow. The four laws submitted to Congress by President Luiz Inácio Lula da Silva at the end of August include a provision that will raise the state's stake in Petrobras – possibly to over 50%, Gabrielli said at a presentation to analysts and journalists in London last month.

To achieve this, the government will transfer to Petrobras acreage assumed to hold 5bn barrels of oil equivalent (boe) of reserves, boosting the firm's capital value by around $50bn (a correction will be made either in the government's or Petrobras' favour as further assessment work establishes a more precise estimate of the acreage's potential); minority shareholders will be entitled to match the investment, increasing their stakes in proportion, but any pre-emption rights not taken up will be acquired by the government – resulting in some dilution for minority shareholders and an overall gain for the state.

There will also be indirect benefits. The sheer scale of the operations involved in developing the very large discoveries made in Brazil's pre-salt areas since 2008 presents an opportunity to establish a sustainable shipbuilding business in Brazil, says Gabrielli, generating jobs – 40,000 of them – and additional tax revenues. It also gives Petrobras close control over its supply chain, he points out, reducing the chances of a repeat of the project delays that Petrobras, in common with numerous other upstream operators, suffered because of the contracting market's inability to keep up with demand during the recent oil boom.

Already, there are 10 floating, production, storage and offloading (FPSO) vessels on order for delivery between 2013 and 2016, with a combined capacity of 1.44m barrels a day (b/d). More will be needed. Petrobras will also need 57 drilling rigs by 2017, including the 26 already on order, says Gabrielli. It will try various ownership schemes, buying some and chartering others. But all will be built in Brazil.

Lula's pre-salt legislative package amounts to an offer no oil company could refuse. Petrobras' improved financial position following the capitalisation will help it make progress with its ambitious upstream programme. And the law changes put the company at the centre of all future pre-salt projects. Yet the workload that the changes imply for Petrobras is onerous. Petrobras' proved reserves amount to 14bn boe at present, but this could more than double in the next few years as pre-salt resources are proved up. Petrobras estimates that its reserves could rise to 30bn-35bn boe, with the addition of 10.6bn-16bn barrels from already discovered pre-salt resources and the undiscovered 5bn boe that the government is planning to invest in the company.

Although Petrobras' capabilities as an explorer and producer are well established, sourcing the manpower, capital and other resources needed to attempt development on such a large scale is a tall order. "The main risk we have is to be too big," admits Gabrielli. "But it's a nice problem to have."

"Petrobras is as a world-class operator more than capable of developing projects on its own," says Ruaraidh Montgomery, an analyst at Wood Mackenzie. "But it may find itself resource constrained in terms of people, not just because of the pre-salt, but because of a range of other projects. It will have to prioritise."

The pre-salt province extends for 800 km along the Brazilian coastline, from the state of Espírito Santo to Santa Caterina and includes the sedimentary basins of Espírito Santo, Campos, and Santos. Total well depths below sea level range from 5,000 to 7,000 metres. Water depths typically reach around 2,000 metres.

Petrobras is to invest $111.4bn developing production in the pre-salt by 2020, mostly in the Santos basin. The job started in May, with an extended well test (EWT) at the Tupi field, estimated to hold 5bn-8bn boe in pre-salt layers. First-phase production of 100,000 b/d at Tupi is expected to begin at the end of next year (although this will not be first oil produced from a pre-salt zone; that flowed from the Campos basin's Jubarte field in September 2008).

There is plenty more to come: the Iara field, also in the Santos basin, holds 3bn-4bn boe. Jubarte, in the Parque das Baleias zone, holds 1.5bn-2bn barrels. Last month, Petrobras (45% and operator) and its partners, BG Group (30%) and Repsol (25%), estimated Guará's recoverable resources at 1.1bn-2bn barrels. Guará will produce first oil in 2012 through a 120,000 b/d FPSO.

Upstream results remain auspicious: Petrobras has drilled 11 exploratory wells in the Santos basin's pre-salt areas and found hydrocarbons with all of them (although ExxonMobil's Guarani well in the pre-salt layer of Santos block BM-S-22 came up dry). Last month, Petrobras found oil and gas with its fourth well – Abaré Oeste – in block BM-S-9 in the Santos pre-salt horizon. Drilled in waters 2,163 metres deep and to a total depth of 5,150 metres, the discovery is the fourth in block BM-S-9, which also includes Guará. Other Santos reservoirs – such as Jupiter, Carioca, Bem-Te-Vi, Guará, Parati, Caramba, Iguaçu e Iracema – are being assessed and also hold large volumes of oil and gas.

If it is evident that Brazil's reserves are set to increase sharply, the outlook for production growth is less clear. Rather than the turbidites Petrobras is familiar with in the Campos basin's post-salt reservoirs, the microbial carbonates it is finding in Santos' pre-salt areas require new geological models. Early signs are encouraging; one Guará well flowed at over 50,000 b/d, says Gabrielli. But, as yet, Petrobras has insufficient data to indicate how the rocks will respond to the injection of water and gas, or how productive they will be. Petrobras is hoping that the series of EWTs it has planned – each typically lasting three to four months – will begin to accumulate the necessary data.

There are numerous technical problems presented by the pre-salt projects, which Petrobras is tackling with its pre-salt technological programme – Prosal – through its Rio de Janeiro research centre, Cenpes. The salt layer, for example, reaches thicknesses of over 2,000 metres – a barrier to imaging and problematic in well completion. The oil's high carbon dioxide content – more than 20% in some reservoirs – corrodes underwater equipment. In addition, the acreage is far offshore – 300 km in Tupi's case, for example – creating logistical problems.

Despite the uncertainties, however, Petrobras believes pre-salt production could reach 1.8m b/d by 2020. Most of that will be contributed by Petrobras, partly because of the law changes, but also because of the dominant position it had assiduously built in Brazil's offshore regions under the concession system.

Attractive unlicensed areas

Under the 5bn boe capitalization programme, meanwhile, Petrobras is likely to receive acreage close or adjacent to areas where it has already established reserves – near Iara is likely, says Montgomery – because it will be easier to make more accurate reserves assessments and will enable Petrobras to develop the resources more quickly. In addition, based on information available at present, these are among the most attractive unlicensed areas in Brazil's offshore.

The legislative changes, meanwhile, undoubtedly diminish the attractiveness of Brazil's upstream for investors. A few – Repsol and BG in particular – are in the enviable position of holding acreage with established resources in pre-salt areas; these will continue to operate under existing terms. Other private-sector shareholders of pre-salt acreage include Hess, ExxonMobil, Partex, Petrogal-Galp and Shell. But the law changes significantly diminish the chances of firms without pre-salt acreage ever getting in on the act, especially in areas the government decides have a high chance of exploration success or producing large discoveries.

Even if privately owned companies do secure access to pre-salt exploration ventures, they will be unable to control projects because Petrobras must act as operator; and the financial rewards, under a competitive production-sharing system, will be lower: winning bidders will be companies that offer the highest percentage of profit oil to the government. Only areas the government believes are characterised by high risk or low productivity will operate under the concession model in force at present.

Yet Brazilian acreage – by virtue of the sheer size of resources being identified, the country's political stability and the size of the domestic energy market – are likely to ensure continued interest among Western majors and independents. And if not, there will be plenty of capital available from China and India, whose companies are likely to be happy to be silent partners in exchange for access to reserves and the supply security that should give.

However, the next licensing round is unlikely to take place before 2011, says Gabrielli, as there are numerous bureaucratic hurdles to overcome first. The president had wanted to fast-track the legislation through Congress in as little as 135 days, but has abandoned that aim because of strong political opposition. A vote is supposed to take place in the lower house on 10 November, but at the time of writing over 700 amendments (mostly "minor", claims Gabrielli) had been proposed to the four bills. Once approved by the lower house, the legislation will be presented to the Senate, before returning to the lower house again.

Gabrielli said at last month's meeting in London that the laws could be approved by March or April and that the corporate changes – the transfer of 5bn boe to Petrobras and the corresponding increase in the state's share in the company – could be complete by the end of the first half of 2010. Certainly, Lula will be keen to see the legislation passed before the next presidential election, in October 2010 – and, as such, part of his legacy.

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