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Petrobras looks to gas

Brazil is expected to complete its long quest for oil self-sufficiency by early next year. The country is now turning its attention to natural gas, where surging demand and potential supply disruptions in Bolivia are becoming a concern, reports Robert Olson

Barring unforeseen delays in production start-ups at several domestic oilfields, next year should see the emergence of Brazil as a small net oil exporter and the culmination of the dream of a generation of Brazilian energy policymakers.

The quest for oil self-sufficiency has transformed the former state-owned monopoly, Petrobras, into the most dynamic energy company in Latin America. Its deep-water exploration and production skills are the envy of Mexico's Pemex and Venezuela's PdV, the region's two biggest oil companies.

Record oil production

Petrobras' Brazilian production set a new record in May of 1.82m barrels a day (b/d) and officials say output is on track to reach 2.3m b/d by 2010. Petrobras' success in developing the deep-water deposits of Brazil's offshore oil basins has even led senior officials to say that they are no longer worried about oil supplies, once one of the country's biggest economic problems. Indeed, last October, the energy minister, Dilma Rousseff, said the country's oil reserves of over 12bn barrels were sufficient to meet future needs.

The new question is whether Brazil has enough natural gas. The turmoil in neighbouring Bolivia, which supplied Brazil with 21m cubic metres a day (cm/d) of natural gas in 2004, has called into question the security of the country's gas supplies just as gas demand is beginning to take off. Although the fuel represents only 6% of Brazil's energy mix, its role is likely to increase as the government focuses on diversifying power supplies away from over-dependence on hydro-electricity and harnessing the environmental benefits of gas-fired power production.

Moreover, investments in new production capacity to supply Asian consumers with Brazilian commodities means gas demand should soar as new smelters and steel mills are constructed. Petrobras expects natural gas demand will soar to 78m cm/d by the end of the decade, compared with 31m cm/d in 2003, the last year for which official figures are available.

However, this plan depends heavily on supplies from Bolivia. Although recent gas discoveries offshore Brazil have meant that plans to import liquefied natural gas (LNG) have been scrapped, Petrobras had been expecting Bolivia to supply 30m cm/d of gas by 2010 – nearly 40% of national demand.

Bolivia's Congress passed a new hydrocarbons law in May, despite the objections of President Carlos Mesa, raising taxes and royalties on oil and gas production to 50% – a level that major investors, including Petrobras, say makes adding new production uneconomic. The law has not satisfied Bolivia's restless leftist groups, which have led huge street protests calling for the renationalisation of the country's oil and gas industry.

"We are worried about what is happening in Bolivia ... There is the possibility of [gas] supply shortages in 2008, 2009 and 2010," admitted Sergio Gabrielli, Petrobras' chief financial officer in May.

Plans shelved

Brazilian officials expect pipeline gas exports from Bolivia to continue, but Petrobras has already shelved $4bn in planned investments in the country's gas sector that were to have increased supplies to both Brazil and Argentina.

Other Brazilian officials have downplayed the risk of supply problems, saying Petrobras has the flexibility within its own portfolio to add more domestic supplies if necessary. Petrobras' discovery in 2003 of the 72bn cm Mexilhão gasfield in the Santos basin off the coast of São Paolo state has led to a re-evaluation of the potential for offshore gas supplies. Petrobras now claims the Santos basin alone could hold as much as 419bn cm of recoverable gas reserves. Company officials have indicated that another gas discovery may soon be announced near Mexilhão.

But growing gas demand in Brazil is also becoming a headache for policymakers. Concern is mounting that the country's strong economic growth could lead to higher-than-expected gas demand, which could result in an Argentina-style energy crisis, with potentially serious consequences for the national economy just before the 2006 presidential election.

Gas demand could jump suddenly, with a number of mothballed gas-fired power plants probably being activated to help meet any unanticipated increase in power demand. Petrobras is revising its estimates for gas-demand growth.

Officials say they remain confident the problems in Bolivia will be resolved and that Petrobras' investment plans will be completed on time. But the federal government has already begun to attempt to curb gas demand in some sectors. The energy ministry has already publicly opposed a further expansion of tax incentives that encourage car owners to convert their vehicles to natural gas and new regulations are being drawn up that will give industrial users priority when gas supplies are distributed.

For its part, Petrobras says it is accelerating the development of its new domestic gas fields. Previously, Petrobras' plan was to start production from Mexilhão in 2009, but the company is trying to complete the development of the field a year early to add 15m cm/d to domestic supply by 2008. The company's optimism is not shared by everyone – although the company has extensive offshore experience, Mexilhão will be its first major gas development.

In addition, its resources are already stretched. The company has been forced to delay some of its exploration plans as it needs to drill more appraisal wells than had been expected. Paulo Mendonca, Petrobras' head of exploration, says some deep-water wildcat drilling planned for this year has been put back to 2006. "We have needed more rigs for evaluating a number of recent discoveries than we had expected so some exploration wells are being slightly delayed," he says.

Unsurprisingly then, Petrobras has held talks with some foreign companies that could see a privately owned partner with more offshore gas experience brought in to help develop Mexilhão.

Until recently, discussions with the UK's BG and Norway's Statoil focused on developing the field as a Brazilian LNG project. However, Petrobras has now aligned its plans for the field with the government's desire to boost the local gas market by increasing supplies from domestic resources. That shift in focus has brought Shell and Repsol YPF into the picture.

When the talks began earlier this year, Petrobras officials said they were willing to consider an asset swap with the Spanish firm to improve Petrobras' portfolio of gas projects elsewhere in the Southern Cone, but with Repsol' YPFs southern cone gas strategy in peril amid continued uncertainty over the political situation in Bolivia, where it has the bulk of its untapped reserves, that may no longer be viable.

Looking for gas

Brazil is not just looking to Petrobras for more gas production. The upstream regulator, the national petroleum agency (ANP), says the forthcoming bidding round for offshore acreage planned for this year will be focused on gas-prone areas. ANP plans to offer 1,134 blocks during the seventh bidding round, to be held in October, although some companies have complained that ANP is not offering much new acreage. The most prospective blocks are in the Campos and Sergipe basins, according to ANP's interim head, Haroldo Lima. Petrobras is once again expected to be the major bidder, but officials are optimistic that foreign companies will show more interest than they did in last years' sixth bidding round, when only 154 blocks of 913 on offer received bids.

Disappointment has continued for foreign firms in recent months. Wintershall, the oil and gas unit of Germany's chemicals giant, BASF, had been optimistic about the prospects for a gas discovery on its BM-S-14 block, which lies only 20 km away from Mexilhão, but after spending $35m on seismic surveys and drilling a well in over 230 metres of water, the company has, so far, failed to make an economic discovery. However, Wintershall is willing to drill another well on the block based on the data obtained from the first.

In addition, ANP has been working on improving foreign companies' access to geological data to help reduce exploration risk, but in a repeat of the sixth bidding round, companies have been forming partnerships with Petrobras instead to gain access to the latter's extensive understanding of the geology of Brazil's offshore. Statoil and BP are understood to be considering forming partnerships with Petrobras for the seventh bidding round.

Pipeline expansion

In the meantime, Petrobras continues to work on its massive expansion of Brazil's natural gas pipeline network. Petrobras and its partners are spending $6.1bn to increase pipeline capacity throughout the country, a project that involves inter-connecting the northern and southern gas-transmission networks. Gas distributors are also boosting capacity on city networks.

Spain's Gas Natural is spending $140m this year to increase distribution capacity at the two distribution companies it owns in the country and expects to invest another $167m by 2007.

A vital part of the expansion of transmission and distribution capacity is the 25m cm/d Gasene pipeline, which will link the gasfields of southern Brazil with the industries of the country's north. In 2004, China's Sinopec became Petrobras' partner in the project, despite Sinopec holding no upstream gas assets in the country. China agreed to finance the $1.2bn project as part of a broader diplomatic push to improve its access to Brazilian natural resources. A loan from China's state-owned export finance bank was finalised in April and construction of the line is expected to begin later this year – once Sinopec finalises its contracting arrangements.

Gasene is critical for Petrobras' plans to tap the offshore gas reserves of Espírito Santo state. Demand there is expected to more than double by 2006 to 2.7m cm/d from 1.2m cm/d this year as several large iron ore plants and other industrial users switch to natural gas. Gas production in the state is expected to climb much faster, however, and Petrobras expects it will reach 10m cm/d by 2010. Without the Gasene pipeline, the gas would have no market.

Petrobras plans to start production at its Peroa-Cangoa gasfield this summer off the coast of Espírito Santo. Production is projected to rise from 3.6m cm/d to 5.5m cm/d by 2007. By the end of the decade, associated gas production from nearby oilfields – such as the 100,000 b/d Golfinho field and the 60,000 b/d Jubarte field – should add another 4.7m cm/d of gas. Additionally, Petrobras continues to evaluate a number of other prospects that could further increase offshore gas production in the area.

Gas from Peru?

Despite projected increases in domestic supplies, Brazilian officials expect the country will continue to import natural gas. With Bolivia an increasingly unreliable source, Brazil is looking further afield for supply security. Plans to import LNG have not yet been resurrected, but Brazil signed a joint memorandum of understanding with Argentina, Uruguay, Chile and Peru in May to study the feasibility of importing Peruvian gas by pipeline into Chile and from there to the rest of the Southern Cone.

Initial estimates are that $2.2bn would be needed to fund a pipeline from Peru's Amazonian gasfields to Chile, where it would connect with existing gas infrastructure. Another $300m would be needed to connect Brazil's southern gas network with that of Argentina. Petrobras officials say the company is interested in the project as the firm is expanding its presence in Peru's upstream areas. Financing has yet to be arranged.

Chile would probably have to put up a considerable amount of capital as the basis of the project is a plan to import 35m cm/d of gas into Chile to replace dwindling supplies from Argentina.

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