15 July 2016
19
THE INTERNATIONAL OIL & GAS NEWSPAPER
Brazil aims for a
brighter horizon
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15 July 2016
OVERVIEW
Brazil keen for stability
after white knuckle ride
Oil and gas sector has paid a heavy price for past
political agendas but hopes are there that lessons
have been learned and future prospects are brighter
GARETH CHETWYND
Rio de Janeiro
I
N A little more than four years
the Brazilian oil sector has
careered from unrestrained
euphoria to severe downturn.
Three years ago, 71 of the world’s
floating rigs were working in
Brazil, but the number has dipped
to less than 35.
Petrobras has signalled that 25
ultra-deepwater rigs will be
enough for its own needs for the
forseeable future.
The number of workers employed
directly or indirectly by Brazil’s oil
sector has crashed by more than
500,000 — more than half — according to industry bodies.
Big new shipyards are standing
idle, and some are cluttered with
half-built drillships, monuments
to failed industrial policies.
The Brazil boom was driven by
the Santos basin pre-salt discoveries, with an estimated 37 billion to
46 billion barrels of recoverable oil
equivalent.
The ramp-up past 1 million barrels per day from just 58 wells
earned Petrobras a deserved recognition at the 2015 Offshore Technology Conference in Houston.
As Petrobras now grapples with
its current financial and existential crises, it is worth remembering that this impressive surge was
achieved with 40% foreign investment equity, due to the presence
of partners, BG Group (now Shell),
Repsol Sinopec and Galp Energia.
The company’s current woes go
much further than oil price blues.
Drunk with the pre-salt punch,
Petrobras was investing around
$47 billion per year in 2012, when
its most ambitious five-year plan
was launched. However, the company’s top managers completely
failed to spot the severity of the
decline on Campos basin assets,
let alone prevent it.
As a result, Petrobras has relatively little to show for all these investments in terms of net production growth, yet became the world’s
most indebted oil company, owing
the equivalent of about $125 billion.
tiator even in the best of times,
has been using all legal means to
drive down its unit costs.
Suppliers have been doubly punished by the parcity of licensing
activity over the last seven years.
This included a five-year hiatus
as Brazil debated the contractual
regime for the pre-salt resulting,
eventually, in the shift to production sharing contracts in 2010, but
only one area, Libra, has been
licensed since then.
The gap coincided with the oil
price highs and excitement about
the pre-salt, so Brazil probably
missed out on a bumper crop of
signature bonuses, as well as suffering a severe downturn in exploration activity.
Policy-makers were warned
about the dangers of giving Petrobras sole operator status on the
pre-salt contracts, and mandating
a minimum 30% stake, but these
warnings were ignored.
Data collated by Abespetro, the
industry association for supply
chain companies, shows that the
split in activity between Petrobras
and other oil companies, which
peaked at 55:45 in 2012, has slipped
back to 90:10, and now the state
company is helpless to carry the
sector forward.
The country also woke up to the
consequences of protectionist
local content policies and contracting procedures that were, with
hindsight, vulnerable to corruption
and undermined competitiveness.
Collapse Then Operation Car
Wash, the infamous corruption
probe uncovered a network of
kick-backs and money laundering
involving former Petrobras executives, contractors and politicians.
The credibility collapse has
bumped up the company’s financing costs even more.
In the most recent update, in
January this year, the company’s
annual investments were averaging less than $20 billion, and may
fall further.
Promises of bumper demand,
stiffened by Brazil’s local content
requirements, attracted a wave of
investments in new Brazilian capacity, but these orders have all
but dried up leaving even the
most competitive sector, subsea
engineering and fabrication, running at less than half of installed
capacity.
The oil giant, a formidable nego-
“Brazil has paid a heavy price for
the political agenda of resource
nationalism and neo-monopolistic policies that greeted the presalt finds,” says Adriano Pires,
director of the Brazilian Centre for
Infrastructure Studies.
But all is not gloom and doom.
President Dilma Rousseff was already shifting to a more pragmatic set of oil sector policies when
she was suspended from office,
and the interim government of
President Michel Temer is pressing ahead swiftly with a bill that
will end Petrobras’ operating exclusivity over pre-salt contracts.
Temer, who is very likely to be
confirmed as president in August,
NUMBER OF WELLS DRILLED IN BRAZIL
OFFSHORE
ONSHORE
FORECAST
345
350
300
286
276
54 255
250
236
218
201
196
200
200
186
99
92
79
94
87 91
97
95
100 102
85 91
92
77 79
159
135
123
114
100
165
155
146
134
150
192
116
106 106
95 97
82 87 81
73 69
113
97
81
122
99 109
93 98
83
88
77
61
59
40
35
45
50
7 11 10 8 9
0
1950
18 20
1955
1960
1965
SOURCE: ABESPETRO/ANP/ACCENTURE STRATEGY
1970
1975
1980
1985
ARTWORK: SIMEN HAKONSEN
1990
1995
2000
2005
2010
2015
30 27 27
2020
is pursuing an aggressively probusiness agenda.
There is a tangible new sense of
urgency about knocking the oil
sector into the kind of shape that
fits Petrobras’ true investment capacity and attracts foreign and
private sector investments.
There is broad consensus across
the Brazilian oil industry —
despite lingering union opposition — around a minimum agenda
of reforms that will get the industry moving again.
Tax breaks These include over-
due clarification of the rules on
unitisation and the procedures for
obtaining a waiver for local content penalties, as well as an extension of tax breaks and a commitment to perennial licensing
rounds, starting with a flagship
“unitisation” licensing round
scheduled for 2017 (assuming that
the other key reforms are in place).
In the gloom hanging over Brazil lately, it is sometimes easy to
forget the quality of the pre-salt
riches, where individual well
flows average around 25,000 barrels per day.
Brazil’s offshore industry enjoys
the advantages of scale, there is
also a growing recognition that
there needs to be a new focus on
competitiveness.
The technical barriers to exploiting Brazil’s pre-salt riches —
gas-rich, carbon dioxide-contaminated carbonate reservoirs
located beneath a two-kilometre
salt canopy in ultra-deep waters
— can spell opportunities that go
hand-in-hand with this quest to
cut costs.
If Brazil’s government gets the
regulatory mix right, global suppliers of innovative and advanced
deep-water solutions could rediscover that sense of El Dorado that
Brazil’s pre-salt once gave them.
15 July 2016
FOCUS BRAZIL
21
REDUCTION IN RIG FLEET AND E&P CAPITAL EXPENDITURE
CAPEX E&P (US$ PER BARREL)
SONDAS OFFSHORE
NUMBER OF
OFFSHORE RIGS
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
CAPEX EM E&P
40
FORECAST
36
35
33
35
33
28
30
25
22
20
71
63
15
15
15
15
25
25
25
25
2017
2018
2019
61
15
46
45
10
35
5
0
2011
2012
2013
2014
2015
2016
SOURCE: ACCENTURE
2020
ARTWORK: SIMEN HAKONSEN
AREA UNDER CONCESSION (EXPLORATION PHASE)
1000 SQUARE KILOMETRES
FORECAST*
END OF
MONOPOLY
450
400
AVERAGE 332,000 SQUARE KILOMETRES
350
300
250
-66%
200
150
112
100
50
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
* IF THERE WERE NO MORE LICENSING ROUNDS
SOURCE: ACCENTURE
Tough task ahead: Petrobras
chief executive Pedro Parente
Photo: PETROBRAS
ARTWORK: SIMEN HAKONSEN
Brazil has paid a heavy price for
the political agenda of resource
nationalism and neo-monopolistic
policies that greeted the pre-salt
finds. Adriano Pires, director of the Brazilian
Centre for Infrastructure Studies
24 – 27 OCTOBER | 2016
RIO DE JANEIRO - BRAZIL
www.flfrio.com
Sponsor Gold:
FOCUS BRAZIL
22
15 July 2016
POLITICS
Before the storm: President Dilma Rousseff and then Vice President Michel Temer earlier this year
Photo: AP/SCANPIX
Temer takes the driving seat
Interim President Michel Temer pledges progress on oil and
gas reform but fightback by suspended Dilma Rousseff and
slush fund allegations among potential challenges
GARETH CHETWYND
Rio de Janeiro
B
RAZIL is currently in the
unusual situation of having two presidents. President Dilma Rousseff was
suspended from office in May as
the result of a congressional impeachment process, and her
former vice president Michel
Temer is now holding office on an
interim basis.
The matter should be resolved
in late August, when the Senate is
scheduled to decide Rousseff’s fate
in a final vote by two-thirds qualified majority.
The impeachment proceedings
were launched against Rousseff
on the grounds that she had
broken fiscal rules during her first
term of office, which ended in
December 2014.
Some critics say the impeachment was tantamount to a coup.
They questioned the motives of
the lawmakers who led the assault on the presidency, some of
whom were directly implicated in
the Car Wash scandal, unlike
Rousseff herself.
Brazil’s constitution allows impeachment on criminal grounds
alone, so merely arguing that
Rousseff should have known
about the corruption was not
enough to force her removal.
“The rebellion against Rousseff
was dressed in fiscal terms to
satisfy constitutional requirements, but the argument that this
was a coup made no headway with
Brazil’s Supreme Court,” says
Thiago de Aragao, a partner at
Arko Advice, a political analysis
firm based in Brasilia.
Wily and cautious Temer moved
swiftly to appoint a pro-business
cabinet once he was in office. He
also appointed Pedro Parente as
chief executive of Petrobras and
put key oil sector reforms, particularly the return to multiple
operators in the pre-salt, at the
top of his legislative agenda.
The multiple operator reform,
seen as a vital first step to the
other promised regulatory reforms, was close to being voted
into law as Upstream went to
press.
“The new administration is trying to be pragmatic and represents a significant shift toward a
more pro-business and pro-market government,” says Jimena
Blanco, Americas team leader
with risk consultancy firm Verisk
Maplecroft-Wood Mackenzie.
“One of the key areas where the
administration already enjoys
congressional support for reform
is the oil and gas sector, where
Petrobras is no longer able to explore or invest in assets adequately. This is part of a much broader
initative aimed at restoring confidence and bringing foreign investment into Brazil.”
Temer, a wily and cautious politician, has been treading warily
before the final impeachment
vote.
He backtracked on plans to
throw open the aviation sector to
foreign capital and has avoided
showing his hand on plans to
hold a pre-salt licensing round in
2017.
Temer has also been working
hard to offer enough rewards and
incentives to build up a broad
coalition base in Brazil’s fractious
Congress.
Uncertainties remain, starting
with the slim chance that Rousseff might avert final defeat in the
Senate and return to office.
“This scenario would spell a
very weak or lame-duck government and would possibly lead to
early elections, and constitutional
uncertainty about the legality of
that, but we rate the chances of
Rousseff returning as very slim,
just 5% to 10%,” says Blanco.
Even after vaulting this hurdle,
Temer faces a fresh risk that he
will be prevented from seeing out
his own term until scheduled
elections in 2018.
Brazil’s electoral authority is
analysing allegations that the
Rousseff-Temer ticket was tainted
by Car Wash slush funds. This
matter is likely to reach a deliberative decision only in 2017, and
could feasibly result in the annulment of the entire Temer-Rousseff
ticket, and the declaration of new
elections.
Pro-investment agenda Temer
has also taken some fire from the
Car Wash scandal. He quickly lost
three of his new cabinet members
due to the emergence of recorded
conversations suggesting the use
of political influence to steer clear
of the Car Wash probe.
At least one plea-bargain statement, by a former executive with
Brazilian contractor Engevix, suggested that Temer had handled
slush funds for the Democratic
Movement Party (PMDB), but no
corroborating evidence has
emerged.
“We see the chances of Temer
staying in office until 2018 as
slightly reduced, at 50% to 60%.
This is because of the potential
termination of the entire Rousseff
mandate by the electoral courts,”
Blanco says. Yet, with some of the
dust from Car Wash beginning to
settle, attention is switching to
the economic measures that can
be expected from the new administration.
Temer’s private investment
advisor, Wellington Moreira Franco, has been listening closely to
the oil sector.
Another pointer came last
month with the naming of experienced oil sector insider Marcio
Felix as secretary of oil and gas in
the Energy Ministry.
Some time has been lost with
the impeachment, and some issues have been thrown back open
to negotiation, but the urgency of
this pro-investment agenda is
growing. Key regulations have
been promised within the next 40
days.
The decision to honour the
previous administration’s social
welfare and public sector wage
commitments bolster support
before the impeachment vote
and October local elections,
but they also force the budget
deficit higher and increase pressure for the pro-investment measures.
Oil industry insiders are confident that these long-awaited
measures will emerge over the
coming weeks.
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FOCUS BRAZIL
24
15 July 2016
REGULATORY FRAMEWORK
Operating
rights hold
the key to
reforms
Role of Petrobras in production
sharing contracts in the spotlight
GARETH CHETWYND
Rio de Janeiro
E
XPERIENCED players on
all sides of the oil
industry believe that a
relatively modest set of
regulatory reforms could have a
dramatic effect on Brazil’s oil
sector.
The starting point, everybody
agrees, is ending the rule that
allows only state-controlled operating rights on the production
sharing contracts that were introduced for the pre-salt in 2010.
The law also requires Petrobras
to take a minimum 30% in all production sharing contracts.
These laws were strongly
backed by Dilma Rousseff when
she was still serving as chief of
staff to president Luiz Inacio Lula
da Silva.
By late 2014, when Rousseff was
starting her own second term as
president, the parlous state of
Petrobras’ finances had persuaded
even her that the single operator
rule would have to be relaxed.
With Rousseff currently suspended from office, Petrobras
chief executive Pedro Parente
made his own position clear, stating that restricting freedom of
choice on whether to invest or
not, was “in the interests of neither company nor country”.
Vowing to tackle Petrobras’
debt, Parente has criticised the
“euphoria and triumphalism” of
recent years. One of the bills proposing to repeal this law has
already made its way through
Brazil’s upper house.
Sponsored by Jose Serra — then
opposition senator, and now
Interim President Michel Temer’s
Foreign Minister — the bill
has been watered down to retain
some preferential rights for Petrobras.
Oil industry lobby groups decided to throw their weight behind the bill, despite the presence
of this clause, though sources
there said they were hopeful that
it would be repealed at a later
stage.
“It is not ideal, because preferential rights distort the market,
but we think it is better to proceed. Attempting an amendment
now would mean the bill going
back to the Senate, setting the
whole process back by at least six
months. There would be little
chance of holding a licensing
round next year,” says an executive with one European company.
Preferential rights Wellington
Moreira Franco, Brazil’s executive
secretary for public-private investment, backed this view.
“We have discussed this with
the oil sector and there is broad
agreement that we should focus
on the bill that has already been
approved by the Senate, rather
than go back to square one with
something more ambitious,” he
says.
The preferential rights clause
may, in any case, have less clout
than first appearances suggest.
Some interpretations suggest
that it is more in the nature of a
right of consultation, leaving the
president of Brazil to take the final
decision about whether to license
out an area or reserve it for Petrobras.
The Serra bill was poised for
lower house approval as Upstream
went to press.
Industry groups say repealing
the single operator rule must be
backed up by a clutch of other
regulatory reforms in order for the
promised licensing round to tap
true potential.
The reform with the power to
unlock investments most dramatically is reservoir unitisation,
they say.
Uncertainty stems from the
failure to flesh out the regulatory
framework on unitisation, made
worse by the introduction of the
new pre-salt contracting regime
in 2010. Numerous existing discoveries are located on concessions but bordered by open acreage in the pre-salt.
Open acreage The 2010 law
change requires Petrobras-operated production-sharing contracts
on new areas.
In several such cases there is
evidence of extensions of reservoirs from concessions to open
acreage.
On some of them, such as the
Petrobras-operated Carcara field,
the extensions are thought to be
very significant, with recoverable
barrels possibly counted in the
billions.
The Rousseff administration
drew up plans to hold a licensing
round on these ‘unitisable’ areas
but — with the single operator
rule in place — the event was a
non-starter because Petrobras
does not currently have the financial capacity to take up the minimum stake of 30%.
Interpreted literally, Brazil’s presalt law could oblige Petrobras to
take over the operatorship even in
circumstances where only a small
fraction of the greater reservoir protrudes onto open acreage. Conces-
Resolution expected within weeks from policy panel
BRAZILIAN offiicals have signalled that
there will be a unitisation resolution
within the next 40 days, probably
through an extraordinary meeting of
the Energy Ministry’s policy panel,
writes Gareth Chetwynd.
In the current mood of pragmatism
partners may get more leeway to
negotiate their own unitisation
solutions than was previously
envisaged.
The administration of former
president Dilma Rousseff was proposing
calculation of reservoir volume based on
reserves in place, but this may not be
seen as the best option for reservoirs
with heterogenous characteristics. “We
think this should be less prescriptive
and based more on sitting down and
negotiating as much depends on the
characteristics of a given reservoir,”
says Antonio Guimaraes, E&P executive
secretary of the Brazilian Petroleum
Institute.
The regulations need to be welldrafted because redesigning Brazil’s
contracting sytem in the wake of the
pre-salt discoveries created some
complex and anomolous situations,
Only one area, Libra, has been
competitively licensed since the pre-salt
laws were introduced.
Another big area, encompassing
Buzios and much of the Sepia field,
presents more complex challenges. This
area was made subject to a 2010 transfer
of rights, allowing Petrobras to produce
5 billion barrels as consideration for the
federal government’s participation in an
oil-for shares transaction.
There are said to be billions more
barrels of oil to be recovered in this
same area.
Two years ago, the Rousseff
administration said the whole area
would be awarded to Petrobras, but that
no longer seems practical.
Any other option would raise complex
questions about unitising reserves from
within the same reservoir and, under
current law, raises the thorny question
of operatorship. The situation can reach
almost absurd levels of complexity, such
as in the case of the Iara field, since
divided into Berbigao, Sururu and Atapu.
The original discovery was made on a
Petrobras-operated concession but the
tri-partioned reservoir extends onto a
surrounding area that was granted to
Petrobras as part of the rights transfer
area.
At another extremity, the same
reservoir protrudes onto open acreage,
bringing three contracting regimes into
play.
Reforming legislation is probably
needed to allow practical solutions to
prevail.
FOCUS BRAZIL
15 July 2016
Sponsored bill: Brazilian
Foreign Minister Jose Serra
Photo: REUTERS/SCANPIX
25
Unitisation to begin
with licensing round
BRAZIL’S future oil and gas secretary, Marcio Felix, confirmed last
week that the administration of interim President Michel Temer is
planning to go ahead with a licensing round of four unitisation areas
next year, writes Gareth Chetwynd.
The four “pre-approved” areas
are near the established discoveries of Sapinhoa, Carcara, Gato do
Mato and Tartaruga Mestica.
These are all areas where the evidence points to extensions from concession discoveries with significant
volumes on the open acreage side.
Although industry leaders are
adamant that missing pieces of the
regulatory puzzle must be put in
place, the low-risk aspect of the unitisation round offers Brazil a chance
to harness new production relative-
number. One of the areas, Carcara,
has been feted as one of the biggest pre-salt discoveries yet, probably covering a greater area than
Libra, albeit with less reservoir
density. Sources suggest that close
to half of the reservoir will extend
onto open acreage.
Carcara, discovered on concession Block BM-S-8 by Petrobras, is
also unusual in the pre-salt in
that it has virtually no carbon dioxide or hydrogen sulphide and
has very high reservoir pressure.
Petrobras opened a data room
for its stake in BM-S-8 earlier this
year, but interest has been muted
because of uncertainty over unitisation.
“Mapping out the licence process
and other unitisation rules would
SIGNED AND APPROVED UNITISATION DEALS
Field
Tartaruga Mestica
(Tartaruga Verde field)
Lula - Lula South
Sapinhoa
Nautilus (Argonauta field)
Basin
Operator
Campos
Santos
Santos
Campos
Petrobras
Petrobras
Petrobras
Shell
UNITISATION DEALS UNDER ANALYSIS
Field
Caxareu
Pirambu
Albacora
Sapinhoa South
Baleia Azul
Gato do Mato
Carcara
Libra
Epitonium
sion holders thinking about developing their own discoveries before
the other side even has an owner
have to negotiate a unitisation
agreement with the federal entity
Pre-Sal Petroleo (PPSA).
Defining volumes these cases,
concession holders face the prospect of carrying the PPSA through
appraisal and reservoir development until another owner is selected, and must do so without
having the necessary rules in
place for issues such as cost recovery or definition of volumes in
these cases.
The deterrent effect of regula-
tory uncertainty on unitisation
has been all too evident.
The Gato do Mato development
has been put on hold — with the
consent of hyrdocarbons regulator ANP — because, in the absence
of clear rules, operator Shell was
reluctant about going ahead with
investments that could ultimately be to the benefit of a future unitisation partner.
Interpretations of the law that
were prevailing with the regulators, could also have resulted in a
mandated transfer of the operatorship to Petrobras, even if — as
the evidence suggests — a much
larger part of the Gato-do-Mato
reservoir lies on the BM-S-54 concession area.
The uncertainty surrounding
unitisation has also had a powerful deterrent effect in respect of
Petrobras’ efforts to farm out or
sell off valuable interests in
projects such as Carcara and Tartaruga Verde, with very significant extensions onto open acreage.
There are additional areas
of uncertainty on the application
of different royalty systems,
two different regimes and whether the PPSA’s powers of veto apply
to the concession through unitisation.
ly quickly. “Done properly, this unitisation round can bring results
much more quickly than in a frontier basin, like the equatorial margin where you can wait four years
for the first well results,” says Jose
Firmo, head of the service companies association Abespetro.
Adriano Pires, director of the
Brazilian Centre for Infrastructure, says: “It still takes at least
five years or so to get production
moving in these unitisation areas,
but they could give Brazil an interesting boost by 2023.”
So far, between 16 and 20 concessions have been identified by
the Brazilian Petroleum Institute
(IBP) as needing unitisation with
production sharing pre-salt areas.
Brazil’s federally owned pre-salt
company Pre-Sal Petroleo has estimated that the areas up for unitisation hold between 9 billion
and 10 billion barrels of oil equivalent in place, for a potentially recoverable 2 billion to 3 billion boe,
but this is seen as a conservative
Basin
Campos
Campos
Campos
Santos
Campos
Santos
Santos
Santos
Santos
Operator
Petrobras
Petrobras
Petrobras
Petrobras
Petrobras
Shell
Petrobras
Petrobras PSC
Shell
EVALUATION
Areas under initial
evaluation for unitisation
Atapu/Sururu/Berbigao
Buzios
Sepia-Jupiter-BM-S-24
BM-C-34
BN-C-32 (Itaipu, Jubarte
surround)
make Carcara an attractive investment,” says an oil and gas lawyer.
The Temer administration
passed up an opportunity to formally approve the licensing round
at a recent meeting of the Energy
Ministry’s policy panel.
“We think there are certain key
elements to be put in place to make
this round truly attractive,” says
Antonio Guimaraes, E&P executive
secretary of the IBP.
“This starts with the repeal of the
single operator rule and includes
the unitisation resolution and extension of Repetro (tax relief).”
FOCUS BRAZIL
26
15 July 2016
RESEARCH & DEVELOPMENT
R&D tax —
‘a good idea,
applied badly’
Oil companies and suppliers say levy has become
disconnected from business end of industry
GARETH CHETWYND
Rio de Janeiro
B
RAZIL’S research and
development tax — a 1%
share of the higher royalty rate — was welcomed
as one of the more enlightened
aspects of Brazil’s local content
policies, but it has become a source
of frustration.
Problems stem from the fact
that the levy is tied to universities
and dedicated research entities,
and must be approved by the
National Petroleum Agency (ANP)
on a case-by-case basis.
Oil companies and suppliers
believe the R&D levy has become
disconnected from the business
end of the sector, with not enough
feeding through into practical and
timely application.
“The creation of the levy was
a very positive decision. It really
looked like Brazil was on the
way to becoming a global hub for
R&D and innovation, but this was
not carried forward properly and
we have been seeing a heavy retreat in investments,” says Jose
Firmo, president of Abespetro, representing supply chain and service
companies.
Laboratories The first wave of
investment under the R&D levy
was typically in upgrading and
expanding infrastructure, such as
laboratories.
“The investments were supposed
to migrate from the theoretical to
the practical, developing into new
technologies and attracting researchers to more pragmatic applications, but we have not found the
right drivers for this,” Firmo says.
Brazil’s failure seems to be in this
crucial interface between research
and private industry. There are
some complaints of overregulation.
“The ANP has to approve each
project, and this has been applied
restrictively. The regulator should
facilitate the decision-making
process, not restrict it,” says a
manager with one of Petrobras’
pre-salt partners.
One such case involved an
unsuccessful attempt to set up a
Brazilian branch of Sintef,
Norway’s independent research
foundation.
The 25-strong team included 18
Brazilians, and the iniative soon
drew strong interest from Petrobras, Statoil and others.
“The aim was to support Brazil
with technical experience from
Norway and boost our own par-
Brazil’s
failure seems
to be in the...
interface
between
research and
private
industry.
ticipation in the technologically
exciting pre-salt play.
The ANP was supportive on a
technical level but they just
couldn’t get the regulations to
work in a way that gave Sintef
enough support to continue. Put
simply, we could not cover our
costs” says Kjetil Solbraekke,
former head of the disbanded
Brazilan unit of Sintef.
In Sintef’s case, the problem
stemmed from the need to fit a
non-profit entity’s administrative
structure within the terms avail-
able to public universities, including salary payments, calculated as
hourly time spent strictly on
approved projects.
Remunerative structures could
not be stretched for the levy to
cover basic administrative costs,
such as rents, and salary payments
that went beyond project time.
Sintef’s Brazilian venture began
in 2009, but it became increasingly
difficult to retain the research
staff, and the initiative ended in
2014.
Industry concerns were in
evidence during a recent DNV GL
innovation day in Rio de Janeiro,
where representatives of Shell,
Statoil, Repsol and Petrobras took
part in an R&D panel.
Participants discussed the shortcomings in a regulatory system
that leaves a gap between the universities’ research culture and the
pragmatic and time-sensitive
needs of the companies.
“The ANP has pursued the objective in creating an R&D base in the
country, particularly with the laboratory infrastructure that has
been put in place, but many
projects are falling short when it
comes to application,” says Pedro
Martinz, head of R&D with Repsol’s local unit.
The slant toward university research, and interpretations of this
by the ANP, has left R&D projects
falling short on the “technology
readiness level” (TRL) rating, critics say.
“The system is not working, and
it is the oil companies that pay the
penalties when TRL falls short, as
it often does,” says Carlos Alberto
Duarte de Lemos, a senior technology consultant with Petrobras.
Others in the oil industry have
complained that current regula-
tions have strong incentives for
regional development that can
sometimes push research into
parts of Brazil with little connection to the oil industry, undermining efficiciency.
“A reworking of the regulations
could bring improvements in implementation and knowledge
transfer and allow companies
more flexibility on things like pri-
ority-setting or pursuing valueadded or cost-conscious investments,” says Statoil R&D manager
Fabiano Lobato.
“Fundamentally, we want to develop projects for implementation,
not to be left on the shelf.”
Shell Brazil technology manager
Joao Mariano says the oil companies also had to do their bit to bring
this improvement. “We have to
Plea to take away uncertainty surrounding Repetro
BRAZIL’S new administration is being
urged to clarify some pressing tax
matters so as to tap true investment
potential from a planned licensing
round, writes Gareth Chetwynd.
Brazil’s onerous tax system would stop
oil sector development in its tracks were
it not for a special exemption scheme,
known as Repetro, that exploits a legal
loophole by classifying offshore
equipment as exports.
The Repetro system is due to expire at
the end of the decade, but the simple
matter of extending this has been held
back amid Brazil’s political upheaval.
“Today, you don’t know when you
invest in a field if Repetro will end in
2019. This is no way to proceed,” says
Jose Firmo, head of Abespetro, the oil
industry body representing service
companies.
Before the impeachment process
against President Dilma Rousseff, the
energy ministry’s policy panel (CNPE)
signalled that this tax break would be
extended by 20 years, but Rousseff’s
impeachment may have delayed
publication of the relevant decree.
“If everyone agrees on the merits of
Repetro there is no reason to suppose it
will not be approved,” Firmo says.
With attention focused on the
extension, Firmo noted that it is easy to
forget that there are also aspects of
Repetro that could be improved. Under
current rules, for example, coverage does
not extend to either warm or coldstacking, meaning that most of the 40
rigs that fell idle in Brazil quickly left the
country. “This was an unnecessarily
dramatic exodus that spells even more
lost jobs and higher mobilisation fees in
the future,” a manager with one of the big
drilling companies says.
Parallel to Repetro, the Brazilian
Association of Exploration & Production
Companies has also led a campaign
against two new taxes that the Rio de
Janeiro state government intends to levy
on production. Rio state has seen oil
sector royalties fall steeply in line with
oil prices and is suffering a partial
collapse in some public services.
The state government has responded
with a new 18% goods and services tax on
each barrel of crude produced in the state
and a monitoring tax of 2.71 Brazilian
reais ($0.74) per barrel.
The ABEP claims the taxes will raise
costs by 40%, undermining viability of
new projects and shortening the life of
older fields. It has has filed lawsuits
challenging the legality of both taxes.
Consultancy Wood Mackenzie has
suggested that introducing the taxes in a
low price environment would result in at
least 300 million fewer barrels being
produced in the Campos basin.
FOCUS BRAZIL
15 July 2016
27
Time to address the
local content issue
A ‘MAJOR
HEADACHE’
Waivers could be key to
moving projects on
Facing the future: research
and development has a
critical role as the oil and gas
industry battles to cut costs
learn to do (joint industry projects)
that bring results, and integrate
the universities into this process.
“Universities can help iron out
the uncertainties, and it is desirable that they get involved with
even more practical applications,
like the development of prototypes,” he says.
However, Mariano also calls for
a “rethink”of the whole scientific
development model in Brazil.
“Today, universities provide the
main mechanism for transforming research into commercial applicaction, but the mechanism
tends to be through incubators or
technology parks, which does not
always work.
“It is not easy to find the right
location for doing prototypes, for
example, and it can be a challenge
to find the right researchers,” he
says.
Almost 10% of Shell’s upstream
investments in Brazil go toward
R&D.
Supply chain What many in the
industry would like to see is a widening of the R&D levy’s scope to
cover activities that are much closer to the business end of the oil sector, extending to R&D work by the
supply chain companies
“Allowing the R&D incentive to
be applied to the sector’s own technology investments could be a potential solution in a time of scarce
orders, and these investments could
be aligned squarely with the new
focus on reducing costs,” says Jose
&ůƵŝĚƐͻĂƌŐŽͻtĂƐƚĞͻdĞĐŚŶŽůŽŐLJͻ^ĞƌǀŝĐĞ
Mauro Ferreira, head of Abespetro’s
chapter for the subsea sector.
Luciana Maria Souza de Mesquita, the ANP’s deputy superintendent for R&D, says recent new regulations would bring improvement
in the practical applicabilty of the
levy, opening new funding channels for training, qualification of
personnel and prototypes.
She said the recent creation of a
new scientific committee at the
agency could also bring improvements.
“The industry knows best what
the technology issues are and how
to solve them, and works best
when the rules are kept simple,”
says Solbraekke, who is now senior
vice president with consultancy
firm Rystad Energy.
BRAZILIAN dreams of developing
the pre-salt fields predominantly
using domestic industry too
often fell victim to political posturing or worse, writes Gareth
Chetwynd.
Petrobras, with its huge demand projections, was used as a
battering ram for such policies,
resulting in bottlenecking, inefficiencies, high costs and delays.
With hindsight, it is hard to
fathom how partners such as BG
Group and Portugal’s Galp Energia were persuaded to back the
“replicant” floating production,
storage and offloading vessel
projects, serving up huge riskladen contracts to local suppliers,
some of which were lacking in
experience.
For older upstream concessions, local content requirements were under 35%, so requirements on projects such as
Lula and Sapinhoa could probably
have been fulfilled by subsea
hardware alone.
Putting these older projects
back on track is largely a question
of mitigating measures, with
Chinese yards typically supplying the solution.
Local content became an important bidding criterion from
the 2006 licensing round onward,
leading to chronic difficulties on
more recent concessions.
Compliance with these commitments is monitored by the
ANP, and fines are piling up into
hundreds of millions of dollars.
Local content is also a major
headache for fields such as Buzios
and Sepia, located in the Petrobras rights transfer area, and also
on Libra, where Petrobras heads
an international consortium.
Both these projects, put together when oil prices were soaring,
received highly-detailed and very
demanding local content requirements.
On the current tender for floating production units for Libra
and Sepia, there are over 60 local
content categories per unit, each
with its own tightly-regulated
percentage.
The collapse of Sete Brasil, the
rig building entity now in Chapter 11-type bankruptcy proceedings, has its own effect.
Even if some rump version of the
28-rig charter survives, this project
will not contribute anywhere near
the local content percentages once
promised to Petrobras projects
such as Libra and Buzios.
Some suggestions for restructuring Brazil’s rules on local con-
'ůŽďĂůŽŶƚĂŝŶĞƌ^ŽůƵƟŽŶƐΘ^ĞƌǀŝĐĞƐ
tent were already in the pipeline
when President Dilma Rousseff
was suspended.
However, administering onerous local content liabilities from
past licensing rounds is the real
problem.
The existing law offers scope
for seeking a waiver when it
proves impossible or impracticable to comply with local content
commitments.
Operators have been exasperated by the long wait for full regulations and clarification about
how waivers will work, and how
fines will be reduced and cancelled.
The National Petroleum Agency has been slow to provide its
own clarification on how waivers
will be applied.
The agency held a public hearing recently to evaluate claims
that there were no seismic vessels mobilised in Brazil during
the 2008 to 2015 period.
Some operators were wary of
this move, fearing an attempt to
refute the argument that there
were no reasonably priced options.
In the event, no seismic vessel
owners came forward with such
arguments, and industry associations merely backed the view
that availability was zero.
With a new Energy Ministry
team now in place, there are renewed hopes for a looser interpretation, or even intervention,
on the topic of waivers.
There are some concerns that
failure to grant significant waivers on projects such as Libra and
Sepia could seriously threaten
the profitability of the entire
project.
It remains to be seen whether
the failure of Sete Brasil will be
admitted as a ground for waivers,
for example.
Industry leaders hope for the
emergence of a workable system
with some built-in recognition of
the extent to which local content
polices ran beyond the reasonable
or the practicable between 2008
and 2013.
Regulators have taken a cautious stance, up to now, wary of
provoking lawsuits by companies
that lost out in past licensing
rounds to companies now unable
to fulfill their commitments.
The Brazilian Institute for Oil
& Gas (IBP) has played down this
concern, claiming that only 7 of
the 979 blocks awarded under
Brazilian licensing rounds up to
2014 were influenced, in their
outcome, by the local content criterion.
“It seems clear that Brazil
should move away from local
content from the perspective of
license round bidding criteria.
“But it is still hard to see how
the problem will be solved on
long-term projects like Libra,”
says Kjetil Solbraekke, senior vice
president (South America) with
Rystad Energy.
www.hooversolutions.com
[email protected]
+1.800.844.8683
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FOCUS BRAZIL
28
15 July 2016
PRE-SALT
Complications surround PPSA
Powerful state entity Pre-Sal Petroleo remains untouched so far by
calls for reform and is fighting its corner in the pre-salt equation
GARETH CHETWYND
Rio de Janeiro
P
RE-sal Petroleo (PPSA), the
federal entity that represents Brazil’s national
interest in the production
sharing consortia, has so far been
spared the attention of those demanding reform of the Brazilian
oil sector.
Created at the height of the presalt euphoria, PPSA at first
spooked some of the oil companies
considering investment in the
new production sharing contracts
because it was given sweeping
powers — including an overall
veto on the operating committees
— seemingly out of proportion to
its non-contributory role in the
investments.
In practice, the way the PPSA
has gone about building up a track
record has been much more reassuring.
The PPSA has been staffed by
some of the most experienced
heads in the Brazilian oil industry, and the small team has been
working hard to bring some value
to the pre-salt equation.
“We recognise that we have
considerable power in the (operating) committee so we set out to
put together a strong technical
team that can genuinely contribute to the task of optisiming
results and finding solutions,”
says Edson Nakagawa, PPSA technical director.
“Controlling costs is part of our
role, and there is a healthy tension
around this, but we try to take a
collaborative position. Nothing we
have done has caused any delays
and we have been able to make
some positive contributions, on
tendering processes for example.”
Nakagawa is upbeat about the
impacts of the Serra bill that is
set to end exclusive operating
rights.
“Publishing unitisation regulations and clarifying local content
waivers will also help avoid stagnation,” he says.
Pressing concerns The PPSA
has a more pressing concern of its
own that has attracted less attention than other problems.
The National Energy Policy
Council (CNPE) is yet to issue a
resolution on the arrangements
for the marketing of pre-salt
crude, including the selection of
official trading agents.
Without this framework in
place, the PPSA is powerless to
start turning the pre-salt riches
into revenue, even though some
oil is already flowing from the
concession side of the reservoir on
fields such as Lula and Sapinhoa.
A marketing framework needs to
be in place before April 2017, when
production from the Libra extended
well test is due to begin, to the tune
of 30,000 barrels per day of oil.
“We need to have a lifting
agreement signed six months before this and the trading agent are
contracted, for which we need the
commercialisation regulations in
place,” says Nakagawa.
Morover, there are several fields
where resevoirs located on
concessions are in production
despite extending onto open acreage in the pre-salt polygon.
Two of the unitisation areas,
Lula and Sapinhoa, are big pre-salt
fields already under production by
Petrobras-led consortia.
The protrusion into open acreage is thought to be a relatively
small percentage of the fields, but
these are big reservoirs. PPSA
president Oswaldo Pedrosa has
stated that the volumes are “not
insignificant”.
The PPSA is also building up
credit with the concession consortia operating on the other side of
a discovery called Nautilus.
Shell started producing from
the main part of this reservoir,
Petrobras rights to pre-salt acreage is a reform target
THE crisis that has hit the Brazilian oil
sector may have united most of the
industry around a basic agenda of
pragmatic reforms, but industry leaders
are eying a more ambitious plan to follow
the planned 2017 licensing round, writes
Gareth Chetwynd.
Eliminating Petrobras’ “preferential
right” to pre-salt acreage is a likely
target.
“This preferential right can hold
things back, bringing an element of
unpredictability because its impact will
depend on the government of the day,”
says Horacio Cuenca, Latin America
upstream director with consultancy
Wood Mackenzie.
“A government with an ideology
similar to what has predominated in
recent years might choose to hold back
on rounds whenever Petrobras lacks
capacity. Another, with a different set of
ideas, might prefer to let things move
along without Petrobras.”
Simplification of the unitisation
process involving two different
contracting systems is another aim.
The argument for simply stretching
the concession to cover reservoir
extension is compelling in cases where
only a minor portion protrudes into open
acreage, observes Kjetil Solbraekke,
senior vice president (South America)
with Rystad Energy.
“I am not a lawyer but it seems the
natural thing to do, in such
circumstances, to turn that part of the
open acreage into a concession. This
recognises that the discovery was made
on the concession first,” he says.
Another suggestion is to abolish the
concept of the pre-salt polygon which,
under current law, is given blanket
treatment as “strategic” and so requiring
production sharing contracts.
Under an outlined proposal, the
government of the day would be free to
decide on a case-by case basis which
areas were strategic or not. The latter
kind would be licensed as concessions.
“Under the current system, a heavy
post-salt oilfield located in the pre-salt
polygon is more or less stranded. It
makes sense to build this flexibility into
the licensing system,” says an executive
with one of the pre-salt partners. There
is resistance to the idea of moving too
abruptly away from the PSC format.
Pre-sal Petroleo director Edson
Nakagawa says: “I agree that there needs
to be more regulatory clarity on the rules
for unitisation, but you have to be careful
not to fall into the trap of changing
whole systems too frequently.
“The PSC has been created and it has
its merits. The government planned for a
take of 65% on Libra, and just turning to
concessions won’t divert it from such
aims.
“The Brazilian PSC actually compares
very favourably with other countries on
government take.”
FOCUS BRAZIL
15 July 2016
Rights Transfer areas could be opened up to tender
ANOTHER reform idea in Brazil concerns the Rights Transfer areas,
where Petrobras has exclusive rights
to produce up to 5 billion barrels of
oil but is barred from farming out
any interest, writes Gareth Chetwynd.
The first phase of this project,
involving four floating production, storage and offloading vessels, ran into delays due to the
technical and financial problems
faced by the Odebrecht-led Enseada consortium. In 2014, shortly
before the extent of Petrobras’
problems became clear, the Rousseff administration approved a
resolution extending the company’s exclusive rights to produce
billions of barrels more crude
from the same area as the Transfer of Rights.
Magda Chambriard, the director
general of the Brazilian hydrocarbons regulator, said the four areas
— Buzios, Iara Surround, Florim,
and Tupi Northeast — could hold
between 9.8 billion and 15.2 billion
barrels of oil equivalent.
At the time, she supported the
measure to simply grant the areas to Petrobras, with government shares ranging from 46.53%
for Florim to 48.53% for Iara Surround, arguing that this was the
fastest route to put the areas into
production.
Petrobras’ current financial
predicament paints a very different picture. A reform-minded
government could reverse the
latter measure by decree, opening up the bountiful “surplus”
reserves to competitive tender.
“A better solution would be to
amend the law to allow Petrobras
to farm out interests in the Rights
Transfer area. This way a more
conventional joint venture partnership could take shape,” says
Adriano Pires, director of the
Brazilian Centre for Infrastructure.
calvincria.com
Upbeat:
Pre-Sal
Petroleo
technical
director
Edson
Nakagawa
29
Photo: PPSA
A role
Turning Challenges
into results.
now called Massa, a few months
ago as part of the BC-10 development.
The PPSA also has an interest
in the Tartaruga Mestica area,
which is contiguous with Tartaruga Verde, where Petrobras is
currently running an extended
well test.
So the PPSA is already accruing
production credits, but is
powerless to actually handle the
oil.
At some point in the future, the
PPSA and the concession holders
will have to work out who owes
what in relation to oil produced on
one side, and upstream expenditure on the other.
Failure to settle this matter
quickly will mean credits building
up on the federal side to a point
that neither side will find comfortable.
The problem is particularly
worrying in relation to Libra.
“If there is not some alignment soon, the government will
probably have to resort to a temporary system for commercialising. We cannot stop the Libra
project because of this,” Nakagawa says.
To some observers, this uncertainy underlines some deeper
problems, of which the PPSA may
ultimately be part.
“The intentions are good but the
rules surrounding PPSA are too
complicated and too rigid,” says
Kjetil Solbraekke, senior vice
president (South America) with
Rystad Energy.
Experience | Capital Discipline
New Opportunities | Credibility
www.qgep.com.br
FOCUS BRAZIL
30
15 July 2016
EXPENDITURE
Brazilian battle
on to slash costs
across the board
Country trying to tackle position as
second-hungriest when it comes to the
need for oil and gas development cash
GARETH CHETWYND
Rio de Janeiro
T
HE Brazilian oil industry
is focusing on costs with
an intensity not seen
before.
Lavish Petrobras investments
have started to ramp-up on the
pre-salt, but a steep decline in output from the Campos basin has
spoiled the party.
The impact of the Car Wash
scandal on the credibility of Petrobras, shipyards and contractors
has intensified the squeeze on
capital expenditure costs.
Imperfect local content policies
ushered in some of the classic
problems associated with protectionism, including high prices,
low productivity and inefficiency.
One study by Rystad Energy
shows Brazil with the second
highest development costs, behind only the UK.
Recent estimates by consultancy Wood Mackenzie suggest that
break-even costs on pre-salt developments governed by concession
rules were averaging between
$40 and $55 (Brent), depending on
the project.
Break-even on the Libra project
was put higher, at nearly $60, due
to this development being licensed under the new production
sharing contract in 2013.
PSC terms reflected the fact that
Libra had been provisionally
mapped as an unusually large and
productive reservoir. Overall government take on Libra is about
65%. The 15 billion Brazilian real
signature bonus — then worth
around $7 billion — bumped up
the break-even barrier from day
one. Costs were also increased by
high levels of carbon dioxide.
Historical oil price data suggests that planners on projects
like Libra may end up working
with an average price of just
$45 over their expected 25 to 30year life span.
“The pre-salt costs are relatively high, but it is far from uneconomic. Obviously we have to look
at the best ways to reduce costs,
but if you look at the PSC format in
other countries, the terms in
Brazil are favourable,” says Edson
Nakagawa, a director of Pre-Sal
Petroleo.
Collaboration Petrobras has
already been spearheading a battle to reduce operating costs.
Suppliers say they would like to
work more closely with the oil
company to move away from the
battle over unit costs and toward
a more collaborative approach to
the question of price efficiency
through integrated planning,
logistics and in research and
development.
Petrobras has already been
focusing its formidable technical
prowess on the costs issue, with
strong advances in the field of presalt drilling.
There are calls for this approach
US$ BARREL
BREAK-EVEN PRICE FOR UPSTREAM PROJECTS - 2014
100
91
80
60
40
36
56
57
26
23
12
13
15
10
8
8
13
22
20
0
PRE-SALT
CAPEX
18
500 MILLION BARREL FIELD
OPEX
COMPANY TAKE
150 MILLION BARREL FIELD
to be stepped up. “It is not really
in the DNA of the offshore sector
to put cost-cutting first,” says Edmar de Almeida, head of the Energy Economics Group (GEE) at Rio
de Janeiro’s federal university.
“Brazil has a proud history of
searching for engineering solutions, but now it needs a new
model for business, requiring ever
more standardisation and simplification and using this expertise
to reduce costs,” he adds.
The scale of demand in Brazil
offers scope for building a competitive advantage. Libra, for example, has an estimated 8 billion
to 12 billion barrels of oil equivalent reserves, according to Brazil’s
regulators.
Most players agree that local
content policies have a place in
such a market, but there is now a
new focus on building upon what
Brazil can do competitively.
“Even at the lowest point in this
downcycle you still see 25 to 30
advanced ultra-deepwater rigs
working in Brazil. This is a level of
activity that clearly justifies
significant supply chain development,” says Abespetro president
Jose Firmo.
“The subsea sector shows what
can be done, producing 100% of
what is used in Brazil. This is a
sector that can penetrate export
markets provided there are some
more advances in productivity,”
says Firmo.
Brazil’s industrial base can also
be relatively competitive and the
market for surface side construction is big enough to foster
healthy competition between
domestic yards.
This opportunity was arguably
spurned by contractors involved
in the Car Wash cartel, but yards
go into the world and become
competitive. Let’s have a rational
debate about how to do this properly.”
Bacci admits that local content
needs to be rethought and improved, but he believes that the
world’s biggest offshore market
must not drop aspirations to build
rigs or floating production, storage and offloading vessel hulls for
the pre-salt.
“All the repair work in the world
would not be enough to maintain
these big facilities,” Bacci says.
Free marketeers say competitive licensing round activity is the
best way to avert downturns.
They argue that Brazil should
drop the highly detailed listing
of local content items and allow
the suppliers to look for what is
most competitive in terms of
price and delivery to build up local
content.
“The preference for local suppliers comes naturally, when goods
and services are supplied competitively,” says one oil company
source.
PRE-SALT COMPETING ALTERNATIVES
GOVERNMENT TAKE
SOURCE: ECONOMIC ENERGY GROUP (EEG), FEDERAL UNIVERSITY OF RIO DE JANEIRO
such as BrasFels, Brasa and QGI
have performed well in the
assembly and integration of FPSO
topsides modules, industry insiders say.
However, the Brazilian yards
are now financially battered and
bereft of orders.
Supporters of more interventionist local content policies say
help is needed and argue it is not
enough for Brazil to settle for
topsides fabrication and integration and repair work.
Shipyard lobbyists argue that
modern new facilities, such as the
Enseada yard in Bahia, Estaleiro
Jurong Aracruz and even Estaleiro
Atlantico Sul, could take Brazilian
productivity to a a new level if
they are given a chance to build
up experience.
“There is not a shipbuilding sector in the world that was built
without strong government support in the form of orders, subsidies or incentives,” says Sergio
Bacci, president of Brazilian shipbuilders’ association Abenav.
“It is not a sector that can just
OTHER OIL AND GAS OPPORTUNITIES AROUND THE WORLD - PRODUCTION COSTS
PRODUCTION COST (
ARTWORK: SIMEN HAKONSEN
)
UK
BRAZIL
US$ BARREL
BREAK-EVEN UPDATED - 2015
NIGERIA
VENEZUELA
80
71
70
50
BRAZIL'S PRE-SALT
30
45
45
20
20
20
9
8
10
9
2ND LARGEST DEVELOPMENT COSTS
3RD LARGEST PRODUCTION COSTS
NORWAY
US NON-SHALE
40
30
0
CANADA
US SHALE
60
INDONESIA
13
RUSSIA
IRAQ
7
17
10
6
PRE-SALT
CAPEX
11
500 MILLION BARREL FIELD
OPEX
COMPANY TAKE
150 MILLION BARREL FIELD
GOVERNMENT TAKE
SOURCE: ECONOMIC ENERGY GROUP (EEG), FEDERAL UNIVERSITY OF RIO DE JANEIRO
ARTWORK: SIMEN HAKONSEN
IRAN
SAUDI ARABIA
$0
5
10
15
20
25
30
35
40
45
SOURCE: RYSTAD ENERGY
50
ARTWORK: SIMEN HAKONSEN
FOCUS BRAZIL
15 July 2016
Industrial base: the BrasFels
yard has performed well in the
assemble and integration of
FPSO topsides modules
Photo: KEPPEL
A Global Player
in the Brazilian
Pre-Salt
Amazonas
Barreirinhas
Brazil
Potiguar
Paraíba
Pernambuco
Sergipe-Alagoas
Santos
Galp is a global integrated energy operator and
one of the first companies to believe in Brazil’s
oil potential, back in 1998.
Today, Galp holds stakes in 27 E&P projects in
Brazil, including the Lula field, in the Santos basin
pre-salt, helping to unlock some of the world's
largest oil reserves.
galp.com
31
New administration expected
to revisit local content revision
PRESIDENT Dilma Rousseff’s
administration in Brazil was
already looking at ways to
refocus local content policy
— proposing transferrable local
credits for inward investment
or exports — but the “Pedefor”
initiative was interrupted by
her suspension from office,
writes Gareth Chetwynd.
“Pedefor was an important
initiative because it signalled a
move from penalties to
incentives and bonuses,” says
Kjetil Solbraekke, senior vice
president (South America) with
Rystad Energy.
Critics said the Pedefor
proposal appeared to be too
bound in red tape, requiring
the involvement of too
many ministries and
committees.
The new administration is
expected to return to the same
theme, throwing open the
debate again, before acting.
Another prime opportunity
for boosting Brazil’s
competitiveness is in the field
of government take and also in
cutting red tape.
IHS data shows oil sector
investment down 26% between
2014 and 2015, but declining by
a much more severe 42% in
Brazil, from $43 billion to $25
billion.
Brazil’s share of world
investment has fallen from
5.85% to 4.5%, when its geology
INVESTMENT
SHARE DOWN
‘Need for competition’ to
bring down costs
suggests the potential for 7% to
10%. “It is perhaps time for
Brazil to consider adjusting
government take to something
that is more compatible to a
break-even of $45 in the
pre-salt,” says Edmar de
Almeida, head of the Energy
Economics Group (GEE) at Rio
de Janeiro’s federal university.
Holding perennial licensing
rounds is also seen as
fundamental.
Those hoping for a
fundamental change in the
Brazilian oil sector are
banking, more than anything,
on what new Petrobras chief
executive Pedro Parente has
called the acid test of
competition.
“An open and competitive oil
sector brings down costs across
all the segments. Oil companies
compete for acreage and the
suppliers compete for the
custom of diverse clients,
helping to bring down costs
and improve quality and
efficiency,” says Adriano Pires,
director of the Brazilian Centre
for Infrastructure.
The Brazilian Petroleum
Institute has also lobbied for
delays with environmental
permitting to be tackled
urgently.
“We need to have more
certainty that the licensing
processes will be technically
adequate and expedited
efficiently. The process is still
slower than we would want,
and improvements have so far
fallen short of what was
expected,” one source says.
Recovery of Brazil’s offshore
industry requires, at the very
least, a more tangible demand
horizon to allow for planning of
investments, training and
recruitment, and this means
licensing rounds.
The halt in the licensing
process between 2008 and 2012
was tantamount to a reversal of
the 1998 opening of the oil
sector, critics say, resulting in
the chronic reduction of
exploration activity seen
today.
Data collated by supply chain
association Abespetro shows
Petrobras activity halving and
private sector activity
shrinking to 10% of the total.
Search the archive:
Pedefor
FOCUS BRAZIL
32
15 July 2016
TECHNOLOGIES
Turning a
problem
into an
advantage
Libra field partners looking
at ways of changing 45%
contaminant content from
a hindrance to a benefit
Challenge: Keith Lewis, applied
technologies manager
at the Libra project
Photo: IBP
GARETH CHETWYND
Rio de Janeiro
T
HE Libra pre-salt oil area is
one of the biggest Brazilian discoveries to date, but
it also presents a more
complex set of challenges than
other pre-salt giants such as Lula,
Sapinhoa and Carcara due to higher levels of carbon dioxide.
The light pre-salt crude shows a
gas-oil ratio of 410 to 450 m3/m3,
with CO2 content of about 45% in
the produced gas. This compares to
a CO2 content of about 15% on a
field such as Lula.
Libra, a flagship project in more
ways than one, is the first oil discovery to be developed using the
production sharing contract model
that Brazil introduced in the wake
of the pre-salt discoveries.
Although Petrobras-operated,
the joint venture sees the Brazilian
company involved in a more integrated partnership than anything
that has gone before, working
alongside Shell and Total each on
20%, China National Petroleum
Corporation and CNOOC Ltd each
on 10%, and Pre-sal Petroleo as the
contract managing entity.
The consortium is working on a
series of technical solutions while
emphasising that their actual implementation at Libra will depend
on how knowledge of the reservoir
evolves.
The partnership aspect is particularly strong in the technical
sphere, where there is a big emphasis on cost control.
If Libra is to serve as a litmus test
for the economics of the pre-salt,
then finding effective solutions to
technical challenges will be critical.
A rich crossover of competences,
expertise and experience is in
evidence among the partner representatives at Libra project headquarters in Rio de Janeiro.
Confidence is high in a team that
believe they can not only overcome
the technical challenges but, in the
case of CO2, turn some of them into
real and significant advantages.
The presence of this corrosive
“contaminant” can push up costs
and squeeze revenues, for example
requiring exotic alloys in the subsea
environment, or increasing the
amount of topside plant required for
processing and compressing gas.
On early pilot floating production, storage and offloading vessels
in the pre-salt, CO2 is stripped out
and re-injected using membrane
technologies, but CO2 levels are
lower on projects such as Lula, and
gas plant still tends to occupy
about 60% of the total space.
On Libra’s pilot FPSO, currently
under tender, gas will be reinjected, with the CO2, but this is just a
first step.
For full-scale development, the
Libra partners want to amplify options for reservoir management by
stripping out the CO2.
Solving the problems has led to
some talk of supersized FPSOs in the
Brazilian pre-salt, but this misses
the more nuanced direction that the
Libra consortium has been taking.
“The high level of CO2 poses one
of the key challenges on Libra, and
will probably provide the focus for
some of the most interesting applications of technology,” says Keith
Lewis, applied technologies manager with the Libra project team.
“These challenges are quite well
known, and Petrobras has already
done quite a lot in terms of extracting and dealing with CO2 in the
pre-salt.
“The difference in Libra is the
very high level of CO2. This doesn’t
change the nature of the challenge, but it does provide opportunities, and we have been focusing
our technologies on this.
“We have tried to look at the
behaviour of CO2, and see what you
can use to actually benefit from
having such high levels.”
CO2 processing has emerged as
Reservoir logs tee up 4D seismic as an invaluable tool
THE Libra area covers about 550 square
kilometres and, with seven wells drilled so
far, the project managers already know that
they are working with a reservoir with an
unusually high hydrocarbon density, writes
Gareth Chetwynd.
Designing and contracting of a new 3D
seismic base for the north-west section of
Libra has taken into consideration the
option for future 4D seismic data for reservoir monitoring.
Ocean bottom node work has been the
chosen technology, and the base survey is
scheduled to be acquired in mid to late 2017.
The use of 4D seismic in carbonate reservoirs is extremely challenging, yet it may
prove to be an invaluable tool for reservoir
monitoring once it is put in place.
Interest in increasing the recovery factor
on such a huge reservoir has made Libra the
likely location for what is likely to become
one of the biggest applications of 4D seismic
technology ever seen in a deep-water envi-
ronment. This application of 4D technology
can allow optimised placement of injection
and production wells, avoidance of “bypassing” oil in the reservoir reduction of overall
drilling requirements.
“Imaging has its difficulties in the presalt, but we see important benefits of 4D in
these complex carbonate reservoirs,” says
Keith Lewis, applied technology manager
on the project.
The Libra partners are still working on
the format, but they plan to start the 4D
survey in the north-west section of Libra,
where the pilot floating production, storage
and offloading vessel will be located, possibly expanding across the whole area.
“Sure, 4D seismic is expensive, but if you
look at the cost of just one well in the wrong
place, it will pay for a lot of 4D expenditure,” Lewis says.
With 4D seismic monitoring, the Libra
team also aspires to greater control over the
injection process, making the most of intel-
ligent completions on injection and production wells, and allowing a more pinpoint
assessment of how sophisticated those
completions need to be in each case.
“This, combined with other monitoring
tools, could allow us to act before gas gets
to the producer, for example, helping us
tackle the issue of dealing with a lot of gas
into topsides.
“Optimising gas and water injection in
this way links into the objective of improving processing configurations, and hopefully increasing the proportion of liquids to
gas in the system,” Lewis adds.
The challenges of working with 4D monitoring in the pre-salt include the demand
for high levels of seismic repeatability.
Permanent monitoring with seabed cables offers a reception solution, but with
higher costs. Ever-faster turnarounds on
multiple surveys mean this offers an alternative.
Another area of research for 4D seismic
covers the problem of improving the repeatability of source signals from the subsalt. The Libra team plans to consider the
alternative of using marine vibrators, rather than air guns.
Libra does not cover as large an area as
some of the other pre-salt fields, but resource density is high with very thick reservoirs.
Project managers, like Lewis, promise
that the field will have some of the best
deep-water wells in the world. The latest
well, announced in June, had 410 metres of
net pay.
“I have worked on many fields around
world, and this one is exceptional. You don’t
see this kind of resource density elsewhere.
In one square kilometre of Libra, there is a
lot of oil.
“It makes Libra very competitive in a
deep-water context. So asking how to get
maximum production from wells is very
valid,” says Lewis.
FOCUS BRAZIL
15 July 2016
Ultra-deep prompts
a rethink on risers
LIBRA FIELD
RJ
INSTALLATION
COST CUTS
BRAZIL
Libra’s demands mean
need for new approach
RIO DE JANEIRO
204 KM
100M
TAMBAU
URUGUA
PIRAPITANGA
TAMBUATA
MEXILHAO
CARAPIA
1000M
BUZIOS
LIBRA
ITAPU
1500M
2000M
2500M
SOURCE: PETROBRAS
ARTWORK: SIMEN HAKONSEN
an area with great potential, including a Petrobras-patented pressurised dense-phase separation
technology called Hi-Sep.
In parallel to this, the Libra
technical team plans to develop a
longer-lasting and more efficient
membrane separation, the Carbon
Molecular Sieve technology, which
can be retro-fitted.
recovery Lewis
stresses that the broader technical
programme that has three main
drivers — reducing costs, boosting
the recovery factor and increasing
the pace of the production rampup.
Hi-Sep’s dense-phase liquid
separation is a case in point, opening up a range of potential knockon benefits.
One obvious advantage of stripping out CO2 efficiently comes
with the capacity to enhance recovery through CO2 flood, already
working on pre-salt fields such as
Lula.
The dense-phase extraction and
handling processes being developed for Libra can allow CO2
Enhanced
33
injection at much higher flow
rates and concentrations than the
gas form, with potential to free up
more of the topsides space for
handling oil.
“There are all sorts of benefits.
Hi-Sep allows you to pump CO2, as
a more efficient alternative to compression, for example, with a major impact on processing plant and
facilities. CO2 becomes an easier
beast to manage,” Lewis says.
Understanding the phased behaviour of CO2 has become an important focus of research on Libra.
“Learning more about this behaviour, in the separation process
and beyond, means you can take
an apparent problem and turn it
into an advantage,” Lewis says.
Advances in the topsides aspects
of this dense phase CO2 processing
are heading for implementation in
the next generation of Libra floaters, after the first pilot.
The topsides process will involve
manipulating inlet pressures as
much as possible, reducing the
number of compression stages,
with major implications for reducing the size of gas plant and occu-
pying less pre-salt deck space than
today’s 60%.
“Getting denser phase behaviour
creates opportunities for weight
reduction and cost reduction, and
allows us to increase oil production,” Lewis comments.
Hi-Sep also increases the subsea
options, with opportunities to
work with injecting liquids and
removal of processing plant from
the topsides. Libra, like most other
pre-salt fields, sits under more
than 2000 metres of water.
“The development of Hi-Sep for
a subsea configuration will take
longer, but that tends to coincide
with a later stage in the field life
when the gas ratio is increasing.
“So Hi-Sep is potentially a system to deal with later in-field management, reducing the amount of
gas going into the production system, increasing oil production further down the curve,” Lewis says.
Search the archive:
Libra
Quest to understand behaviour of CO2
THE search for potential and interlinking
opportunities from having high levels of carbon
dioxide is going further at Libra.
“Injecting CO2 also helps us with hydrate
inhibition. This may change the limits on
dehydration in reinjection, and opens a window
to other technologies that can increase oil
throughput through the system and reduce
costs,” says Keith Lewis, Libra project applied
technologies manager.
Understanding the phased behaviour of CO2 is
part of a bigger picture for mapping, evaluating
and applying technologies on Libra, within the
framework of those three main drivers. At an
earlier stage of the project, experts from all Libra
partners worked out a list of 168 candidate
technologies, leading to the selection of 19 for
implementation, in a first phase.
Well results and a growing body of data on
reservoir analysis led to a recent review of the
original list to open the door to technologies
whose value may have been missed. The new
workshop led to the admission of another 50 ideas
for evaluation and subsequent shortlisting.
At least two of these supersonic and highefficiency glycol dehydration techniques came
into the frame as a result of work done on the new
parameters for dehydration limits.
COMPOSITE flexible risers have
provided a lively topic for
research in recent years, though
developers have been frustrated
by the fall in oil prices, writes
Gareth Chetwynd.
Conditions in Brazil’s
ultra-deepwater pre-salt, and
the traditional Brazilian
preference for using flexible
riser configurations, presented
a promising launch-pad for
these new technologies.
Libra’s special demands point
squarely in the direction of a
step-change in riser materials
and designs, to enable freehanging catenary riser
configuration.
The main driver for carrying
forward the research on
composite flexible risers for the
longer-term development of
Libra is clearly not about
dealing with greater depths or
pressures. It is about reducing
the demand for buoyancy aids
and thereby reducing the
cost of installation and
underlying aim of removing
buoyancy modules and
delivering the free-hanging
catenary design.
The third part of the puzzle
for a free-hanging catenary
riser on a technically
demanding project such as
Libra is the possible use of new
materials to move away from
buoyancy aids required for the
lazy-wave configuration.
Engineering studies have
scanned solutions that might
allow for a free-hanging
catenary design using
conventional steel tensile and
pressure armours, but the
sheer quality of the Libra
reservoir seems to be
pointing to something
different.
“Libra has exceptional
highly productive wells, so we
are looking at the need for
larger flowlines or production
lines. We are working on
qualifying six-inch WAG lines
and eight-inch production
lines, but this becomes more
challenging to deliver freehanging catenary design using
conventional materials,” Lewis
says.
“This encourages us to look
at alternative material
selection and study composites,
where there is a greater
potential for hanging even the
largest lines in Libra in a
Libra has exceptional highly
productive wells, so we are
looking at the need for larger
flowlines or production lines.
Keith Lewis, Libra project
applied technologies manager
shortening installation time
offshore.
“Put simply, as it is
expensive and time-consuming
to put buoys on to risers, we
want to hang a flexible riser in
free- hanging catenary
configuration. We want to
reduce the cost of installation
and increase the pace of
hooking up in order to
accelerate the ramp-up to
production,” says Libra’s
applied technology leader Keith
Lewis.
The assessment of what is
required for a free-hanging
catenary configuration on Libra
has started with subsea layout
optimisation, aiming at fewer
lines to be installed.
On the Libra pilot floating
production, storage and
offloading project, under
tender, this quickly led to a
conceptual shift to a single line
for WAG injection.
The idea, appealing in its
simplicity, is attributed to the
Petrobras subsea engineering
team, and involves connecting
wells via a seabed loop to
enable hydrate-free changeover
between liquid and gas
injections.
The Libra team has also
found a route to reduce size,
and therefore weight, on some
items, starting with a shift
from six inches to four inches
for service lines, again with the
free-hanging catenary
configuration.
“We are working with all the
major suppliers on this. We
believe that there are
opportunities to reduce the
weight by 30% to 50%, bringing
advances in accelerated ramp-up
and cost reduction,” Lewis says.
The Libra team has not yet
made any choices as to the best
facilitators of this free-hanging
format.
Carbon fibre and glass fibre
technologies are among the
options under scrutiny, and
proposals vary from broad
application to a more targeted
approach, for example focusing
on tensile armour or on the
pressure armour.
The underlying aim remains
that of reducing weights and
dispensing with buoyancy
modules.
“Libra is stimulating
suppliers with its capacity to
provide a business application
for their technologies. We are
very focused on cost
reduction,” Lewis says.
Libra’s potential to serve as a
launch-pad for such innovative
solutions harks back to the
heyday of the pre-salt
discoveries, when the
world’s leading deep-water
technology providers saw
Brazil as the future testing
ground and principle market
gateway.
FOCUS BRAZIL
34
15 July 2016
STRATEGY
Petrobras faces long
haul to rebuild credibility
Brazilian giant has fallen to become
the world’s most indebted oil
company but the fightback has begun
GARETH CHETWYND
Rio de Janeiro
S
TATE-run Petrobras, once
seen as heir apparent to
ExxonMobil’s crown, has
been devastated by the Car
Wash corruption scandal and the
drop in oil prices.
Instead of becoming the world’s
leading oil company, Petrobras is
now the largest debtor, owing
close to $130 billion, and has little
to show for this in terms of net
production growth.
New chief executive Pedro
Parente has made it clear that
tackling debt and rebuilding credibility will be his priorities, promising a disciplined effort to cut
costs, raise cash from the sale of
non-core assets and continue to
strengthen anti-corruption compliance procedures.
Petrobras is not yet free of the
consequences of the Car Wash
corruption scandal, and may be
heading for the heaviest punishment ever meted out by the US
Securities & Exchange commission, plus billions of dollars worth
of compensation payments for
aggrieved international shareholders.
In terms of management and
operations, Petrobras will soon
unveil a new version of its business plan, probably with some
more investment cuts and reduced production targets, but
investors will hope to avoid another crop of write-offs.
Progress is being made in cutting costs, with some debt refinancing as well as the investment
cuts, and reduced operating costs.
“Brazil tends to have high unit
costs and low productivity, yet
Petrobras has been extremely
cost efficient in the pre-salt, with
operating expenses at about $8
per barrel,” says Horacio Cuenca,
head of research for the Americas
with consultancy Wood Mackenzie.
Like its peers, Petrobras has
been seeking opportunities to reduce its offshore fleets, typically
brokering roll-off deals in return
for charter extension and reduced
rates for chosen units.
Suppliers have often gone along
with this, taking a pragmatic
view of available opportunities in
such a difficult market.
Concerns However, the wounded
giant has been going further than
ever before to avoid or delay payments, and there are also some
concerns.
“We have seen Petrobras taking
many more risks on potential
liabilities. One example is by using the Car Wash corruption evidence to drop rigs owned by companies such as Ensco and
Vantage,” says an oil and gas lawyer working in Brazil.
“These allegations are being
based on generic grounds, rather
than specific corruption clauses,
which is risky. Another example
is using Brazilian flag clauses to
exclude blocs of vessels. This
should only be applied in specific
cases to specific vessels, and is
clearly not the intention of the
law. These are risks.”
Petrobras also plans to reduce
its workforce by 12,000, which
will help it save $9.20 billion or 33
billion Brazilian reals by the end
of the decade. Weakened trade unions have so far showed little
stomach for a fight, but this could
change.
There are rising expectations
about a Petrobras asset disposal
programme that was supposed to
raise $15 billion in 2015-16, but has
only pecked at that target so far.
Petrobras is starting to move
more decisively in selling midstream assets in the gas and electricity sector, including a $5 billion
sale of the TAG pipeline system to
Canada’s Brookfield group.
The sale of regasification termi-
nals, with integrated power
generation asseets, has attracted
interest from oil majors such as
ExxonMobil, Total, PetroChina
and Shell.
A plan to raise billions from
prime upstream assets was
launched in the first quarter of
2015, but made little progress due,
observers say, to a failure to push
the process aggressively, and buyers’ concerns about the lack of
clear regulations to deal with unitisation scenarios.
These hindrances appear set to
change. Petrobras is making a
more decisive stance on its desire
to sell, with announcements on
offerings involving onshore and
shallow-water assets.
The new administration is also
promising to issue comprehensive
regulations on unitisation measures next month, potentially unlocking huge Petrobras sales such
as Carcara (BM-S-8), Jupiter (BMS-24) and Pao de Acucar (BM-C-33).
However, some investors say
they have lost some confidence in
the company’s whole risk analysis
capacity.
One applied this sceptical view
Research and development sticks to its cost cutting task
THE work by Petrobras to reduce costs has
been unglamorous at the best of times, but
it has been overshadowed by the glaring
publicity over corruption and financial
problems, writes Gareth Chetwynd.
However, the company’s research and
development division has been making
quiet progress with several projects, the
most visible of which is the reduction of
costs on drilling through the salt canopy
and into the pre-salt carbonates.
In 2010, pre-salt wells were requiring
152 days for drilling and 158 for
completion. By 2016, this had fallen to 51
and 33 days, respectively.
A technology programme that ran
from 2013 to 2015 focused on drilling
management and also product
partnership with suppliers, such as
Baker Hughes’ Kymera drillbit and
Schlumberger’s Stinger.
Another of the 23 projects tested
reduced use for Superduplex steel
resulting in more than $200 million in
capital expenditure savings during tests
allowed lower cost materials on
on 115 pre-salt wells on the Lula and
columns and casings, eased delivery
Buzios fields, despite the presence of
schedules and allowed higher local
carbon dioxide,
content, Fagundes
seawater and high
told an IBP forum on
acidity.
costs and
“Applying the
competitiveness.
latest knowledge on
Fagundes outlined
rock-fluid interaction
23 R&D projects with a
in pre-salt provided
costs profile —
an insight into a
comprising 10 with an
higher-thanoperating expenses
expected pH and
profile and 13 capex
opened a window for
projects — consuming
less expensive
just 276 million
metallurgy,”
Brazilain reais ($83.4
according to Jose
million) in the 2016
Roberto Fagundes,
budget.
Petrobras general
Petrobras’ focus
manager for
areas for cost
geo-engineeing and Partnerships: a 26-inch Baker
reduction were listed
Hughes Kymera drillbit, used
well-engineering
as well construction,
off Brazil
R&D. This single
maintenance and
Photo:
BAKER
HUGHES
breakthrough
abandonment, subsea
material, installation and intervention,
surface processes and efficiencies for
gas and liquids separation, processing
and compression, plus reliable
measuring in the presence of
contaminants, and flow assurance and
optimisation.
“You can see the changing focus in the
R&D programmes. In the 1980s, it was all
about bringing technology to Brazil for
the shallow-water expansion. In the
1990s, the challenge was adapting
technologies for deeper and deeper
waters, but also working with heavier oil
on projects such as Papa Terra and
Membro Siri,” Fagundes said.
“Then the 2006 to 2010 period, as the
pre-salt took centre stage, had a
technical programme set to 2018. This
was a time when wells were easily
costing $800,000 to $1 million a day.
Now for the 2015-2020 period, we see a
new shift from pre-salt investments to
the reduction of costs,” he added.
FOCUS BRAZIL
15 July 2016
35
Block vote: a Petrobras field in the onshore Reconcavo basin
Photo: PETROBRAS
Concession sale can
offer hope to sector
ONSHORE
INITIATIVE
Topaz Project may
provide revitalisation
Fall from grace: Petrobras
was at one point set to
overtake ExxonMobil as the
world’s leading oil company
Photo: BLOOMBERG
PETROBRAS BRAZILIAN OIL PRODUCTION PROFILE
4000
*PRODUCTION 1000 BPD
3000
2000
1000
2024
2025
2021
2022
2023
2019
2020
2018
2015
2014
2016
2017
2011
2012
2013
2010
2007
2009
2008
2005
2004
2006
2001
2002
2003
0
2000
to Tartaruga Verde, under development but put on the block last
year.
The development went with a
capital expediture structure that
assumes the ability to produce
more than 400 million barrels, but
the model falls apart if it turns out
closer to a 200 million barrel
project, a source says.
Results on an extended well
test, where significant amounts of
water were produced, might have
justified a more cautious approach. Investors will be mindful
of the failings of Petrobras’ generic FPSO project, he adds.
These “Opportunity FPSOs”
were installed on the Golfinho and
Jabuti fields, but both suffered a
severe decline in production after
early success. The results were
particularly disappointing on
Jabuti, a fractured albian carbonate that produced a record 44,000
barrels per day from a single well
before massive water inflows.
This nasty surprise wiped about
half of what was expected from
the project in terms of recoverable
reserves. However, there is no denying the quality of many of the
assets that Petrobras is looking to
YEAR
SOURCE: RYSTAD ENERGY
sell. The data room for Carcara
only opened recently and, with
clear unitisation rules and new
owners on the open acreage side
promised soon, oil companies
may jump at the chance to invest
in what could be the best pre-salt
field so far.
“The worst wells on Carcara are
ARTWORK: SIMEN HAKONSEN
like the best ones on Lula, and
there is no carbon dioxide,” says
one source.
“The only question is whether
Petrobras still wants to sell.
The economics will be better
than Libra or Buzios, once
the unitisation rules are in
place.”
THE proposed sale by Petrobras of
more than 100 onshore concessions spread across five states
provides a ray of light for a sector
that has been long-neglected in
Brazil, write Fabio Palmigiani and
Gareth Chetwynd.
The initiative, called the Topaz
Project, offers 98 producing fields
and six exploration blocks in the
mature Reconcavo, Potiguar,
Espirito Santo and Sergipe basins
that are currently producing
about 35,000 barrels per day of
oil.
The amount represents approximately 20% of the company’s
entire onshore production, but
less than 2% of its total domestic
output.
To put this into perspective, a
single high productive well from
the Sapinhoa pre-salt field can
produce 35,000 bpd, and even
more is expected from fields such
as Libra and Carcara.
Petrobras estimates the onshore
areas on offer hold 257 million
barrels of oil equivalent in proven,
probable and possible reserves.
Proposals were received in June,
sources say.
While the fields may not represent much in terms of Petrobras
production, they are a lifeblood for
small producers.
The Brazilian Association for
Independent Oil & Gas Producers
(Abpip), which represents 25
companies that have a combined
production of about 3000 bpd
from 50 onshore fields, believes
the sale may just be the tip of the
iceberg.
“Petrobras has been suggesting
this can be a pilot project, with
many more onshore fields to
be offered at a later date,” says
Abpip executive secretary Anabal
Santos Junior. “This is important
because it can propel new investments at fields that were almost
abandoned by Petrobras.
“This can lead to more hiring,
giving small producers new investment opportunities while
keeping the wheel spinning.”
Although onshore production
represents just a tiny fraction
of Brazil’s hydrocarbons production, there are currently over
8100 onshore wells on stream,
compared to just 770 offshore
basins.
Onshore production in Brazil
has been declining in the past few
years due to lack of investments.
It dropped 26% in the last decade
to 187,400 bpd.
Small producers are also eyeing
the so-called fourth mini-round,
which may see the offering of
up to 13 onshore fields with marginal accumulations. The event is
scheduled for launch at the end of
2016.
In a similar event last year, the
hydrocarbons regulator ANP
awarded nine out of 10 fields, raising 4.25 million reais ($1.3 million)
in signature bonuses.
Such events are sorely needed.
“Onshore activity has all but
ceased. The main region, the
north-east, has one rig drilling, if
that,” says Jose Firmo, head of the
supply chain association Abespetro.
Petrobras followed up the onshore sale with a new offer last
month, consisting of nine mature
fields in shallow waters.
The company launched a competitive sale process for the disposal of the Caioba, Camorim,
Dourado, Guaricema, Tatui, Curima, Espada, Atum and Xareu
fields.
The nine areas produced on
average 13,000 barrels of oil equivalent per day in 2015, representing
just 0.5% of Petrobras’ total output.
The fields have been grouped
into production complexes with
integrated facilities in order to
provide potential new owners
with full operating conditions.
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FOCUS BRAZIL
36
15 July 2016
EXPLORATION
Efficiency: Statoil’s
Peregrino platform in the
Campos basin off Brazil
Photo: STATOIL
Statoil set for the ultra-deep
Norwegian operator preparing to drill
pioneer well in Espirito Santo basin
FABIO PALMIGIANI
and GARETH CHETWYND
Rio de Janeiro
F
Plans: Statoil Brazil
president Paal Eitrheim
Photo: STATOIL
IVE years after production
started at the Peregrino
heavy oil field, Statoil is
preparing to drill its first
well as an operator in the ultradeep waters of the Espirito Santo
basin.
“Our exploration efforts are now
concentrated in the Espirito Santo
basin, where we plan to drill the
first wells in the end of 2017. It
will probably be one of Statoil’s
most active drilling operations
outside Norway,” says
Statoil Brazil president
Paal Eitrheim.
The Norwegian company is presently analysing seismic data and
discussing with partners Petrobras, Total
and Queiroz Galvao
Exploration & Production which prospects to prioritise
and how to optimise
resources.
Upstream understands that Statoil
will soon be tendering for a rig to carry
out a four-well wildcatting programme
in Espirito Santo.
The proposed cam-
paign will feature the drilling of
two wells in Block ES-M-743 and
one well each in blocks ES-M-598
and ES-M-671 from late 2017 to August 2018.
Over the past few years, Statoil
has participated in the drilling of
a number of wells in Espirito
Santo at Petrobras-operated blocks,
making important light oil discoveries, including Indra and Sao
Bernardo.
“Espirito Santo is an emerging
oil basin in Brazil with proven
post-salt and pre-salt plays,
with higher risks not proven
yet. We have learned a lot with
the recent activities conducted by
our partner, and we are ready
to operate in this basin,” adds Eitrheim.
Great opportunity Statoil is also
soon expected to take over operatorship of Block BM-C-33 in the
Campos basin, home of large presalt discoveries such as Pao de Acucar, Gavea and Seat.
A deal for the change of command was signed with Repsol
Sinopec late last year and is pending approval from market regulator ANP.
Eitrheim says: “This is a great
opportunity to deploy Statoil’s
experience as offshore operator
and gas supplier.
“BM-C-33 is a complex carbonate reservoir, so we are now
analysing the data collected
through the drilling and production tests, which had a very positive result.”
BM-C-33 is estimated to hold
more than 700 million barrels of
oil and 3 trillion cubic feet of natural gas in resources in water
depths close to 3000 metres.
“Right now, our focus is to
map the subsurface. The consortium is working to mature our
reservoir understanding to establish the most effective drainage
strategy. Given the water depth,
this is most likely going to be a
subsea development,” explains
Eitrheim.
“Gas treatment is also a key issue. The plan is to use existing
technologies, extended, as required, for the specific water
depth and reservoir conditions.”
Brazil occupies a top spot in
Statoil’s investment profile and,
with long-term growth in mind,
the company is moving forward
with a second phase development
at the Peregrino development in
the Campos basin.
Wood Group was recently
awarded a multi-million dollar
contract to provide detailed engineering and design for a third
wellhead platform to serve this
shallow-water project.
The platform, WHP-C, will
be installed in 120 metres of water
and will provide additional capacity for between 40,000 and
45,000 barrels per day of oil from
Peregrino South-East, adding
250 million barrels of recoverable
reserves, with first oil scheduled
for 2020. “The expectation is to
expand production, increasing
the number of wells from a new
area.
“In all, 22 wells — 15 oil producers and seven water injectors —
should be drilled in phase two,”
says Eitrheim.
Since phase one started production in April 2011, Statoil has been
adopting solutions to standardise
operations in Peregrino to reduce
costs, while delivering significant
improvements in drilling efficiency.
Eitrheim says: “These factors
have largely contributed to the
reduction of investment costs by
around 35%, improving the breakeven from almost $70 per barrel in
2014 to below $45 per barrel in
2016.”
FOCUS BRAZIL
15 July 2016
37
STRATEGIC PLANNING
BG buyout
cements
Shell’s
position
Anglo-Dutch supermajor’s
production goes from
30,000 bpd to 215,000 bpd
FABIO PALMIGIANI
Rio de Janeiro
T
HE acquisition of BG
Group gave Anglo-Dutch
supermajor Shell a major
addition to its portfolio in
Brazil, cementing its position as
the largest international oil company with upstream activities in
the country.
Shell completed the $68.2 billion merger with BG five months
ago, gaining access to numerous
exploration opportunities in the
northern equatorial margin and,
more importantly, a significant
slice of pre-salt riches in the
Santos basin.
Before the deal, Shell was producing about 30,000 barrels per
day of oil in Brazil from its Parque
das Conchas and Bijupira-Salema
fields.
“Thanks to the merger, we are
now producing 215,000 bpd, and
by 2020, Brazil will represent
more than half of Shell’s deepwater production and about 25% of
the company’s total hydrocarbons
output,” said Shell Brazil president
Andre Araujo, addressing a recent
industry forum.
Working interests Shell acquired
working interests ranging from 25%
to 30% at key pre-salt developments
operated by Petrobras, including
Lula and Sapinhoa, already on
stream via eight floating production, storage and offloading vessels
— with three more units soon to be
deployed — and Lapa, Berbigao and
Sururu due to enter production later
this decade.
Araujo said: “The acquisition is
transformational for Shell in
Brazil, given the presence that BG
has built in the country over the
past few years.
“Shell has been in Brazil for 103
years, and we continue to reinvent ourselves while looking for
new opportunities.”
Shell recently unveiled a new
medium-term plan that calls for
capital expenditure of between $25
billion and $30 billion per year to
2020, while announcing its intention to raise $30 billion from divestments in the next two years.
“Today, Shell has no plans to sell
assets in Brazil... any portfolio revision is business as usual,”
Araujo added.
Since the acquisition, Shell has
been investing to simplify its
operations in Brazil to make it
more efficient, despite the higher
complexity of its new assets.
“We are making some adjustments in the company. The low oil
price environment is forcing us to
act,” Araujo said.
“The whole industry made a
mistake, which was to get used to
high oil prices, but Shell is making a great effort to avoid any
kind of euphoria when prices recover.
“The company is now focused
and well-structured to work with
low oil prices for a prolonged period of time.”
Araujo said Shell will continue
to bet in Brazil, and remains
bullish when it comes to its
pre-salt and post-salt perspectives.
In the Santos basin, the company is working alongside Petrobras, Total, China National Petroleum Corporation and China
National Offshore Oil Corporation
in the development of the giant
Libra pre-salt field.
First oil is scheduled for early
2017 via a series of extended well
tests via the Pioneiro de Libra
FPSO.
Commercial output is due for
2020, with a larger floater to be
contracted. Shell holds a 20% interest at Libra.
Shell has been facing a series of
hurdles to develop another promising pre-salt find, Gato do Mato,
New opportunities: Shell Brazil president Andre Araujo
discovered on Block BM-S-54 back
in 2010, but the company has been
locked in unitisation talks with
the federal government since
early 2014 .
Araujo said: “Work at Gato do
Mato is halted because we don’t
have a clear legislation regarding
unitisation agreements in the
pre-salt.
“We are used to carrying out
unitisation at other countries, but
the different types of contracts in
Brazil cause a certain complication.
“It is important to solve this
matter quickly, but in the right
way, with clear rules that help the
industry, so we don’t shoot ourselves in the foot.”
Araujo criticised the new law
that establishes further taxation
for exploration and production
activities in Rio de Janeiro
state.
“We all know that Rio de Janei-
Photo: Shell
ro is facing a huge financial crisis,
but in order for the state to attract
investments, the rules must be
stable and clear, especially when
it comes to the taxation,” he said.
“Surprises like this new tax
have a direct impact in a company’s decision to move forward
with a project.
“The risk of more taxes generates insecurity in the oil sector.
You don’t kill the goose that laid
the golden egg.”
FOCUS BRAZIL
38
15 July 2016
DOMESTIC COMPANIES
Independent
producers
working hard
to survive in
tough times
Players such as Ouro Preto, QGEP
and Barra Energia focused on
capital discipline as low oil prices
continue to take a toll in Brazil
FABIO PALMIGIANI
Rio de Janeiro
T
HE prolonged low oil price
scenario in the international market has
made it more difficult for
Brazilian independent producers
to withstand the current downturn.
However, the new generation of
domestic players has learned from
the mistakes of its predecessors,
carving up a new image for the
sector that may help Brazil attract
new investments.
After companies such as OGX
and HRT made big promises that
were followed by poor results and
large losses, banks and financing
agents have become cautious
about the risks of investing in
Brazil.
The recent drop in crude prices,
the Operation Car Wash corrup-
tion scandal and political uncertainties have only worsened the
situation. But while it has become
challenging to tap capital markets
to fund projects, Brazilian independents are working hard to preserve cash and survive the present
cycle.
“It has become harder to be an
independent oil company in Brazil
because our image has been taint-
ed by some recent failures. I think
we need to prove ourselves twice
to show we have a solid business.
This is a burden we will have to
carry for a little longer,” says Ouro
Preto founder and chief executive
Rodolfo Landim.
Companies such as Ouro Preto,
Queiroz Galvao Exploration & Production (QGEP) and Barra Energia
have responded by seeking to
adopt strict internal controls and
transparent governance policies
and are aiming to apply rigorous
standards to carry out investments without the need to raise
much debt.
“Capital discipline is very important... There has to be a constant quest for efficiency, cost reduction, results optimisation and
caution to allocate cash at projects
QGEP looks to Sergipe-Alagoas as Atlanta output looms
QUEIROZ Galvao Exploration &
Production (QGEP) has been diversifying
its offshore portfolio in Brazil, increasing
its exposure to new frontier plays while
preparing to begin output from the
Atlanta heavy oil field in 2017, writes Fabio
Palmigiani.
The company recently decided to bet
on the hydrocarbons potential of the
Sergipe-Alagoas basin where it last year
won deep-water blocks SEAL-M-351 and
SEAL-M-428 in a licensing round.
The permits are located near some of
the biggest light oil discoveries made by
Petrobras in the area in recent years,
including Moita Bonita, Muriu, Barra,
Cumbe, Farfan and Poco Verde, which are
estimated to hold more than 1 billion
barrels of recoverable reserves. “We see
Sergipe-Alagoas as the main driver for
our exploration efforts over the next few
years,” says QGEP chief executive
Lincoln Guardado.
“I would say that, excluding the Santos
basin pre-salt province, Sergipe-Alagoas
is probably one of the most attractive
plays in Brazil.”
Guardado adds that QGEP is looking to
farm down its 100% stakes at the two
blocks, but keep operatorship.
“We see enormous upside potential for
Sergipe-Alagoas. We liked all the 10
blocks offered in the 13th licensing
round, but we choose to invest in the two
we considered the best,” says Guardado.
QGEP has until 2020 to shoot new
seismic in Sergipe-Alagoas.
On the more immediate horizon, QGEP
is focusing on beginning output at
Atlanta. First oil is eyed for early next
year via the Petrojarl I floating
production, storage and offloading
vessel, which should arrive in Brazil by
December.
The low oil price scenario pushed the
company to re-negotiate contracts with
all of its suppliers in a bid to reduce
operational costs at its heavy oil
development, originally pegged at
$480,000 per day, not including the
payment of royalties.
“We are seeking to optmise operational
costs at Atlanta, and we hope to achieve
costs that are compatible with the final
sale price of our oil,” Guardado says.
QGEP signed an agreement to sell
production from Atlanta to Anglo-Dutch
supermajor Shell, which is still
marketing the viscous 14 degrees API
crude though Guardado believes the oil
will be sold for a discount of between $18
and $20 to Brent prices.
Production at Atlanta is expected to
reach 20,000 barrels per day of oil from
two wells linked to the Petrojarl I.
QGEP is still considering the
possibility to spud a third well at
Atlanta, which would increase output to
30,000 bpd throughout the three-year
period of the early production system.
“A third well would not increase our
operational costs by a wide margin, but
it would boost our estimated revenue by
a third. We expect to make a final
investment decision on drilling a third
well next year,” explains Guardado.
FOCUS BRAZIL
15 July 2016
39
Ouro Preto thinks big
Expectations: Ouro Preto
founder and chief executive
Rodolfo Landim
Photo: OURO PRETO
with higher return on investment,” says Barra Energia chief
executive Renato Bertani.
According to Landim, not only
has the market become more
risk-averse, but the costs of
securing new funding have increased.
“There will always be money
available to fund good projects,
but depending on market conditions, this money can be either
cheap or expensive. The problem
I see is the expectation that banks
have toward oil prices in the spot
market, which is raising financing costs for projects being developed right now that have a
lifespan of 20 years or more,” says
Landim.
Guarantees QGEP chief execu-
tive Lincoln Guardado says even
companies not looking to access
capital markets are being affected
by the negative outlook.
“We are feeling the effects on
our warranty costs. We have to
renew a series of guarantees every
year, such as the minimum exploration programme, and this has
become more expensive,” says
Guardado.
QGEP has about 1.3 billion reais
($403.7 million) in cash reserves,
enough to fund its operations for
the next two or three years, and is
due to start production at the Atlanta oilfield in early 2017.
However, the company has not
discarded tapping capital markets
in the future to fund other
projects or even Atlanta.
“The way in which we will do it
has not been decided yet. We have
already discussed with some
banks the possibility of offering
our reserves as guarantee, as this
would carry smaller costs,” says
Guardado.
Meanwhile, Landim highlights
the importance of funding
exploration projects with full
equity, saying Ouro Preto will
not leverage itself or raise debt to
pay for seismic surveys and
drilling.
“We have hundreds of millions
of reais in cash, and we are obviously preserving it. I see no problem in raising some debt to finance production development
projects, but not exploration,”
says Landim.
“We need to raise money to pay
for our operational costs, but this
can be accomplished in several
ways, including the partial sale of
some of our assets... but this has
to take place at the right time,
when market conditions improve.”
Barra is also benefiting from a
cautious investment strategy.
The company, through its minority stake in the QGEP-operated
Atlanta field, will begin to generate cash next year and is looking
to expand beyond the Santos basin, where it also holds a 10% interest in Block BM-S-8 — home of
the Carcara pre-salt discovery.
Portfolio The company won the
backing of private equity outfits
First Reserve and Riverstone,
which injected $500 million each,
and another $200 million came
from institutional investors.
According to Bertani, Barra Energia has used $700 million so far,
and retains about $500 million in
its coffers.
“As a deep-water player, we are
looking at opportunities, particularly in the pre-salt in the Campos
and Espirito Santo basins... However, we are only investing in new
areas if it makes sense to our portfolio. We are not putting at risk
our investment capacity,” says
Bertani.
OURO Preto may be a tiny company compared to the likes of
state-controlled Petrobras, but the
independent has big ambitions to
expand and a surprising appetite
to invest in Brazil’s most productive play — the Santos basin
pre-salt province, writes Fabio
Palmigiani.
Founded in 2010 by Rodolfo
Landim, an executive with long
experience in the oil and gas sector, Ouro Preto emerged at a time
when the Brazilian industry was
going through turmoil as the government revamped the country’s
regulatory framework after large
discoveries in the pre-salt.
“It was a complicated period because we created a team and were
ready to participate in new licensing rounds, but we were not expecting it would take so long for
the government to sort the new
legislation, so we waited for three
more years until everything was
finally done,” says Landim, who is
also chief executive of Ouro Preto.
With the resumption of oil
rounds in 2013, Ouro Preto attracted investors and was able to secure acreage in new frontier plays
such as the offshore Barreirinhas
basin and the onshore Parnaiba
basin.
In 2014, Ouro Preto took another
step to expand by acquiring the
Brazilian upstream assets of US
independent El Paso for an undisclosed sum.
“That was a very important deal
for us because we acquired some
producing assets like Camarupim
and Pescada-Arabaiana, began
generating cash flow and got upside on a couple of production development projects,” says Landim.
Ouro Preto is now targeting a
giant leap forward, with plans to
operate in the Santos basin presalt province.
The company is counting on the
Brazilian Congress to approve a
bill ending Petrobras’ obligation
to operate all future pre-salt fields
with a minimum 30% stake.
“My strategy for the pre-salt is
to set up a vehicle to attract resources from potential investors
that want to invest solely in the
pre-salt with people who know
the Brazilian market. I’m going to
try to come up with investments
directed to a specific opportunity,
and I think this can be very
attractive,” explains Landim.
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FOCUS BRAZIL
40
Changed
days for
graduates
TALENTED graduate engineers
could, until very recently, look
forward to the brightest of futures
in the Brazilian oil industry,
writes Fabio Palmigiani.
However, the sector has been
one of the hardest hit by the fallout from the Operation Car Wash
corruption probe, due not only to
the savage downturn in business
but also to the damage that has
been done to credibility and financing opportunities.
“The sudden halt of the large
construction groups in Brazil
caused a major problem for engineering companies, generating a
wave of defaults and leading several companies to file for bankruptcy protection, while others,
in some extreme cases, ceased to
exist,” says Nelson Romano, president of the Brazilian Association
of Industrial Engineering (Abemi).
“It all happened so fast there
was no time for smaller companies, or even foreign players, to fill
the spaces left by these large conglomerates. That led to a gigantic
drop in demand for engineering
services, and the consequence of
that is an alarming reduction of
jobs for industrial engineers.”
Romano recalls that Abemi
once had included more than
500,000 industrial engineers employed in Brazil in all sectors, not
just oil and gas, but that number
is down to about 200,000.
“It appears there can be some
improvement in civil construction in the short term, but we are
not that optimistic when it comes
to oil and gas,” Romano says.
“Today, the unemployment level among Brazilian engineers is
alarming. That is very sad and
worrisome, because if it takes too
long for the sector to get on its
feet, we can lose these skills and
knowledge forever.”
Romano, who also heads
France’s Doris Engineering in Brazil, says his company is taking action to ensure it will remain competitive in a time of low demand.
“We are keeping our senior staff
and developing new technologies
to improve competitiveness... including ways to standardise
methods and reduce costs, so that
the final project is even more
efficient,” Romano explains.
Doris is also adopting measures
to preserve its economic strength,
having reduced its staff in Brazil
by half, to about 125 employees,
and investing in technology for
the future.
Overview: Nelson Romano,
president of the Brazilian
Association of Industrial
Engineering
Photo: DORIS
15 July 2016
SUBSEA
Engineering sector looks
to build for the future
The scale of the Brazilian market and the preference for subsea
completion and flexible risers has led to boundaries being expanded,
but now the downturn is focusing minds on lower-cost solutions
GARETH CHETWYND
Rio de Janeiro
T
HIRTY years of developing
equipment
for
the deepest water conditions in the world have
placed Brazil, and its suppliers, in
the vanguard of applying new
technologies and developing
solutions, and also in terms of
capacity.
The pre-salt, with its added
element of corrosive fluids,
spurred a new wave of investments from companies such as
GE, Technip, Aker Solutions and
FMC Technologies.
The scale of the Brazilian market, and Petrobras’ preference for
subsea completion and flexible
risers, has given the sector an
important differential.
Important foundation Taking
the ultra-deepwater sector, industry associations estimate that
between 25% and 30% of all global
subsea equipment was being produced for Brazil before the 2014
downturn, a scale seen as an important foundation for building
up an internationally competitive industry.
“When the oil price was at $100
per barrel, our challenge was all
about installing enough capacity
to prevent overheating, as well as
qualifying equipment for the presalt conditions. This has changed
with the downturn,” says Jose
Mauro Ferreira, subseaa director
with Abespetro, the Brazilian
azilian industry body representing
ing supply
chain companies.
In 2014, the subsea sector was
expecting orders worth
th $30 bil20 period,
lion in the 2015 to 2020
but investment has slumped
tput has
since then and output
dropped to less than half
alf what it
was in 2014.
The situation is not as critical
as in the surface side industries,
ndustries,
which have seen a severe
re collapse
in engineering and shipyard
activity, but even the more competitive subsea sectorr is facing
ut the deserious concerns about
bilitating long-term effects
ects of the
downturn.
“Most engineering talent has
been saved from thee cuts so
far, but this is changing.
ng. The industry has come a long
ng way in
building up engineering
ing skills
and productive facilities,
es, so it is
important to think carefully
about what we can do too preserve
what has been built up,”
,” says Ferreira.
“The focus has shifted
ted to the
development of a new generation
of lower-cost solutions
ns for the
supply and installation
n of subsea
equipment.”
There have been suggestions
ggestions
on how Petrobras might try a
more collaborative approach to
studying costs, especially in the
research and development stage.
This led to calls for Brazilian
policymakers to reset the country’s R&D levy with this aim in
mind, helping an important industry through the current crisis
in the process.
“Allowing the R&D incentive to
be applied to the sector’s technology investments could be a potential solution in a time of
scarce orders, and these investments could be aligned squarely
with this focus on reducing
costs,” Ferreira says.
Warning However, while the
current open debate on oil sector
policies indicates a growing appreciation of the challenges, policymakers are being warned that
there is a need for urgency in taking action.
“Next year will be critical. If
nothing improves the suppliers
will have no option but to cut
back on the flesh of their engineering capacity,” Ferreira says.
Most
engineering
talent has
been saved
from the cuts
so far, but
this is
changing... It
is important
to think
carefully
about what
we can do to
preserve
what has
been built up.
Mauro Ferreira,
subsea director,
Abespetro
Search the archive:
Brazil subsea
Aker rising to the challenge to cut costs
AKER Solutions was one of the many
companies surfing the wave of Petrobras
subsea sector orders in recent years, writes
Fabio Palmigiani.
The company opened its new subsea
plant in Parana state in April and the
facility will specialise in manufacturing
subsea trees for the pre-salt sector.
The plant, Aker’s biggest, employs
between 1200 and 1300 workers and
doubled the company’s Brazilian
capacity. Aker signed a frame agreement
with Petrobras in March 2013 covering 60
well-sets of vertical subsea trees, subsea
control systems, tools and spares for
delivery by 2018.
“We have a respectable backlog of
subsea trees from our frame agreement
that gives us some breathing room, but
we continue to look for more
opportunities,” says Ricardo Serafim, Aker
Brazil’s vice president for strategy and
marketing.
Aker also has a contract worth more than
$300 million with Petrobras to supply eight
manifolds that alternately inject water and
gas to increase oil recovery, and an
agreement to provide maintenance and
other services for subsea equipment.
However, Serafim admits the future is
uncertain. “If truth be told, the subsea
industry here in Brazil was cushioned. We
had a client that embraced us all and an oil
price above $100 per barrel that justified
any investment. The important thing was
to have the equipment available,” he says.
Describing the market downturn as a
strong lesson for the sector, Serafim says
Aker has responded by investing in
standardisation and operational efficiency.
“We have a cost-cut programme in place
and our goal is to achieve a global reduction
of 30%,” he says.
The development of new technologies is
one of the pillars at Aker, according to
Serafim, and the company is investing in
the next generation of subsea control
systems.
The company is also looking at
opportunities outside the subsea sector to
expand its footprint in Brazil.
“We are looking at asset integrity
management with great interest,
especially because key companies in
Brazil that used to carry out this sort
of work have been banned from
signing new contracts with Petrobras in
the wake of the Operation Car Wash
investigation,” Serafim says.
“We are considering entering
this niche market in Brazil...
We have the tools to operate.
We only need to get a
full understanding of
the operator’s
requirements,” he adds.
15 July 2016
FOCUS BRAZIL
41
Capacity: Abespetro
subsea director
Mauro Ferreira says
next year will be
critical for the
subsea engineering
sector in Brazil
Photo: FMC
Quieter times: two Brazilian sector PSLVs
Photo: ODEBRECHT OIL & GAS
New wave of cuts to
hit Petrobras PLSVs
BRAZIL’S Petrobras relies on its
advanced fleet of flexible
pipelaying support vessels
(PLSV) to ensure the ramp-up of
pre-salt production, but even
this once vibrant sector is
feeling the effects of the
downturn, writes Fabio
Palmigiani.
A few years ago, it appeared
crystal clear that Petrobras would
require two dozen PLSVs to tackle
the enormous amount of work in
the pre-salt — with as many as 26
new production units planned to
enter operations in Brazil from
2016 to 2020 — but now the
state-controlled company may no
longer need half of its ordered
vessels.
Since it started to re-assess
the size of its massive PLSV fleet
a little more than a year ago,
Petrobras has made some
progress in cutting costs and
reducing its fleet to a number
more compatible to its existing
needs. The company currently
has 16 PLSVs in operation, with
seven newbuild units due for
delivery by the fourth quarter of
2017.
Industry sources estimate
Petrobras’ demand for PLSVs
over the next couple of years
will be in the range of 10 to 12
vessels, indicating that the oil
giant needs to make deeper cuts
to deal with the projected
oversupply.
With that in mind, Petrobras
is in a fresh round of contract
renegotiations with its main
suppliers to streamline its fleet
and secure lower dayrates, as
some of the larger vessels hired
from Sapura Navegacao, Subsea
7 and the Technip-DOF Subsea
consortium were chartered at
dayrates close to $300,000.
Even though they represent
just 4% of Petrobras’ offshore
support vessel fleet, the PLSVs are
highly specialised units with a
considerable order backlog, as
most vessels currently on hire
and expected to enter operations
are chartered for periods of five
and eight years.
The downturn is also affecting
the offshore rig market.
Petrobras, which at one point had
close to 70 rigs in operation, has
since reduced its offshore fleet to
half that number.
“We will have a drilling fleet
that will be completely adjusted
to our current demand by the
end of the year,” Petrobras
exploration and production
director Solange Guedes said
recently.
Demand drops anchor
DEMAND for offshore support
vessels in Brazil has been falling
since Petrobras hit the brakes
on contracting more units two
years ago, as it looked to
reorganise its finances and
operations, writes Fabio
Palmigiani.
For 15 consecutive years, from
the opening of the country’s oil
and gas industry to foreign
operators in 1999 until 2014, the
Brazilian OSV fleet had more
than tripled to a record 500
units.
According to the Brazilian
Association of Offshore Support
Companies, the contracting
spree finally ended in 2015,
when Petrobras started to react
to the low oil price
environment.
The number of OSVs in Brazil
fell to 445 vessels in 2015 and is
now about 416 units.
However, offshore brokers
predict more than 70 other
contracts in Brazil will be cut by
December.
“While some of these
contracts may be renewed for
the optional period, we expect
that most of these vessels will
indeed be released,” says a
source.
Petrobras currently has
ongoing tenders for platform
supply vessels (PSV), oil spill
response vessels (OSRV),
remotely operated vehicle
support vessels and shallow
diving support vessels, but
sources believe these new
charters will not be enough to
compensate the number of units
to be dismissed this year.
When it comes to new
demand from other operators in
Brazil, there is not much on the
immediate horizon.
France’s Total is tendering for
three PSVs and one OSRV to
operate in the Foz do Amazonas
basin, but only for 2017, when
the company will begin drilling
in the area.
Meanwhile, Karoon Gas
recently delayed an appraisal
programme at its Echidna
discovery to the first quarter of
2017, for which it is thought
likely to seek six OSVs.
FOCUS BRAZIL
42
15 July 2016
MATURE FIELDS
Petrobras rallies
to try to stem
Campos slump
The sparkle of the pre-salt promise distracted oil giant
from its core area, so now it is struggling to play catch up
FABIO PALMIGIANI
Rio de Janiero
T
HE revitalisation of
mature fields off Brazil
has proven to be as important as the development of new pre-salt reserves,
as Petrobras needs to make
urgent progress to slow down
the fall in production from the
prolific Campos basin.
In May 2010, when Petrobras was
just starting operations from the
Lula pre-salt field via an extended
well test, the company was producing 1.686 million barrels per day of
oil from the Campos basin, which
represented more than 80% of the
company’s total domestic output.
Fast forward to May 2016, and
oil production in the Campos basin has dropped to 1.416 million
bpd, and now accounts for slightly
less than two thirds of the company’s output in Brazil.
“Petrobras committed a strategic
mistake. It practically abandoned
the Campos basin and did not carry
out the necessary investments in
maintenance, focusing instead on
the development of the pre-salt
province, where production costs
are higher,” says Adriano Pires,
director of the Brazilian Centre for
Infrastructure Studies, a Rio de
Janeiro energy think-tank.
“That happened at a time when
the government was saying the
pre-salt would be the salvation of
Brazil. Political motivations got in
the way of technical decisions,
and now production in Campos is
dropping at a rate that will be very
difficult to revert.”
Marlim Sul, Marlim Leste, Roncador and Albacora — where production has been dropping at alarming rates in recent years, have
been targeted by the ANP as the
centre for Petrobras’ investments
for enhancing production.
Marlim is expected to anchor
most of the investments in the
medium term. The field, which is
currently producing 182,000 bpd
from seven ageing platforms, will
receive two new floating production, storage and offloading vessels in the next decade.
The FPSOs will probably be
chartered units, and will use flexible riser systems due to environmental concerns about coral reefs
that did not exist in the heyday of
the Campos basin expansion.
“The current Petrobras business
plan had a first unit eyed for 2019,
but the situation at Petrobras deteriorated since that plan was announced, so I don’t think anyone
still expects that to happen so
soon,” says a source with a floater
company.
In late May, the ANP agreed to
extend the lifespan of Marlim for
Improvements In an effort to
salvage production in the Campos
basin and improve performance in
mature fields, Petrobras launched
the Proef operational efficiency programme in 2012.
The company has been working
hard ever since to improve operational efficiency at most of its
older production systems in the
Campos basin, successfully lowering operating costs, but the decline has not been stemmed.
Market regulator ANP has become more proactive in recent
years in forcing Petrobras to act to
maximise the recovery of hydrocarbons in the Campos basin.
Five large fields — Marlim,
an additional 27 years, meaning
the concession contract will now
expire in 2052 instead of 2025, giv-
CAMPOS AND SANTOS BASIN FIELDS
ES
CACHALOTE
BRAZIL
BALEIA ANA
JUBARTE
BALEIA AZUL
MG
BALEIA
FRANCA
CAXAREU
PIRAMBU
ALBACORA
ALBACORA
LESTE
RJ
MARLIM
MARLIM LESTE
MARLIM SUL
SP
CARATINGA/CARIMBE
ing Petrobras the possibility to
produce an extra 900 million barrels of oil equivalent from the
area.
The ANP has also asked
Petrobras to install one new production unit each at Roncador and
Marlim Sul, but details on when
this might happen are not very
clear.
“Petrobras has been reducing its
investments over the past couple
of years, and I suspect the current
management will reduce it further in 2016,” says Pires.
“So this means even less money
for the Campos basin.”
One option for Petrobras is to
include more of these areas in its
divestment plan.
Financial difficulties Some in-
URUGUA
TAMBUATA
NORTE DE SURURU BM-S-51
MEXILHAO
ATLANTA
OLIVIA
2-ANP-2A-RJS
ITAPU
BUZIOS
NORTE DE BERBIGAO
SURURU
PR
MERLUZA
BM-S-51
SAGITARIO
CARCARA
SUL DE
BERBIGAO
AREA DE
IRACEMA
LULA
1-SPA-52A LAPA
SAPINHOA
C-M-539
TAMBAU
CAMPOS BASIN
LIBRA
ATAPU
OESTE DE ATAPU
SUL DE SURURU
SEPIA LESTE
SEPIA
JUPITER
1-RJS-652A
SUL DE
LULA
SUL DE
SAPINHOA
SC
100M
SANTOS BASIN
1000M
100M
2000M
3000M
3000M
SOURCE: PETROBRAS
ARTWORK: SIMEN HAKONSEN
100KM
dustry sources believe that
Petrobras’ financial difficulties,
coupled with the current low
oil price scenario, may dissuade
the ANP from enforcing the contracting of these two units for
Roncador and Marlim Sul any
time soon.
Other investments to revitalise
production at mature fields in the
Campos basin should include the
drilling of more wells to test
untapped reservoirs, shooting
new seismic, optimisation of subsea equipment and actions to
expand water injection and boost
water treatment capacity at
topsides.
Petrobras is yet to come to the
market with tenders for such
work.
FOCUS BRAZIL
Optimism stays afloat
for Brazilian offshore
Photo: PETROBRAS
BIG POTENTIAL
STILL EXISTS
But ‘it will take time to
turn things around’
PRE-SALT PRODUCTION FORECAST
-200
2.000
-300
1.500
-400
1.000
-500
500
-600
0
-700
2050
-100
2.500
2046
0
3.000
2042
100
3.500
2030
200
4.000
2026
300
4.500
2022
5.000
DIFFERENCE (103 BPD)
ESTIMATE OF THE AVERAGE ANUAL OIL PRODUCTION FROM THE BRAZILIAN
PRE-SALT PRODUCTION SHARING CONTRACTS & UNITISATIONS
2018
switched to China’s Cosco yard, allowing the
project to leap-frog the P-74.
The attempt to convert the P-74 entirely at
Inhauma has ended in failure — the
Odebrecht-led Enseada consortium seems to be
in no financial condition to finish the hull that
has been there since 2012.
The other two hulls for the P-75 and P-77 were
converted in China and integration will take
place at QGI’s Honorio Bicalho yard in Brazil.
Petrobras is also tendering for two large
FPSOs for the Libra and Sepia pre-salt fields,
with commercial production earmarked for
2020.
Bids were re-submitted recently, but one
source suggested that the whole exercise,
carried out with excruciatingly detailed local
content requirements, might ultimately turn out
to be an argument in favour of local content
waivers.
There has been some talk of a fifth floater for
Buzios and a new unit to revitalise output in the
Marlim field, but there is little optimism about a
new wave of Petrobras orders.
Libra will get a dynamically positioned
FPSO for extended well tests in the second
quarter of 2017, and is expected to start its
huge ramp up with the pilot project in 2020,
but even this project may struggle to stay on
track without a sustained recovery in oil
prices.
In the private sector, Queiroz Galvao E&P is
planning to start up an extended well test on the
Atlanta field in early 2017, using the Petrojarl I
FPSO, and Karoon Gas is looking to charter a
mid-sized unit to produce from its Echidna
discovery in 2019.
2014
THERE should be enough new production on
the way to keep overall Brazilian output
rising modestly into the next decade, despite
the accelerating decline on the Campos
basin, write Gareth Chetwynd and Fabio
Palmigiani.
The last in a crop of big chartered units will be
delivered over the next 12 months, comprising
two units by Modec International, on the
pre-salt Lapa and the post-salt Tartaruga Verde
fields.
Floating production, storage and
offloading vessels ordered from local
shipyards have been travelling a more
tortuous road.
The P-66 FPSO, the first of a scheduled eight
“replicants” was supposed to start production
on Lula South in 2015, but first oil was put back
to 2017.
Integration at the BrasFels shipyard has been
held up by the wait for gas compression units,
following a re-bid by Petrobras.
Five other replica floaters are progressing,
helped by the transfer of much of the hull
construction integration work to China,
and all six should enter production before the
end of the decade. Two more replicant FPSOs,
P-72 and P-73, have been pushed back
indefinitely.
Petrobras is facing a bigger headache with four
FPSOs designed to produce oil at the Buzios field,
under the pre-salt transfer of rights.
The hull for the P-76 FPSO is expected to leave
the Inhauma yard in Rio de Janeiro for Techint’s
integration yard in Parana yard soon, after more
than a year of delays.
Most conversion work on the P-76 was
OIL FLOW RATE (103 BPD)
Sector set to see overall output
increase as latest units ramp up
DESPITE all the uncertainty,
there is still optimism about the
future of Brazil’s offshore sector,
write Gareth Chetwynd and Fabio
Palmigiani.
“Brazil has not been fulfilling
its potential due to regulatory
questions that create barriers, but
it is important to appreciate the
size of the prize. Brazil has
geology that is very favourable,”
says Antonio Guimaraes, E&P
executive secretary of the
Brazilian Petroleum Institute
(IBP).
There has been excessive
hype about the wonders of the
pre-salt — the Lula field has
suffered pressure loss in some
areas and has started to yield to
the oil-water contact — but
experienced heads still wax
lyrical about this extraordinary
play.
“The pre-salt assets are just
magnificent. The wells may be
expensive, but there are few areas
around the globe that are so
productive,” says Horacio Cuenca,
head of Americas upstream
research with Wood Mackenzie.
The main problem with this
play and some others is
sometimes the sheer abundance
of hydrocarbons. On Carcara, for
example, sources say that the
reservoir drive is so powerful
that there is little scope for
re-injecting the bountiful gas,
with talk of the first two
floating production, storage and
offloading vessels requiring
compression capacity for 20
million cubic metres per day.
“Re-injecting, as on Lula,
improves recovery and reduces
the size of the task when you
have to find a market onshore,
so on Carcara you potentially
have a big problem monetising
that gas, but this is the kind of
‘problem’ that oil companies
like solving,” says Cuenca.
In the days when Jose Sergio
Gabrielli was Petrobras chief
executive, the company was
investing to chase a 2020
production target of 4.2 million
barrels.
The current plan has cut this
target to 2.7 million bpd, but
analysts expect this to come
down further when the updated
business plan is unveiled.
“I think it will be pulled back
to 2.2 million bpd,” says Adriano
Pires, director of the Brazilian
Centre for Infrastructure
Studies.
Petrobras will continue to
play the leading part in
developing the pre-salt fields,
but there is a virtual consensus
now that Brazil is poised to
enter a new period of private
sector investment.
Edson Nakagawa, a director of
Pre-Sal Petroleo, says: “Some
might argue that it is better to
wait for oil prices and Petrobras
to recover before pressing
ahead, but we have seen see
how this can lead to missed
opportunities.”
Pires says: “It will take time
to turn things around. If you
imagine it takes a minimum of
five years from licensing to new
production, the impacts of a
unitisation pre-salt round in
2017 would only be felt in 2023,
at best.”
Others were more bullish
about the role that the oil giant
will continue to play.
“Building an open sector with
the partipation of many more
players is crucial, but there can
be no more immediate impact
than getting Petrobras back on
its feet and with ambitions to
invest,” says Jose Firmo, head of
the supply chain association
Abespetro.
The oil industry is in agreement
about the formula for bringing the
Brazilian oil sector back to life,
starting with a unitisation
licensing round and regulatory
improvements but extending to a
concerted effort to reduce costs
and increase competitiveness in
Brazil.
“The real challenge is
whether Brazil will have a
government that governs in the
interests of the oil sector and
not in the interests of
Petrobras,” says Pires.
2038
On call: a Petrobras
worker at the
Marlim field
43
2034
15 July 2016
YEAR
PETROBRAS BUSINESS PLANS
2014-2018
2015-2019
DIFFERENCE
PRODUCTION CURVE ESTIMATE
BASED ON CURRENT INFORMATION FROM FIELDS UNDER
EVALUATION, DEVELOPMENT AND PRODUCTION INCLUDING
AREAS UNDER CONCESSION, TRANSFER OF RIGHTS AND
PRODUCTION SHARING REGIMES
SOURCE: PPSA
ARTWORK: SIMEN HAKONSEN
FOCUS BRAZIL
44
15 July 2016
INFRASTRUCTURE
Acu superport
proves to be a
smart manoeuvre
Facility conceived by Eike Batista’s EBX group in good
position to serve Brazil’s most important offshore region
GARETH CHETWYND
Rio de Janiero
T
HE collapse of Eike Batista’s EBX empire showed
what can go wrong when
an integrated group of
companies pursues leveraged
growth during a commodities
boom.
Some lofty promises — such as
OGX’s million barrel per day of oil
production and OSX’s assembly
line of floating production units
— turned to dust in the downturn.
However, other components in
the EBX group were built on a
sturdier business logic, and one or
two of them are marching along
impressively under new investors.
The Acu industrial port, located
about 240 kilometres north of Rio
de Janeiro, is the most successful
of these.
The “superport” was conceived
by Batista as a hub for exporting
iron ore from Minas Gerais but
expanded to host oil and gas industries serving Brazil’s most
important offshore region.
The original business plan included a giant shipyard, a steel
mill and even Brazil’s answer to
Tesla, the world’s leading manufacturer of electric cars.
Batista sold part of his mining
business to Anglo American and
opened up a new iron ore export
route through Ferroport, Acu’s
first port terminal, retaining a
50% stake.
As dredging of the three kilometre-long T2 port canal advanced, industrialists saw the
port as a cleverly planned response to Brazil’s infrastructure
bottleneck, promising to bring
new levels of efficiency to offshore
logistics.
Multinational companies began
setting up manufacturing and operations bases along the canal,
including new flexible pipe plants
for Technip and NOV for the challenging pre-salt conditions.
With the demise of EBX, US investment giant EIG Energy Partners acquired a controlling interest in LLX, paying $562 million to
complete the half-built port, a
large part of which was in 2013.
The result, Prumo Logistica, is
now 74% controlled by EIG. Dubai’s
Mubadala Development Company
and Brazil’s Itau bank are also key
stakeholders, converting debt to
equity for stakes of 6.7% and 6.2%,
respectively.
This second phase of investment reached a milestone with
the inauguration of three privately-run terminals in June.
Expansion The T-Oil terminal,
fruit of a partnership between
Prumo and Germany’s Oiltanking,
allows the transfer of up to 1.2 million barrels per day of oil from shuttle tankers to long-haul vessels.
Oiltanking acquired its 20%
stake in 2015 for $200 million, becoming the T-Oil operator.
A contract, for handling up to
200,000 bpd of crude was signed
with BG, inherited by Shell.
This output comes from stakes
in Petrobras-operated pre-salt
fields such as Lula and Sapinhoa.
Andre Araujo, head of Shell’s
Brazilian unit, has said the
company is considering an expansion of its operations at Acu,
where storage depots and blending facilities form part of the plan.
Transhipment operations are
expected to start from T-Oil in
August. Its jetties can handle six
shipments simultaneously, with
sheltered conditions for manoeuvring offering an attractive alternative to a Uruguayan port facility
used by BG Group so far.
“The fact that our terminal is
sheltered will greatly reduce delays for our customers. There is
also far greater control of the operation if there is ever any case of
any spillage,” says Prumo’s chief
executive Jose Magela.
Prumo has also started operations
at Acu’s new maritime fuels terminal, operated under a joint venture
with UK supermajor BP, and has
started some bulk shipments from
its own multi-cargo terminal.
In addition, Offshore service
vessel provider Edison Chouest is
investing nearly 1 billion reais in
a new 15-berth offshore base at
Acu, due to open in 2017.
Chouest won a contract to serve
Petrobras from six berths, two of
which are in operation so far, but
is banking on much greater demand in Brazil, building more
than double that capacity.
Chevron is reportedly poised to
follow Petrobras by signing up for
use of more of the new Chouest
berths.
Other companies setting up
their operational bases at Acu include power and propulsion provider Wartsila and mooring specialist Intermoor.
There is space for many more.
Acu’s port and inner channel
boasts more than 25 kilometres
of docks, piers and breakwaters,
including 13 kilometres of quays
on Terminal 2. Its 300-metre wide
inner channel, has 6.5 kilometres
of quays with a draft ranging
from 10 metres in the upper sec-
tion to 14.5 metres in the lower
section.
These investments support Prumo’s view that Acu will become
the main offshore service hub for
the Campos and Santos basins.
The Roncador field is about 130
kilometres away from Acu, while
Lula, in the Santos basin is further, about 450 kilometres distance from the base.
“Bottlenecking has been an ever-present problem for Brazil.
Logistics has so far been very re-
stricted to Macae, with just three
inefficient Petrobras berths,” says
Magela. “By offering excellent logistics and significant de-bottlenecking, you can greatly increase
the number of vessels per day,
compensating for the moderate
increase in distance compared
with Macae.”
A total of 13 billion Brazilian
reais ($3.2 billion) has been invested in Acu port so far, including 6.4
billion reais by Prumo, 3.7 billion
for Ferroport and 1 billion reais on
Prumo Logistica committed to delivering on promises and
PRUMO Logistica’s style is very
different from Eike Batista’s
aggressively marketed vision for
EBX, writes Gareth Chetwynd.
“In the past, there was a failure
to deliver on promises. Under the
new controller we have kept a low
profile until basic infrastructure
was ready and the contracts are
ready to start delivering revenue
with proven efficiency,” says
Prumo’s head of investor relations
Luiz Felipe Jansen de Mello.
With port operations now ramping up, revenue streams — limited to about 100 million reais last
year — are beginning to gather
momentum.
Natural gas is emerging as the
focus of a third expansion phase
at Acu port, scheduled for completion in 2019.
Prumo has obtained environmental permits for the construction of a liquefied natural gas regasification terminal able to
handle 14 million cubic metres per
day, and for 3.5 gigawatts of
thermal power generation capacity.
A power transmission line has
already been installed on the site,
and Prumo plans to build a 40-kilometre pipeline from the port to
the big regional gas pipeline system, Gasene.
Sources suggest that Shell and
Engie, formerly GDF Suez, are
among the potential investors
to have expressed a firm interest
in the proposed gas-to-power
projects.
Prumo’s chief executive Jose
Magela, who has a strong gas
background from his time with
BG Group in Bolivia, does not comment on interest from one company or another but stresses that
Prumo is willing to adapt to investors needs and preferences
“We want to build a hub that
will provide the leading alternative for bringing gas to shore and
connecting to a grid,” Magela
says.
“We are talking to a number of
potential partners, including
some who are active in specific
sections of the gas and gas-topower businesses and others who
can span the whole chain. We
think we can boost efficiency
through partnership, but we can
adapt to all kinds of customer
preferences.”
Prumo is also confident that
Acu will become a winning contender to host a landfall for a
fourth trunk pipeline from the
gas-rich pre-salt fields.
“We think Acu is the obvious
choice for a new pipeline. A hub
on this scale could foster a new
wave of industrial growth, using
gas as a source of power or a direct
input,” Magela adds.
Acu port’s industrial area occupies 90 square kilometres, with a
vast expanse of land available for
such development in the future.
Plans for a huge drydock and shipyard may have been dropped but
the site of OSX’s proposed integration quay could still provide an
option for one of the contenders
hoping to supply Petrobras with
its next floaters on projects such
as Libra and Sepia.
The port at Acu will open its
own 500-metre quay for offshore
vessels in 2017, while Prumo is
also working on plans for another
dry dock for vessel repairs.
Planning applications have also
been submitted for a new offshore
base for helicopters. The base
would be 100% private, but would
look to Petrobras as its biggest potential customer.
The scale of the ongoing
FOCUS BRAZIL
15 July 2016
Hub: the Acu port terminal in
Rio de Janeiro state, Brazil
Photo: PRUMO LOGISTICA
Natural gas under-developed in
Brazil despite output doubling
BRAZIL’S domestic production of
natural gas has doubled in the past
decade, and pre-salt associated gas
is starting to play a more important
role in the country’s energy matrix,
but the market is still under-developed, write Fabio Palmigiani and
Gareth Chetwynd.
Natural gas output in Brazil
increased 10.1% in 2015 from 2014
to 96.4 million cubic metres per
day.
Nearly half of that amount or
used for re-injection and consumption at production units,
with some flaring. To supply national demand, Brazil still relies
on its gas imports from Bolivia
and its three liquefied natural gas
regasification terminals.
Brazil’s energy research company EPE predicts natural gas production from the pre-salt layer
will supply 170 MMcmd to the domestic market by 2024.
“Pre-salt gas has a few challenges, especially the infrastructure costs to bring it to shore,”
says Paulo Carvalho, production
development superintendent at
state-owned pre-salt entity PPSA.
Petrobras is currently building
a third pipeline, Route 3, dedicated exclusively for the area. Once
operational, Petrobras will be able
to export 54 MMcmd from pre-salt
fields.
“The production of pre-salt associated gas will require transport
solutions and the challenges to
deal with the amount of gas to be
produced will be enormous, so we
need mechanisms to get this
done,” says Shell Brazil president
Andre Araujo.
Natural gas demand in Brazil
fell 0.7% in 2015 to 98.63 MMcmd
and is expected to drop again in
2016, as the country heads for a
second straight year of sharp economic recession.
“Over the past 12 months, natural gas consumption in Brazil declined 25%, resulting in an oversupply of gas,” says Queiroz Galvao
the two flexible pipe plants. Another 750 million reais will be invested this year, mostly in a
dredging operation that will deepen the approach canal to the T1
terminal from 20 metres to 25 metres, permitting VLCC tankers to
use the facility.
The most recent financing
tapped by Prumo was a $350 million credit line through the US
Overseas Private Investment Corporation, earmarked for the current dredging operation.
d efficiency
investment
programme can be construed as a vote of confidence in the Brazilan
offshore sector. “We
welcome the recent
statements that suggest the Brazilian government will take a
more flexible view of
how Petrobras and
Brazilian industry
gets involved in developing the presalt,” Magela says.
Acu already provides an example of
what can be done by
the private sector,
Magela believes.
Grid:
Prumo
Logistica
chief
executive
Jose
Magela
Photo:
PRUMO
45
RELIANCE ON
IMPORTS
Pre-salt presents
challenges
Exploration & Production chief
executive Lincoln Guardado.
EPE director Ricardo Gorini says:
“Despite the projected decline for
2016, gas demand is expected to rise
in the medium-term. We just don’t
know if it will grow at the same rate
as gas supply.”
The 20-year contract for shipments through the 3150-kilometre
Brazil-Bolivia gas pipeline is due
to expire in 2019, and given the
uncertainties faced by Petrobras,
there is growing speculation
about whether the deal will be renewed or not. The current take-orpay agreement between Petobras
and YPFB covers shipments of up
to 30 MMcmd.
“The natural gas market lacks its
own effectively regulated system
to encourage growth,” says Antonio Guimaraes, executive secretary for the Brazilian Petroleum
Institute (IBP).
“The problem is that gas is treated as if it were oil, and this hurts
the economics. Getting access to
the infrastructure has also been a
persistent problem. This is changing now, and it is a good time to
rethink the whole transport model, hopefully creating a transparent system geared to providing
access. A dedicated pipeline operator, as exists in the electricity sector, might be one option.”
Decio Oddone, Prumo Logistica
oil and gas projects director, says:
“Nobody knows if Brazil will still
require the Bolivian gas in the
next decade. The market conditions are definitely not the same
as when this agreement was first
signed.”
He argues the situation at Petrobras may be a key factor when the
time comes to renew the contract.
“Petrobras has also been signaling its intention to exit the gas
market. If that happens, Bolivia
will have to negotiate volumes directly with Brazilian companies.
It will be much more complex
without Petrobras as the main
player,” Oddone says.
Last year, Petrobras announced
the sale of a 49% stake in its natural gas distribution subsidiary
Gaspetro to Japanese group Mitsui
for 1.93 billion reais ($598.7 million).
The company is also selling its
pipeline network, two LNG terminals, associated gas-fired power
projects and its liquefied petroleum gas distribution company Liquigas.
Livia Amorim, researcher at
think tank Getulio Vargas Foundation, highlights that Petrobras’s retreat from the gas market is not the
only factor, because diplomatic relations between two nations may also
be taken into consideration.
Northon Torrez Vargas, consultant and former technical director
at Bolivia’s national hydrocarbons
agency, says the two countries
will conduct a new round of negotiations this month to talk about
the details of a potential new gas
contract.
Infrastructure: IBP E&P
executive secretary Antonio
Guimaraes
Photo: IBP
PGN building on its knowledge
A PIONEER in Brazil in implementing a gas-to-wire project to
monetise natural gas reserves
from the new frontier Parnaiba
basin, Brazilian independent
Parnaiba Gas Natural (PGN) is investing to build on this knowledge and achieve growth, writes
Fabio Palmigiani.
PGN invested around 800 million reais ($245.4 million) in 2015
to boost infrastructure, including
90 kilometres of pipelines, and
drill 30 wells in Parnaiba, using
four land rigs, despite the downturn elsewhere in Brazil’s onshore
sector.
The company hit a target, set 18
months ago, to invest 1 billion
reais to increase its production
capacity by 70%, reaching 8.4 million cubic metres per day of gas by
July.
PGN is currently producing
about 4.2 MMcmd from four fields
— Gaviao Real, Gaviao Vermelho,
Gaviao Branco and Gaviao Branco
Sudeste. The company has another four fields declared commercial
and eight development plans under analysis.
Monetising gas in a region with
no infrastructure was achieved
through a partnership with Bra-
zilian power utility Eneva. Eneva,
which is now in the process of acquiring PGN for 1.15 billion reais,
built a gas-fired thermoelectric
plant near the discoveries, and
then used transmission lines to
provide energy to the country.
“The pipeline infrastructure
from our fields to our gas-treatment plant, and from there to the
power plant, is so small that I like
to call it reservoir-to-wire, because that’s pretty much it,” PGN
business development and partnerships manager Tatiana May
said at the Gas Summit Latin
America forum.
“Our model is vital to ensure the
successful monetisation of gas,
and Brazil has great potential for
the production of onshore gas on
little-explored plays.”
Eneva has installed power-generation capacity for 2.2 Gigawatts
in the region, which represents
about 7% of the country’s entire
thermoelectric capacity.
PGN remains confident that the
gas-prone Parnaiba basin can generate more profit, and last year the
company acquired six new exploration blocks in the region during
the country’s 13th licensing
round, increasing its concession
area to roughly 25,000 square kilometres.
Work on these blocks is expected to begin in 2017 with the acquisition of new seismic surveys to
map potential drilling locations.
May said: “We had an exploration success of 50% in the blocks
we acquired in the ninth round,
with significant volumes of gas
discovered.
“To develop the sector we need
to continue shooting seismic,
drilling more wells, certifying reserves and investing in technology to reduce costs associated to
exploration, so that gas production costs remain at competitive
levels.”
According to May, recent studies showed that non-associated
gas in Brazil, like that in Parnaiba,
has a production cost of $1.1 per
million British thermal units,
compared to a range of between $5
and $7 per million Btu of the presalt associated gas.
The potential of the Parnaiba
basin has attracted new players in
recent years. Brazilian independent Ouro Preto has seven blocks
in the region and is looking to
spud its first exploration well next
year.
FOCUS BRAZIL
46
15 July 2016
REGULATION
Industry adapting to
life after Car Wash
The sweep of Brazil’s most intense corruption probe has moved
deeper into the political sphere and further revelations are likely, but
shell-shocked oil and gas sector now trying to find a way forward
GARETH CHETWYND
and FABIO PALMIGIANI
Rio de Janeiro
B
RAZIL’S Car Wash probe
has not formally concluded, but the focus has
switched away from
Petrobras and into the political
arena, where the dramatic denouement may be yet to come.
In the corporate field, Petrobras
has been busy installing the most
rigorous compliance system
possible.
Some say that this process,
overshadowed by Department of
Justice and Securities & Exchance
Commission suits in the US, has
been pursued so rigorously that it
has left little space for contracting
activity to continue and has distracted from the urgent need to
conclude divestment transactions.
Brazilian engineering and construction companies embroiled in
the corruption investigations are
trying to adapt to the new postCar Wash world, and some are
struggling for their very survival.
A long list of traditional companies and industrial groups that
were suspended from the Petrobras vendor list have entered into
bankruptcy protection proceeedings, such as Chapter 11 of the US
bankruptcy code.
The list includes traditional
Brazilian groups such as OAS,
Schahin, Mendes Junior, Galvao
Engenharia, GDK, Alusa Engenharia, Fidens, Iesa, Tome Engenharia, TKK Engenharia and
Jaragua Equipamentos. Other
suspended companies, such as
Odebrecht, Queiroz Galvao, UTC
and Engevix, have so far managed
to avoid a judicially supervised
process, but relations with creditors has been fraught with difficulties.
Seeking an escape route from
industry-wide paralysis, some
companies have sought settlements or “leniency agreements”
to cap their liabilities, following
the tenets of a law enacted in 2013.
Bureaucratic For a company to
be fully cleared of wrongdoing, it
needs to sign leniency agreements
with federal prosecutors, the
country’s anti-trust agency Cade
and the Ministry of Transparency
& Compliance, formerly known as
Brazil’s comptroller general’s
office (CGU). There are some additional uncertainties involving the
federal tax agency and the federal
audit tribunal.
“Unlike the US, where the Department of Justice handles the
cases, in Brazil the process is extremely complicated, long and
bureaucratic, discouraging some
companies from taking this path,”
says Bernardo Weaver, a partner
in the Rio de Janeiro office of law
firm Tauil & Chequer Advogados.
So far, five companies have
signed leniency deals jointly with
federal prosecutors and Cade.
Andrade Gutierrez, Camargo
Correa and Toyo Setal agreed to
co-operate with investigators and
pay fines worth 1 billion reais
($303 million), 800 million reais
and 15 million reais, respectively.
At least two other leniency
deals are being kept under wraps
because prosecutors opted not to
disclose their terms.
Upstream undersands that one
of these involves Brazilian engineering group Carioca Engenharia, the company that renovated
part of the Inhauma shipyard,
which is expected to pay 100 million reais in fines.
There is some co-ordination
with agreements brokered by the
tiating a leniency agreement in
relation to bribery allegations preceeding the Car Wash scandal,
have apparently suffered delays
with the change over.
The company is currently bidding on the Libra and Sepia
projects, but needs the leniency
agreement in place and legally
recognised before new contracts
can be signed in the Brazilian
public sector, Upstream was
told.
Other mooted agreements left
in limbo involve companies such
as UTC Engenharia and the
Car Wash was important for
Brazil, but you can’t just destroy
the companies that provide the
infrastructure for this country.
Sergio Bacci, president of Abenav
former CGU, but there has also
been overlap.
In one case, that of Toyo Setal,
the CGU was demanding restitution payments of 720 million
reais, exceeding the company’s
annual revenue.
The new ministry is yet to put a
signature to a leniency deal, and
its very creation may have delayed
agreements that were under negotiation by the CGU. Some anticorruption regulations also need
to be fleshed out.
SBM Offshore’s attempt at nego-
construction division of the Queiroz Galvao group.
There is also the question of the
relation between the settlement
and investigations and prosecutions of individuals involved in
the Car Wash scheme, often resulting in plea-bargain deals, with
sworn depositions.
“The leniency agreement is a
useful tool, but the overlap on
things like the anti-trust code and
criminal proceedings sometimes
leaves participants worried about
how much they are protected
against processes outside the
agreement and also on the extent
to which agreements amount to
an admission of guilt, “ said Edmo
Colaghi, compliance officer with
GE’s Brazilian unit, speaking at a
recent industry seminar.
As information mounts, and the
premiums available for collaboration diminish, Brazilian authorities have been resorting to unconventional methods to gain more
leverage.
In the case of Marcelo Odebrecht, former president of Odebrecht, and Leo Pinheiro, head of
OAS, another bid construction
company chief in jail for over a
year, prosecutors were said to
have been brokering a kind of contest between the two men and
their respective companies, offering leniency to the party able to
supply most information.
Depositions such as these two
have the power to unseat the
highest-ranking officials, but
there is growing concern about
the financial stress being faced by
the big construction groups.
“Car Wash was important for
Brazil, but you can’t just destroy
the companies that provide the
infrastructure for this country.
You can’t make the blue collar
workers pay the ultimate price. It
is time to start thinking about rebuilding and not just dismantling
industry,” says Sergio Bacci, president of Abenav, the national shipbuilding association.
FOCUS BRAZIL
15 July 2016
Spotlight: Marcelo Odebrecht
(centre), once the head of Latin
America’s largest engineering
and construction company
Odebrecht, being escorted by
federal police officers
Photo: REUTERS/SCANPIX
47
Leniency agreements have key
role to play on the road back
THE leniency agreement and a
very comprehensive corporate
governance and compliance programme in Brazil are seen as the
route back to respectability for
companies embroiled in the Car
Wash corruption inquiry, or anxious to stay clear of such problems, writes Gareth Chetwynd.
This comes in spite of the frustrations and uncertainty surrounding Brazil’s overlapping institutional arrangements.
One of the earliest and most
comprehensive leniency agreements was signed by Camargo
Correa, in September 2015.
“Our financial exposure from
Car Wash became fully visible, so
we have the advantage of certainty,” a source with the company
tells Upstream.
“Also, only 25% of our orders are
for public works, compared with
60% for Odebrecht or 85% for
Queiroz Galvao, so business activity is moving along.”
Encouraged by the new corporate governance regime at Petrobras, and tough financing conditions, Brazilian contractors have
been investing heavily in compliance procedures, including training and mechanisms to deter and
prevent corruption.
“The first thing the banks ask
you is ‘how is your compliance
programme?’. It is important to go
to Petrobras, to the (National Development Bank) and the CGU, or
its successor, to study their pro-
CORPORATE
GOVERNANCE
Uncertainties still
casting a shadow
grammes and see how you can fit
your own compliance into the system at all levels,” said Flavio
Rimoli, executive vice president
for governance and compliance
with Camargo Correa, speaking at
a recent DMM compliance
forum in Sao Paulo.
“You can have no new business
without passing through ethics
committees and the whole compliance process, verifying also
that it has proper analysis of risk
both when you sign a proposal
and when you sign the contract,”
he said.
The UTC construction group
put its own compliance programme in place about eight
months after the details of the
Car Wash scandal emerged in
November 2014.
With top executives jailed, new
leaders were appointed across the
group, and an experienced chief
compliance officer named and
given technical support from a
trained and funded multi-disciplinary team. An ethics code and
ethics committee were put in
Promoted and Organized by:
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Petrogal Brasil
Galp | Sinopec
place and a whistle-blowing channel contracted externally.
More than 13,000 people have
received training at 616 events,
according to Jose Guimaraes,
compliance officer at the UTC Participacoes unit.
“We see monitoring and compliance culture spreading around
the pillars of the programme,
with the stress on visibility. We
reached 100% implementation two
months ago, although we aspire to
continuous improvement,” he
says.
The Car Wash revolution has been
so powerful in Brazil that there is
little room for talk of budgetary limits, even in times of crisis.
“We have never had so much
difficulty getting Petrobras to sign
up for business, but if there is one
area where they have been willing
to spend, it is on compliance,” says
one Rio de Janeiro-based lawyer.
“The value of training is appreciated as never before, because
there is acute awareness of reputational value... Brazil wants to
learn from this,” says Guimaraes.
The new culture is spreading. At
Petrobras, about 60,000 workers are
said to have completed a basic
course raising awareness of the
compliance implications of dealing
with customers or accepting gifts.
“Sometimes you have to work
with your own partners and stimulate them to set up an ethics
committee and other procedures
of their own,” Rimoli said.