Tuesday, September 20, 2011

Brazil: The world’s next major oil producer?

In 2007, a consortium led by Petrobras, Brazil’s national oil company, discovered the Tupi field in the Santos Basin off the coast of Brazil. The field, now known as a “pre-salt deposit,” was found 18,000 feet below the ocean surface underneath a 6,000-foot layer of salt. Tupi and other pre-salt finds hold the potential to make Brazil one of the world’s most prolific oil exporters. Although Brazil already produces 2.1 million barrels per day of crude oil and lease condensate, it did not become a net exporter until 2009. In the next decade, Brazil aspires to more than double its conventional production and significantly expand its oil exports.

Read more at : Brazil Energy Report

According to Oil & Gas Journal, Brazil’s proven oil reserves are estimated currently at 12.9 billion barrels, not including major presalt fields. Estimates of Brazil’s pre-salt reserves have varied widely. In 2008, Haroldo Lima, Director General of Brazil’s National Petroleum Agency, stated that the country’s pre-salt deposits could contain between 50 and 70 billion barrels of oil. More recently, in January 2011, Petrobras announced its assessment that the Tupi and Iracema fields (renamed Lula and Cernambi) contain 6.5 billion and 1.8 billion barrels of commercially recoverable oil, respectively . It will be some time before the Brazil’s pre-salt reserves are fully quantified, but knowledge of exact reserve levels is not critical to assessing the viability of Brazil’s proposal to expand their production in the coming years.

In its 2010-2014 business plan, Petrobras outlined production targets of 3.0 million barrels per day in 2014 and 4.0 million barrels per day in 2020. In the plan, more than one-quarter of the company’s Brazilian production in 2020 comes from pre-salt fields.

In the IEO2011 Reference case, Brazil’s conventional liquids production increases to 3.3 million barrels per day in 2020 and 4.9 million barrels per day in 2035; and its total liquids supply, including unconventional liquids such as ethanol and biodiesel, increases to 6.6 million barrels per day in 2035. The projections reflect a somewhat more conservative view of the pace of expansion, given the financial, regulatory, and operational challenges that Petrobras will need to overcome in order to realize the full potential of Brazil’s pre-salt resources.

Financing the development of pre-salt oil fields will be expensive. One analyst has suggested that Brazil’s current undertaking could be “the largest private sector investment program in the history of mankind [53].” The Petrobras business plan includes investments of $224 billion between 2010 and 2014, more than half of which will be spent on exploration and production activities. To facilitate the plan, the company raised $67 billion in the world’s largest initial public offering ever in September 2010. However, most of the capital came in the form of a reserves-for-shares swap with the Brazilian government [54]. Petrobras will need to fund the majority of its investments through operating cash flow. The increase in the government’s equity points to an expansion of state involvement in the petroleum sector.

The government’s capitalization of Petrobras was part of a set of laws passed in 2010 to regulate development of Brazil’s pre-salt reserves. The legislation also established a new federal agency (Petrosal) to administer pre-salt production and set up a fund to align the expenditure of pre-salt revenues with Brazil’s development goals. Most importantly in terms of Brazil’s investment climate, the law changed the country’s concession-based system for exploration to a production-sharing agreement (PSA) system.

Under the PSA system, Petrobras will hold at least a 30-percent share of each project and be the operator . Some analysts fear that the new system will reduce foreign interest in investing in Brazil and overburden Petrobras. The re-launch of Brazil’s latest bid round for oil exploration blocks is scheduled for 2011, pending settlement of a dispute over the distribution of pre-salt royalties among Brazilian states. The results of the bid round will highlight the full impact of the legislative changes on the development of pre-salt resources. Development of pre-salt deposits represents a daunting task, with considerable technological uncertainty about how the geologic formations will behave once production has begun. In addition, the reserves are located more than 150 miles off Brazil’s coast, making them difficult for pipelines and people to reach. Petrobras plans to purchase 45 floating production, storage, and offloading (FPSO) vessels to extract the pre-salt oil; however, only 75 such rigs currently exist in the world .

In addition to massive investments in physical capital, the planned expansion of Brazil’s production will require additional human capital. Petrobras plans to train 243,000 technical professionals to work in the petroleum industry in the coming decade and to invest hundreds of millions of dollars in oil-related research and development centers at Brazilian universities . Given the scale of the task, the predominant role played by Petrobras, and local-content requirements, operational challenges introduce a nontrivial amount of uncertainty into projections of Brazil’s liquids production. Brazil’s pre-salt discoveries represent some of the most promising oil finds, and its role as an oil producer will grow in the coming decades. The extent of that expansion

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