Offshore Brazil’s pre-salt story: Exploration & tech investments in 2012

Tales of discovery from Brazil’s offshore pre-salt (or pré-sal) territories were ten-a-penny in 2011, and considering the 109 oil discoveries made worldwide in the first nine months of the annum (of which 19 were in Brazil and 17 in pre-salt itself) it’s obvious why the play has column inches bursting at the seams.

Pre-salt yarns have done the rounds in the oil and gas community for some time—lest we forget the decades of exploration already carried out and the proverbial jackpot reserves totalling up to eight billion barrels of oil equivalent discovered by Petroleo Brasileiro S.A (“Petrobras”) in the Tupi pre-salt field in 2006—but now that ‘Brazil Offshore’ has transitioned to noun-status in industry vernacular, it looks like the leading role played by the pre-salt is just beginning.

Ensuing interest in these sorts of plays in Brazil doesn’t mean that the growth story is going to be an easy read (even if it does hold as much as 50 billion barrels of oil) and if its rigorously forecast boom in interest and activity is going to happen, a gamut of challenges will have to be overcome.

Firstly, there are issues related to commercial recovery of the hydrocarbons buried at capacious levels below the ocean floor under thick layers of salt. Waters are super-deep at around 2,000-plus meters, and carbonate reservoirs are no more forgiving at around 5,000-plus meters over great expanses. Secondly, at around twice as expensive to extract compared to conventional oil recovery today, these great depths demand technological investments and firm focus on exploration. Thirdly, given their depth and distance from shore, logistical headaches look likely. And fourthly, there is the issue of installed capacity meeting potential output—just a smattering of the hurdles up ahead.

Opting in with Petrobras

One group seeking to tackle development gripes head on is Petrobras, whose pre-salt success to date is pioneered by the Tupi accumulation in the Santos Basin where hydrocarbon volumes are estimated at five to eight billion barrels of oil equivalent (boe). The company also has the Guará well in the Santos Basin which reportedly houses between 1.1 to 2 billion barrels of light oil and natural gas, specifically, at gravity of approximately 30o API.

These are remarkable volumes quotes by any estimation, and according to the company results from wells drilled and tested to date, ‘there is no doubt regarding the technical and economic feasibility of the commercial development of the accumulations that were found’.

A brief history

Initial drilling commenced in the Santos basin in 2004, fuelled in large part by the belief held by technical members of the Petrobras team that the deeper pre-salt layer of the Santos basin would house major oil reservoirs.

The first 2006 discovery took place when the team drilled down to 7,600 meters from the surface of the water and both a giant gas accumulation and reservoirs of oil condensate were found. Within the year the major Tupi discovery was made—the largest hydrocarbon find globally since the Kazakh Kashagan discovery in 2000—this time at just over 5,000 meters from the surface of the water.

In May 2009 extended well testing at Tupi revealed it to be capable of producing around 30 barrels of oil per day (bpd).

In June 2009, first oil was processed from the Santos basin pre-salt at the Capuava Refinery (Recap), in São Paulo. Various other wells have since been drilled, continually delivering oil finds and proving that the potential highlighted in 2004 was spot on.

In headlines

Tupi may have since undergone a name change to the Lula field, but it remains to be the company’s first major pre-salt play.

Figures released for 2011 in December revealed that Lula played a crucial part in Petrobras reaching record annual output levels across its operations. Averages for oil (2,084,262 barrels/day) natural gas excluding liquefied gas (60,664,000 cubic meters) and oil and gas (2,465,828 barrels of oil equivalent) were posted, and the company stated that the production hike in December was due to new wells onstream— P-57 (Jubarte) and P-56 (Marlim Sul) in the Campos Basin—and higher output from FPSO Angra dos Reis in the Lula field.

On January 24, news broke that Petrobras plans for a fourth production well to come onstream in March, boosting crude output from Lula by 95,000 barrels a day. Furthermore, the company plans to increase the volumes of natural gas piped from Lula to the shore to 2.8 million cubic meters a day this year.

Ahead of this announcement, on January 19, came reports that the company had signed a deal to construct its first floating storage and offloading unit (or FSO) to tackle the distance between Lula and Brazil’s Atlantic Ocean coast. Plans to convert an existing tanker hull 80 kilometres offshore from the Campos basin company base into an FSO—adding to the existing pipeline and due for completion in around 18 months—reflect the group’s continuing interest in developing the pre-salt in the years to come and addressing the cost, logistics and installed capacity challenges in place today.

Aligning with government plans

Brazil’s President Dilma Rousseff and various heads from the cabinet have been vocal in their support of plans to develop the pre-salt into a highly attractive stream of revenue for both semi-state run Petrobras and the country. Rousseff—formerly energy secretary for the southern state of Rio Grande do Sul and later mines and energy minister—is not only taking a supportive political stance; she is knowledgeable about them and has been actively involved in developing Brazil’s offshore for many years.

Aside from years spent crafting models for granting offshore concessions following the Tupi discovery, the running issue from a legislative perspective has been how best to arrange and distribute royalties payments from future value generated by pre-salt players; a conundrum that was highlighted on January 17 when ministerial sources suggested that the fields are likely to go to auction this year (not in 2013 as previously expected) while a resolution to royalties agreements remains unknown. Various analysts continue to question whether disagreements over the division of royalties between federal and state government sources will slow up the development process.

Latter day multinational milestones

November 16, 2010 – Oil and gas technology, information services and project management giant Schlumberger inaugurated the first multinational research centre wholly dedicated to Brazilian exploration and production. The Brazil Research and Geoengineering Center was designed to foster the use of geosciences and engineering to improve activity in the deepwater reservoirs and pre-salt of offshore Brazil.

December 1, 2010 – The Brazilian Congress approved and submitted to President Lula some new legislation proposing a production-sharing model for pre-salt and offshore oil and gas reserves. It looked to move on from two pieces of legislation enacted earlier that year, by focusing on (i) granting mechanics, (ii) operatorship, (iii) consortium participation, (iv)consortium decision-making, (v) bidding criteria, and (vi) offtake entitlement.

May 12, 2011 - The Brazilian National Agency for Petroleum, Natural Gas and Biofuels (ANP) grants British Petroleum (BP) approvals to purchase 10 exploration and production blocks in Brazil from Devon Energy, including interests in eight licence blocks in the Campos basin (where blocks include the pre-salt Wahoo discovery) and Camamu-Almada basin.

September 26, 2011 – The second international Pre-salt Brazil conference is staged in Rio de Janeiro.

November 22, 2011 – The ANP suspends all Chevron drilling until “safe conditions” are re-established following the oil spill off the coast of Rio de Janeiro. The state-level reaction to Chevron’s incident is widely viewed as a precautionary measure to safeguard plans for future pre-salt and wider hydrocarbon development.

December 29, 2011 – Having become the second biggest integrated oil company in Brail in 2001 and picked up 16 exploration licenses in the Campos, Espiritu Santos and Santos basins in 2005, oil and gas major Respol Sinopec (JV) (25 per cent) and project partners BG Group (30 per cent) and Petrobras (45 per cent and operator) announced that they have submitted a Declaration of Commerciality to ANP for the Guará area in the pre-salt area of Santos Basin.

January 17, 2012 – Ministerial sources suggest that Brazil will take pre-salt plays to auction within the year, earlier than previously predicted.

January 25, 2012 – Repsol Sinopec announced that it had found oil traces in the deepest area of offshore Brazil under exploration. Oil was found in 2.789 meters of water at the BM-C-33 exploration block in the Campos Basin, ANP stated online.

In 2012 - Anadarko Petroleum plans to sell its Brazilian business ventures spanning one million gross acres, valued at over US$3 billion. This portfolio includes some pre-salt areas, and is said to have caught the eye of multinational major players including Total, of France (already active in Brazil), Norway’s Statoil (already active in Brazil) and Maersk, of Denmark (active in Brazil since 2007).