January 31, 2019
Eighty years after the first oil discovery, Brazil is moving to double its production and become the main area of exploration outside the United States and the Organization of the Petroleum Exporting Countries. The pre-salt layer, discovered in 2006, already accounts for more than half of production and could make the country raise its production from 2.6 million barrels a day to more than 6 million barrels a day by 2030 and become a relevant exporter of the commodity. The time factor in decision making is essential at a time when the world is experiencing an energy transition in which fossil fuels tend to lose relative share in the coming decades.
“The price of oil at $ 70 a barrel with the most favorable international scenario, the resumption of growth in the United States and the technological evolution, which made the cost of pre-salt oil extraction fall from US $ 30 to US $ 7, create a fantastic rate of return, which attracts a lot of attention and opens up very positive perspectives “, affirms the president of the Brazilian Association of Infrastructure and Basic Industries (Abdib), Venilton Tadini. The pre-salt, responsible for 55% of the national production, should represent about 80% in 2027, with strong participation of the Santos Basin, according to projection of the Energy Research Company (EPE).
“Pre-salt is the most promising oil-producing province in the world, but because of the large investments required, there are few companies that have the technical and financial capacity to operate in this region,” says the director general of the National Oil, Gas Natural and Biofuels (ANP), Décio Oddone. “The major global oil companies have already participated in pre-salt area auctions, especially since Petrobras’s mandatory one-off operation in 2016.”
Ten years after the beginning of its production, the Brazilian pre-salt reached the mark of 1.5 million barrels of oil per day – more than Oman, in the Middle East, being one of the fastest learning curves in the history of industry in the world. “Our focus should be on the assets in which we are the natural owners, those in which we are able to extract the maximum possible return,” says Petrobras President Roberto Castello Branco.
Production is expected to pass through a turning point this year, with a projected 13% increase in Petrobras production, which would reach 2.3 million barrels per day. After delays, three platforms P-76 (Búzios), P-67 (Lula Norte) and P-68 (Berbigão), all in the pre-salt, should start operating in 2019. Each of them has the capacity to produce 150 thousand barrels per day of oil – the equivalent of 7% of the average production of the company in the country.
This year, an important decision to be made by the new government refers to the Rights of Transfer assignment and the model of surplus auction to be adopted. The Rights of Transfer assignment was signed with Petrobras in 2010 in the company’s capitalization process, and granted it the right to explore five billion barrels of oil without bidding. In this type of exploration, Petrobras will bear all operating costs and assume all risks. The revision in the contract, pending since then, may imply losses or gains for the company or the Union, depending on adjustments in variables, such as oil reserves and barrel prices.
The indications are that Petrobras is a creditor. The state-owned company could receive anything between $ 4 billion and $ 14 billion. The volumes are estimated to be much larger than the five billion barrels that Petrobras was entitled to in 2010, prompting the government to seek an auction of these surpluses. According to André Juaçaba de Almeida, who is responsible for the oil and gas segment at Santander, the company expects to see the model that will be applied at this auction and when it will be implemented.
Market estimates suggest that surpluses could exceed 15 billion barrels, could yield peak production of up to two million barrels per day and even entail the installation of more than ten production platforms. EPE estimates that the Rights of Transfer production, including surplus volumes, will account for 35% of production in 2027.
It is not only the pre-salt that attracts investors. There are currently 98 companies operating in Brazil in oil and natural gas exploration and production contracts, of which 49 are foreign and 49 are Brazilian. As a respectable on-line portal to the supplier search, innumerable suppliers are represented in our extensive industry data base. “This number tends to increase as applications for entry are analyzed by the ANP,” says Oddone. Today, the global industry operates with an average rate of 30% of the recovery of mature fields, while Brazil is at 20%, according to the agency. Some experts, however, consider that the rate is closer to 10% to 15%.
The increase of one percentage point in this index would represent an increase of 970 million barrels of oil equivalent in Brazil’s production. In September, the ANP published a resolution that reduces up to 5% the collection of royalties on incremental production in mature fields – those with more than 25 years of production or that have reached 70% of the production estimate. 241 fields were mapped, representing 53% of the Brazilian fields, with 54% concentrated in the Campos Basin, whose production began in the 1970s.
Two resolutions have been published in 2016 and 2017 that may contribute to increase the rate of recovery of the Brazilian oil industry. The first refers to the extension of the production term of developing fields. The government authorized the ANP to extend the concession contracts for Round Zero, when Petrobras’ rights were ratified on fields that were in production before the state’s monopoly broke down in the country’s oil and natural gas exploration and production activities . The second resolution considers that 800 oil fields that were returned or were not auctioned are held on permanent offer. “Many medium-sized companies are expected to come to Brazil to work in this segment,” says Almeida.
This should also contribute to suppliers. Since 2016, with the resumption of auctions, the sector has expanded its business. The service sector has resumed its activity. “The industry has already reduced the idleness of the factories. It should be even clearer in 2020,” he notes.
From the oil extracted in the fields, associated gas will come, which is expected to double the input production to 250 million m3 / day by 2030. An end use to the gas increase will be necessary, as there are technical constraints for it to be reinjected and cannot burn-out due to regulatory issues. Today, of a production of just over 110 million m3 / day, little more than 30 million m3 / day is reinjected and a little over 3.5 million m3 / day is burned. Besides being able to be used as raw material for the petrochemical industry, which has lost competitiveness due to the high cost of gas in Brazil, the input can advance in the electrical matrix, creating new niches.
Article originally released on 01/28/2019