Despite tough conditions in Brazil’s offshore oil and gas industry, recent developments could pave the way for a new wave of investment.
The country has huge long-term appeal to sustain investor interest beyond the industry’s short-term struggle with low oil prices and other factors. Brazil had 16.2 billion (bn) barrels of proved oil reserves by 2015, 1% of the world total, and 0.5 trillion cubic metres of proved natural gas reserves, 0.2% of the global figure. It has more than 7.5 million (m) square kilometres (km²) of on- and offshore reserves, but just 4.2% is under contract for exploration and production activities. Offshore basins with potential for hydrocarbons cover 2.5m km², with only 313,000km² (12.5%) under contract.
National oil company (NOC) Petroleo Brasileiro SA (Petrobras) states that the average daily production per well in the Santos Basin pre-salt area is 67% greater than in the North Sea and 150% higher than in the Gulf of Mexico.
Number one for offshore capexInternational oil companies understand the potential. Brazil attracts the world’s highest offshore capital expenditure (capex) on oil and gas developments, especially for deepwater. Investors include BG Group, BHP Billiton, BP, Chevron, ExxonMobil, Repsol Sinopec, Shell, Statoil and Total.
However, Petrobras is by far the biggest spender. Corruption by individuals within the company has hit the industry hard, alongside lower oil prices and a weaker economy and currency.
Asset write-downs and cash flow problems have reduced Petrobras’ capacity to invest its own or borrowed money on field development. It has reduced its five-year investment plan, causing project delays and cancellations.
The industry is cyclical and will rebound. The untapped potential means local players should invest through the downturn, while Petrobras and the government take steps to revive investment. Petrobras’ USD15.1bn divestment plan 2015-2016 to reduce debt, boost cash and focus on priorities may unlock commercially attractive assets for investors. For example, there was unconfirmed expectation in spring and summer 2015 that the NOC would farm out some interests in highly productive pre-salt deepwater areas.
Discussions have been taking place over a potential revision of production sharing agreements and local content regulations. This could lead to greater foreign participation and trigger moves away from Petrobras’ current position as sole operator in the pre-salt basin and other strategic areas, where it must have a minimum 30% stake in each field.
The 13th licensing round, launched in October 2015, included 84 offshore and 182 onshore blocks. It triggered good advance interest, according to Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) – the national petroleum agency and regulator for onshore and offshore safety. Dozens of companies registered initial interest and paid the participation fee; a few could be considered large players capable of operating in ultra-deepwater, confirming Brazil’s long-term potential, ANP added.
Technical challengesOffshore Brazil faces technical challenges too. Drilling beyond 2,500-metre water depth requires heavier riser systems and drill strings. Pre-salt reservoirs need special gear such as managed pressure drilling.
New technologies deployed now and likely in the future include: new flexible riser technologies and integrity management including life extension; qualification of new materials such as linepipe clad and corrosion resistant alloys; and CO2 separation and injection equipment at the process plant.
Brazilian fiscal policy stimulates the R&D needed to exploit resources economically and safely. At least 1% of concessionaries’ gross revenues from large fields must fund in-country R&D under a levy imposed by ANP.
In 2014, for example, operators generated BRL1.4bn (USD600m) for R&D, according to ANP. Recognizing this level of commitment, DNV GL’s R&D Centre in Rio de Janeiro opened in 2014 to support companies’ innovation activities.
DNV GL recently assisted ANP in developing new legislation on offshore pipelines and well-integrity management. The company has sound experience in these areas, acquired through support to operators and regulators worldwide.
DNV GL has been present in Brazil since the early 1970s, and is sure that Petrobras and the Brazilian offshore industry will re-emerge with more robust governance practices and a huge appetite for continued and additional investment. These are reasons for the industry to be resilient and aim at long-term opportunities.
Research is tailored to local needsDNV GL’s dedicated research centre in Brazil marked its first anniversary in September 2015. The Rio de Janeiro based unit not only caters for local needs but also supports global technology developments and innovation that will enhance the country's growing production and resource base.
The centre is already involved in a number of joint industry projects (JIPs) relevant to Brazil’s ultra-deepwater sector. These include an assessment of the thickness of offshore pipelines, a methodology for life extension and reuse of flexible pipes, and a state-of-the-art tool for the management of blowout preventer reliability. The centre also seeks external projects that operators can fund in compliance with the country’s research levy of 1% on gross revenues from large fields.
DNV GL advises local operators to maintain investment in R&D throughout the current low oil price climate, so that new technologies will be ready to trial or deploy when activity rebounds in Brazil.
 ‘Statistical Review of World Energy 2015’, BP, June 2015