Petrobras Says New Discovery Could Take 8 Years to Develop

Petrobras says it may take up to eight years to bring their recent natural gas discovery into production. Finance director Jose Sergio Gabrielli and Exploration and Production director Guilherme Estrella told journalists at a press conference that it will take between two and four years to assess actual reserves in the Santos Basin area, and then another four years to make it commercially viable.

Petrobras said recently that natural gas reserves in the productive Santos Basin are estimated at around 420 billion cubic meters. Original estimates announced in April pointed to 70 billion cubic meters. With its original estimate of 70 billion cubic meters of natural gas, the Santos Basin discovery was already the biggest ever made in Brazil, increasing the country's total gas reserves by 30%. Estrella said estimates could rise even more as productivity studies continue, but reserves will only be proven "in a few years."

However, as much as the company is excited about the find, executives said a key question should be asked: how will Petrobras market all that natural gas?

"We have to proceed with this evaluation work not just to consolidate our natural gas reserves data, but also to find out ways to place this natural gas, to assess its commercial viability on our market," Gabrielli said.

This comes as Brazil is trying to renegotiate its natural gas contract with Bolivia as local demand has been far lower than expected. The two countries have been discussing over the past few months how to lower prices and volumes in the 20-year contract between Petrobras and Bolivian state gas supplier Yacimientos Petroliferos Fiscales Bolivianos.

Worse still, demand isn't expected to pick up in the medium term owing to uncertainties in Brazil's electricity market. A few years ago, market watchers believed that economic growth would trigger strong demand for natural gas, which would be used to power thermoelectric power generators all over Brazil.

But such expectations were frustrated in recent years, and demand for electricity in Brazil has effectively been dwindling for the past two years.

Gabrielli confirmed Petrobras has been working hard to change the terms of the contract with Bolivia, but he declined to reveal details. Market analysts say executives are pushing for a price reduction of up to 45%, as well as changes to a "take or pay" clause in the bilateral contracts which determine that Petrobras must pay for a certain volume of natural gas even if it doesn't use the product.

When asked if the recent natural gas finds in the Santos Basin would serve as ammunition in the talks with Bolivia, executives said that they were "completely different stories."

Gabrielli said Petrobras is investing $1.1 billion this year to improve its natural gas pipelines and distribution networks, especially in Brazil's more industrialized Southeast and the less developed Northeastern region. The company is also planning to integrate its networks so that gas from the more productive Southeast can be transported to more isolated areas of the country.

"We hope that the gas market will grow in Brazil, but right now we can't give you a precise answer about what we're going to do with gas from Santos ... it's something we are considering from a strategic point of view," Gabrielli said.

The directors also said that recent discoveries of lighter types of crude have placed Petrobras in a strategically comfortable situation in E&P terms.

"We had reached something like a dead end last year in which we only had E&P possibilities in the Campos Basin, exploring heavy crude," Estrella said, adding "now new doors and windows have opened for us, with light crude finds in Sergipe-Alagoas, in Espirito Santo and in Santos."

Executives said they expect proven reserves to increase by 10% to around 12 billion barrels of oil equivalent by the end of the year.

Petrobras has discovered lighter types of crude recently, which is expected to improve Brazil's profile over the long term as a heavy oil producer. Once it begins production in wells containing lighter crude, Petrobras expects to significantly reduce its costs and help Brazil's trade balance. Petrobras now has to import lighter oil to mix with the heavy crude it produces locally.