Analysis: Petrobras Building Up Its Rig Fleet

Already the world's largest offshore operator by rig count, Petrobras is poised to materially increase its drilling rig fleet this decade. With massive potential in deepwater finds in the pre-salt layer and the Campos and Santos Basins offshore Brazil, the Brazilian NOC intends to satiate its demand for deepwater rigs through new construction.

Company Background

Petroleo Brasileiro SA, the national oil company (NOC) of Brazil, is one of the world's largest oil companies. The NOC, commonly referred to as Petrobras, produces almost 2.5 MMboe/d and employs almost 80,000 workers around the globe. The company, which is listed on the NYSE, also has extensive downstream operations and owns oil refiners and oil tankers throughout the world.

Created in 1953, Petrobras' initial activities centered on assets it inherited from the National Oil Council. The company began processing oil shale in 1953 with the development of Petrosix technology. Offshore exploration was launched in the 1960s, and daily production rates began to rise significantly within the past 10-15 years as deepwater and ultra-deepwater projects have been brought onstream. The company operated the Petrobras 36 oil platform, the world's largest, until an accident resulted in a total loss in March 2001. It was replaced with the Petrobras 52 in 2007, which now ranks as the largest platform in Brazil and the third largest in the world.

Some notable Petrobras achievements include doubling oil and natural gas daily production in 2003 to reach 2 MMbbl, and the start up of the P-50 oil platform in 2006 in the Albacora East Field in the Campos Basin, which allowed Brazil to achieve energy self-sufficiency.

Petrobras' Already Massive Rig Fleet Prepares for Growth Spurt

Petrobras currently has 50 existing rigs under contract and working, making it the largest offshore rig operator in the world by active offshore rig count. In fact, Petrobras' active fleet is almost 40% larger than the second largest rig operator, ONGC. Compared the majors, Shell has 18 existing rigs currently contracted and deployed, Chevron has 19, ExxonMobil has 11 rigs, and BP has 10.

GRAPH: World's Largest Rig Operators by Active Rig Count

Of the NOC's 50 rigs, 35 are semisubmersibles, 10 are drillships, and five are jackups. All but three rigs are working in Brazil. One drillship is contracted to work off of West Africa, one drillship is contracted to work in the GOM, and a semisubmersible is working in the Black Sea.

The average dayrate for Petrobras' entire fleet is about $275,000/day. Broken down by rig type, semisubmersibles average in the $270,000s, drillships average near $300,000/day, and of the disclosed jackup rates, the average is in the low- to mid- $100,000s. In addition to the 50 rigs the NOC currently has deployed, contracts for another six ultra-deepwater rigs are scheduled to commence or resume this year including the recently awarded contracts for the Ocean Valor and the Ocean Baroness.

Deepwater and ultra-deepwater units comprise about 50% of the NOC's rig fleet. Petrobras has historically demonstrated an aversion to paying premium dayrates for deepwater rigs and instead has employed a rig contracting strategy based on offering long terms at discounted dayrates. Additionally, the NOC's contract structures often include a performance component (between 5-15% of compensation) resulting in lower base dayrates. In the graph below, it is clear that the company's strategy has paid off as the average dayrate Petrobras is paying for its deepwater units is well below that of other large deepwater players. It should be noted that Total, which is paying the highest average dayrate depicted below, has a fleet more heavily weighted toward ultra-deepwater rigs than the other companies shown.

GRAPH: Average Dayrate Paid (4,000+ ft. floating rigs)

Although Petrobras has had success in contracting rigs at below market dayrates, the NOC was not able to avoid the dayrate surge created by limited deewpater rig availability near the peak of the market during the last cycle. In early 2008, the NOC contracted three Seadrill ultra-deepwater rigs at dayrates over $600,000. The West Eminence and the West Orion were awarded six-year contracts at dayrates in the $610-$620,000 range. The other award was for the West Taurus, which now commands the highest dayrate in Petrobras' fleet. The West Taurus is drilling off Brazil at a rate in the mid $640,000s. The term contract started in February 2009 and is scheduled to terminate in February 2015. At the time, these contract awards firmly placed ultra-deepwater leading edge dayrates above the $600,000 per day mark; however dayrates for similar rigs have subsequently declined to stand between $400-$500,000 today.

West Taurus Ultra-Deepwater Rig
West Taurus Ultra-Deepwater Rig

Petrobras is aggressively planning for its future. Looking ahead over the next five years, the operator has an increasing number of rigs already contracted (even if none of its current contracts are renewed upon expiration). Assuming no renewals, in March 2011, Petrobras has 59 rigs contracted, followed by 65 rigs in March 2012, and 69 rigs in 2013.

Much of the growth noted above is centered around the NOC's newbuild ambitions. To mitigate the risk associated with depending on existing rig capacity to meet its exploration and development needs, Petrobras has based its rig fleet growth plans around new construction. Based on RigLogix data, Petrobras currently has contracts in place for 22 newbuild rigs, most of which are ultra-deepwater floaters. Some of the contractors building these rigs include Odebrecht, Delba Perforadora Internacional S.A., Etesco, and Schahin.

As the Brazilian NOC, Petrobras has sought to stimulate the Brazilian economy by utilizing local content requirements to support indigenous contractors. In addition to the 22 newbuilds the NOC has under contract, 28 additional newbuild construction announcements are expected to be made in the months ahead. The NOC has made it a primary objective to construct rigs in Brazil, and established yards such as Jurong and Keppel are understood to be working with Petrobras to accommodate this requirement.

GRAPH: Petrobras Offshore Rig Fleet Potential

The chart above shows the aggressive fleet growth the NOC has achieved and plans to potentially achieve this decade. Petrobras' current fleet is already more than 50% above 2005 levels, and after several contracts start up and the newbuilds the NOC has on order today deliver over the next several years, Petrobras' fleet size could be approaching 80 rigs (assuming expiring contracts are renewed). Furthermore, if the NOC executes its newbuild plans for 28 additional rigs that have yet to be ordered, the fleet could expand to more than double what it is today. Clearly the NOC's renewal decisions on future contract expirations will go a long way to determining the company's ultimate fleet size. However, with just a handful of contract expirations over the next 12 months, a clear trend on the renewal front will likely not begin to emerge until the 2012-2013 timeframe.

Field Development Activities

With a capital spending plan over the next five years of $174 billion implying about $35 billion annual spending, Petrobras has allocated only about $3 billion/yr for international projects, with the US being the biggest international target. Petrobras recently disclosed that its capex guidance for 2010 is around $39.5 billion, which is above the level implied by its five-year plan largely due to higher downstream spending estimates.

Looking ahead at US activities this year, Petrobras remains on schedule to bring its biggest GOM project online by mid-2010. The Cascade and Chinook fields are in the Lower Tertiary play, 150 mi from Louisiana, where major oil discoveries have been made in recent years.

The industry is watching this project, not only because of its location, but because it will be developed through the first FPSO to operate in the GOM. The FPSO, which was built in Singapore, is capable of producing up to 80,000 b/d. The company will bring two wells in Cascade and one in Chinook online in the first phase of the project. The second phase plan has not yet been confirmed, but there has been talk of bringing online seven wells from each field.

Petrobras, which operates both fields, holds a 100% stake in the Cascade field and 66.7% in Chinook with Total holding the remaining 33.3%.

While the company does have operations worldwide, its main focus is on Brazil. The biggest project in 2009 was the Tupi Field, which pumped its first crude in April 2009. Discovered in July 2006, Tupi is the largest hydrocarbon find in Brazil to date with estimated recoverable reserves of 5-8 Bboe. A second well drilled in September 2007 confirmed the recoverable reserves. This well confirmed a light oil discovery of 28 degrees API.

Petrobras serves as the operator, holding a 65% interest in the field. British BG Group holds 25%, and Portugal's Galp Energia holds the remaining 10%.

Petrobras is executing two phases of development for Tupi. Launched in March 2009, the first well, 1-RJS-646, will produce about 14,000 b/d. The Cidade de Sao Vicente FPSO, contracted from BW Offshore, collected information about the field to be used to create long-term production solutions for Tupi and other Pre-Salt developments.

The second phase of development calls for a pilot FPSO to produce from the field. Petrobras contracted MODEC to convert the oil tanker M/V Sunrise IV into the FPSO Cidade de Angra dos Reis for operation on the field by December 2010.

To be located in 7,054 ft of water, the Cidade de Angra dos Reis FPSO will have a production capacity of 100,000 b/d, 150 MMcf/d of gas, and a storage capacity of approximately 1,600,000 bbl. The FPSO will also be able to inject 100,000 b/d of water. The FPSO is planned to arrive in Brazil in Q4 2010 and will be installed in about 7,000 ft of water. The FPSO is designed to remain on the field for up to 20 years.

Oil production from Tupi will be offloaded into vessels and transported to shore. However, produced natural gas is more challenging to transport. Several possible solutions have been suggested and are being evaluated for approval.

Follow Petrobras and its projects worldwide by visiting SubseaIQ, or follow the developments, contracts and initiatives of the NOC's growing rig fleet through RigLogix.