Analysis: Pre-Salt Could Brighten Offshore Brazil

Brazil could become one of the largest oil producers worldwide if its plans to develop large offshore, pre-salt oil deposits prove successful. However, meeting this challenge will require unlocking reserves from technically difficult deepwater fields with oil under layers of rock and salt thousands of feet below sea level. Potential regulatory changes could also impact the process of producing these reserves.

The South American nation has increased its oil production during the past decade in order to meet increasing domestic energy demand associated with economic growth. To meet this goal, the government and Petrobras have stepped up their efforts to produce Brazil's proven offshore reserves, most of which lie in the offshore Campos and Santos basins. Brazil, along with the U.S. Gulf of Mexico and West Africa has been touted as the "Golden Triangle" in terms of deepwater exploratory success.

Brazil's offshore fleet of 78 rigs, most of which are operated by Brazilian state energy company Petrobras, includes 10 jackups, 23 semisubmersibles rated for work in less than 4,000 feet of water, 26 semis rated for work in greater than 4,000 feet of water, one drillship rated for work in less than 4,000 feet of water, and 10 drillships suited for work in more than 4,000 feet of water. Most are currently drilling, but the fleet also includes rigs en route to drilling sites, ready stacked, coldstacked, undergoing modification or inspection, under construction, production and workover rigs.

Breakdown of Brazilian Rig Fleet

Deepwater-capable rigs are especially in demand, but these rigs command day rates lower than other deepwater markets such as the U.S. Gulf of Mexico and West Africa. According to RigLogix, the average day rate for the 30 rigs under contract offshore Brazil is around $343,300, lower than other deepwater markets such as the U.S. Gulf of Mexico, where deepwater rigs have earned an average day rate of around $443,700, and West Africa, where deepwater rigs earn an average day rate of $437,300.

Average Day Rate for Brazil vs. Rig Markets

The 10 drillships rated for water depths of over 4,000 feet currently offshore Brazil are earning an average day rate of $366,900, up from the average day rate of $361,100 being earned by 10 drillships of this category last year.

Semisubmersibles rated for more than 1,500 feet of water have seen day rates increase from $200,500 this time last year to $230,400. Recent contract awards for semis rated for 4,000 feet of water or greater were made at just under $400,000. Meanwhile, average day rates have declined for jackups rated for work in greater than 300 feet of water, from $184,500 this time a year ago to $129,000. Recent contract awards for jackups with this water depth rating had day rates in the $135,000 range.

Brazil Average Day Rate

Since June 2005, the number of rigs working offshore South America has increased steadily, from 33 rigs to 70 rigs this month. Utilization has remained fairly robust during that time period, with 31 rigs out of 33 under contract in June 2005 for rig-by-rig utilization of 93.94 percent, peaking at 100 percent utilization in April 2006, when all 34 units in the region were under contract. For the most part, utilization has remained above 90 percent, but has dipped in recent months, with 62 rigs out of 70 under contract for rig-by-rig utilization of 88.57 percent.

Brazil Rig Utilization

Tupi & Pre-Salt Discoveries

Last month, Brazil's National Petroleum Agency reported that Petrobras has made an oil discovery offshore Brazil in the Santos Basin with the 2-ANP-1-RJS well which, if confirmed, could be the largest oil discovery made since the pre-salt Tupi oil field was discovered in November 2007.

Tupi and the pre-salt discoveries that followed transformed the nature and focus of Brazil's oil sector, drawing the attention of oil companies worldwide and uncovering oil finds that could significantly impact the global oil market.

A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in BM-S-11, which is estimated 5 billion to 8 billion barrels of recoverable oil and natural gas reserves in a subsalt zone that is an average of 18,000 feet below the ocean surface. Tupi was the largest oil discovery since the supergiant Kashagan field in Kazakhstan. In addition, oil encountered in the subsalt zones appears to be lighter and sweeter than most of Brazil's existing heavy crude production.

Following Tupi, numerous additional pre-salt discoveries were announced, such as Carioca, Iara, and Guara. Preliminary estimates by industry analysts of the total extent of recoverable oil and gas reserves in the entire subsalt reserve have exceeded 50 billion barrels of oil equivalent.

In 2009, Petrobras released its strategic plan for developing the pre-salt areas. This plan included development of the Tupi, Iara, and Guara fields that would occur in three discrete phases: extended well tests, pilot projects, then large-scale production through multiple, duplicate floating production, storage and offloading vessels.

Along with their potential to significantly increase oil production in the country, the subsalt areas are estimated to contain sizable natural gas reserves as well. According to Petrobras, Tupi alone could contain 5-7 Tcf of recoverable natural gas, which if proven, could increase Brazil's total gas reserves by 50 percent. There are plans to build a natural gas pipeline from Tupi to Mexilhao, where the natural gas could then flow into the national grid.

Last month, Petrobras completed a year of production at the Tupi field with the Extended Well Test (EWT), RJS-646, that produced results “extremely consistent” with what the reservoir staff had anticipated and with the expected flow assurance, said Jose Miranda Formigli, executive manager for pre-salt with Petrobras.

However, considerable challenges must still be overcome in order to bring these reserves to fruition. The difficulty of access to the reserves, considering both the large depths and pressures involved with subsalt oil production, mean that there are many technical hurdles that must be overcome. Production from additional pilot projects is possible in the near-term, but large-scale development of the subsalt reserves will likely not occur until the next decade.

Petrobras also is designing projects in order to reinject carbon dioxide (CO2) into the formation in order to meet possible future restrictions on CO2 emissions. Other challenges include the transport of oil and gas as well as offshore workers and supplies over long distances, given that the pre-salt discoveries are two times further from shore than other fields. As a result, Petrobras will utilize not only dynamic positioning ships already in use in the Campos Basin, but intermediate stations that allow the transfer of oil to conventional vessels for transport.

The company's E&P Services unit also is seeking to identify sites on the Brazilian coast to install ports and airports for helicopters to fly back and forth and to install a fiber optic ring for Santos Basin operations for better communications management.

Market Players, Changes

Petrobras dominated all aspects of Brazil's oil and gas market from upstream to downstream until 1997, when the Brazilian government opened the market to outside competition. Petrobras has continued to serve as operator of most offshore oil and gas projects, with a few international companies such as Shell, ExxonMobil and Chevron and some Brazil-based companies such as OGX participating. In March, BP entered the Brazilian deepwater market with its acquisition from Devon Energy Corp. of interests in 10 exploration blocks offshore Brazil.

The Brazilian government in August 2009 released the proposed regulatory framework to govern development of its pre-salt fields. The framework consists of four pieces of legislation. The first piece of legislation would establish new production share agreements (PSAs) to exploit the pre-salt reserves, in contrast with the concession framework used for existing resources. Petrobras would be the sole operator of each PSA and would hold a minimum 30 percent stake in the projects.

The third piece of legislation would establish a new agency, Petrosal, to administer the state's share of each PSA. Under the third piece of legislation, the government would establish a new development fund to manage government revenues from the pre-salt development. The fourth piece of legislation would allow the government to capitalize Petrobras by granting it pre-salt oil reserves that are currently not otherwise licensed. These new rules would not affect existing operators in Brazil.

The proposed regulatory framework would have important implications for the development of Brazil's oil sector, according to the U.S. Energy Information Administration (EIA). The emphasis upon Petrobras as the sole operator in the pre-salt basin would surely slow the pace of development of new projects, especially considering the company's already-aggressive development plans for pre- and post-salt oil reserves.

The rules would also increase the government take of profits from oil production, possibly reducing the incentive for private companies to participate, EIA said. In addition, PSA structure proposed in the legislation would give non-operating partners little influence over project decisions. The new regulations are still being debated by Brazil's Congress, and a final form had not yet emerged.