The Edge

Developing Brazil’s Goldilocks oil riches

Three reasons why it will be better this time

What makes some oil plays more valuable than others? The answer: big discoveries in excellent reservoirs that are cheap to exploit. Few places on earth do all three. Brazil does, as I was reminded on a trip to Rio last month. Its pre-salt Santos basin fields, such as Lula and Libra, have these attributes in abundance.

Exceptional geology but project returns challenged for companies that bid up on profit share

The reservoirs in these giants lie at the ‘Goldilocks’ depth – not too expensive to drill, but deep enough for oil to flow freely to surface. Individual wells in the exceptional pre-salt carbonate reservoirs can produce up to 50,000 barrels in a single day – a good Permian fracked well takes two months to do that. Many producing wells are choked because the subsea flow lines or platform just can’t cope with the sheer volumes. Nice work if you can get it.

So no surprise that Brazil has been the global hotspot for business development through the downturn. Majors and NOCs are drawn by the prospect of low-cost mega-barrels. Yet-to-find resources in pre-salt alone are 18 billion boe on our estimates. Other basins on the huge continental margin, some unexplored, could hold as much again.

ExxonMobil, Shell, Total and Equinor have all ramped up exposure to Brazil in the last four years through M&A; BP and Chevron joined them in highly competitive bid rounds. Exploration budgets to access new acreage are restricted globally, but Brazil is an exception. Companies paid out US$8 billion in signature bonuses in 2017 and 2018, three-quarters of the global spend. There are also big opportunities to access discovered resource opportunities this year. 

All this bullishness in spite of the protracted ramp-up on the pre-salt projects developed so far. Production today lags 1 million b/d below our 2010 forecasts. Petrobras took on a Herculean task, developing multiple fields in a new deepwater province as sole operator and dominant equity partner. The government’s requirement for local content added to the challenge. This put inordinate strain on the domestic supply chain with a domino effect on costs and delivery. Brazil Inc. was in pre-salt up to its eyeballs, and then came the collapse in oil price.

The next big test comes with Libra (6 bnbbls of oil), Buzios (9 bnbbls) and Carcara (2 bnbbls). These are the last three giants to be developed of the first wave of pre-salt finds. Horacio Cuenca, Research Director, Latin America Upstream, thinks these projects will show Brazil can be far more effective in project delivery for three reasons.

1. A fresh approach

A wider range of players will participate in future Brazilian E&P. Petrobras (40%) is joined in Libra by Shell, Total, CNOOC and CNPC. This partnership brings a wealth of experience on project design, procurement, development and execution to Brazil pre-salt. Equinor is developing Carcara in a consortium that includes ExxonMobil. These IOCs and NOCs have operated under tight capital discipline since the downturn yet have managed to commission and develop big greenfield projects. 

2. Costs will be lower.

Breakeven costs for Libra have fallen from US$69/bbl in 2014 to US$38/bbl (NPV15). Importantly, the government has eased local content rules, paving the way for new contracting strategies and innovation. Gone are one-size-fits all FPSOs; the Libra FPSOs are designed to optimise costs and efficiency on that project. Investment in Libra comes with costs in the service sector at a low with excess capacity domestically and internationally.

3. Petrobras has put past difficulties to good use

Using a purpose-built FPSO, it has embarked on six-month well tests with multi-zone completions on Libra and Buzios to get a thorough understanding of reservoir performance. The data on producer and injector wells will be fed into the final project to tailor the well configuration, platform and facilities and maximise productivity.

One uncertainty hanging over the development of future discoveries in recently awarded blocks is the effect of fiscal terms on project returns. Companies that bid high on government profit share on new acreage may need high oil prices and even lower costs to meet their returns criteria. Signature bonuses on top will exacerbate the problem. Commercialising substantial volumes of associated gas is another for which producers and government are actively seeking a solution.

Meantime, Libra (onstream 2021) and Buzios (Phase 1 has just started) together will add the best part of 3 million b/d of new oil production by the mid-2020s. This will be the biggest increment in non-OPEC growth next decade outside the Permian.

Delivery on time and on budget will be a critical first step in rebuilding confidence, as the industry contemplates a new phase of upstream investment in Brazil’s giant prospects.