Brazil Rebounding Rapidly Both Petrobras & Private E&P Expanding
by George Hawrylyshyn
Rio de Janeiro
During the second half of the 1990s, the Brazilian oil and gas industry began undergoing profound changes that are still underway and leaving the state oil company, Petrobras, with a completely different face. Although it remains government-controlled by law—51% of the voting shares must be retained by the government—Petrobras has lost its mandate to administer the oil monopoly in the name of the government and must now compete with all other oil companies for concessions and for the market.
Because of its predominance and omnipresence in the Brazilian oil scene for almost half a century, Petrobras actually retains a de facto monopoly and probably will for some time, but it will never be the same. Now Petrobras faces outright competition from the major oil companies and other operator who often have even more experience in the general oil business and much more money to invest.
To replace Petrobras in the administration of the oil activity, the Brasilia government set up the National Petroleum Agency- ANP, in January 1998. This regulatory and monitoring body has a mandate to end all state control over the country's oil industry by 2001. As one of its first activities, it granted Petrobras the company's already producing areas for 20 years as well as a series of other areas where it had done sufficient work to believe the areas could be commercial. These were the areas offered by Petrobras for other partnership deals and project financing.
All these changes overlap, and, at this time, everything seems to be happening at once in the Brazilian oil and gas industry, as befits the scenario of a transition period from almost total government control to a free market economy. As transition brings growing pains, so there are both good and bad things happening as a new rules take shape.
The negative side results in impatience of many foreign oil companies and other prospective investors, with the slow pace of defining new conditions and rules. On the local side, it has led to classical confrontation between the outgoing president of Petrobras, Joel Mendes Renno, and the head of the ANP, David Zylbersztajn, over the short three-year exploration period.
The left accused the government of dismantling Petrobras and preparing it for privatization at a low price, while the right was accusing Petrobras of getting too much and retaining the de facto monopoly.
Perhaps the most optimistic indication of the state of the Brazilian oil and gas industry comes from outside: Robertson Research International, London, lists Brazil as the top-ranking country for oil investment outside North America, this year. Last year Brazil was fourth and just five years ago, it was 48th.
But there is good news at home as well, starting with a total change of Petrobras executives, as well as at the second and third levels, and the new appointees are of a new generation and seem more in tune with Petrobras's new role. The new president of Petrobras, Henri Phillipe Reichstul, has a better rapport with ANP and has obtained an extension of the "impossibly short" three-year exploratory period.
The new periods for Petrobras partnerships are the same as those that had already been established for the ANP 1st Round. Without the hurdle of a short time for exploration, the state oil company is considering giving its prospective partners, including Shell, Texaco, Esso do Brasil, and BP-Amoco, an ultimatum to sign the contract or desist.
Some of the majors, say other conditions have also changed since the start of negotiations last year and funds available then might not be now. Still it won't be long before it is known who actually signs and for how much. Shell for one, announced its budget for investment in Brazil for the next three years had been cut from US$3 billion to $1 billion.
This was said two months ago, in the midst of a crisis that saw Brazilian currency devaluated by almost half US$1= R$ 2.25. In the meantime, the currency stabilized at US$1=R$ 1.65 and an inflation and investment scare evaporated. There is still a recession and other problems but compared to Russia and parts of East Asia, the recovery here is miraculous.
A strong indication of the industry's faith in this country, is the privatization of the state of Sao Paulo gas distribution company, Comgas, which was sold to British Gas/Shell for about US$1billion—120% over premium. Another good follow-up of the interest is that at least 42 companies from around the world, reportedly including all the majors, have submitted pre-qualified for ANP's 1st Round of bidding for E&P concessions.
Petrobras Activity (back to top)
While going through all these political and administrative changes, Petrobras is managing to keep up with its daily activities without neglecting its traditional deepwater E&P, development, and R&D. In early May there were 27 offshore rigs drilling in Brazilian waters, mostly in the prolific Campos Basin, of which 16 were semisubmersibles, six were drillships, and five jackups. (All were working for Petrobras but the first post-monopoly drilling by private companies is expected later this year.)
An indication of the continuing stress on deep waters is the fact that 15 of the offshore wells being drilled now are in what Petrobras calls deep waters—beyond 400 meters or 1,312 ft (which in the North Sea is considered ultra-deep)—four of them are beyond the 1,000-meter or 2,380-ft mark, the deepest right now being 1,939 meters or 6,362 ft.
Earlier this year, Petrobras beat its own world water-depth production record by bringing onstream the deepest producing well in the offshore industry, the 1-RJS-436A in the Roncador Field, in 1,853 meters or 6,079 ft. of water. This Roncador Pilot Early Production System well is another indication that the deeper drilling is in Campos, the bigger the production—Well 1-RJS-436 is producing 20,000 b/d oil and could go as high as 25,000 b/d, whereas the older and shallower water wells in Campos produce an average of under 2,000 b/d.
Petrobras's domestic production has peaked at 1.2 million b/d and is heading for 1.5 million next year and 2 million in 2002/3, and all this from already discovered crude, which means that any additional discoveries could exceed this production goal. Almost 3/4 of the present output is already being produced in Campos, by 26 floating production systems—between semi-based FPS and FPSOs mostly based on old Petrobras tankers—and 18 fixed towers based in shallower waters. In the coming years the Campos share will be even greater as most of the new development programs are for Campos.
Petrobras Relinquishments (back to top)
Once sole owner of all the Brazilian acreage, Petrobras has just relinquished 28 of the blocks it had inherited from the old regime, alleging changed conditions did not allow them to explore them in time. This is the first relinquishment in Brazil and is part of the transition period for deregulation of the oil sector, along with such other "firsts" as the call for joint-venture partners for Petrobras projects in Brazil, the first open bids by ANP, first spec surveys, and first work on Brazilian soil by a foreign operator. Because the areas were among those given to Petrobras for first choice, they will prime acreage in future ANP rounds.
Petrobras JVs
With the removal of the main objection for partnership projects with Petrobras, the Brazilian company expects that many of the 14 outstanding contracts should be signed soon, including the big ones. The three-year period for making a commercial strike was extended in May to 5-9 years and coincided with rising prices of crude, paving the way for US$1.2 billion in investments in exploration and more than US$ 4 billion (B) in development. Up to now, of the 32 projects/areas offered by Petrobras, only 12 of the contracts have been signed.
ANP: 1st Round
A total of 42 companies had submitted qualification documents for the June 16 bids in the Brazilian 1st Open Round of E&P Concessions, by ANP, a tender in which Petrobras would have no special privileges. Twenty-seven blocks are being offered, 23 offshore and four onshore, with 12 in the Campos and Santos Basins.
The conditions for these concessions are easier than the Petrobras partnerships in terms of time limits, being from four to nine years. This round covers 2.3% of the country's sedimentary basins and will be followed by a 2nd Round later this year.
Seismic (back to top)
There's something of a seismic boom under way offshore Brazil. A newcomer to Brazil, non-exclusive spec-seismic now accounts for around 20% of the total offshore basin areas that have been surveyed up to now. This is some 232,000 km of 2D and 50,000 km² of 3D. Most of it is in and around the Campos Basin. Seven companies (Western, Fugro, Geco-Prakla, Geomag, GSI, Spectrum, and Veritas) were authorized by ANP to run some 60,000 km of 2D, and PGS obtained permission to run up to 50,000 km² in 3D, which would make it the biggest seismic campaign in Brazil. ANP estimates that spec-survey will hit the 2 million mark by the year 2000. Furthermore, there have been two recent proprietary seismic contracts signed by Petrobras, one with Western Geophysical and the other with PGS.
The new president of Petrobras, Henri Phillipe Reichstul, has undertaken a major reshuffle at Petrobras all the way from the Director level down. In all the posts but that of Financial Director, the new Petrobras officers and second and third echelon, come from company ranks: