Latin America: Growth expected across the board

Brazil remains forerunner in diverse continent of expanding E&P

By Katherine Scott, associate editor

Picture Latin America as a quilt. In unison, the pieces come together to form a vibrant and vast region, but separately, every patch tells a story all its own. “Each country has different needs and challenges regarding both offshore and onshore. It’s not a one size fits all,” said João Geraldo Ferreira, president and CEO of GE Oil & Gas in Latin America. Addressing these individual markets and their own specific needs, from technology to regulations to local content, requires understanding and commitment.

But in a region that has it all – shallow water, onshore, deepwater, ultra-deepwater, heavy oil, conventional and shale gas, and pre-salt plays – it’s still Brazil that’s leading the way in the Latin American energy sector. “Over 90% of what we’re talking about in offshore Latin America is Brazil. And in some respects, in some market focus areas, Brazil drives the global trend,” said Leslie Cook, senior research consultant for Quest Offshore Resources, a market intelligence provider.

Since pre-salt was discovered offshore Brazil in 2005, it has been impossible to mention the country’s E&P landscape without talking about Petrobras. The region’s largest operator in offshore operations in terms of both production and rig count, the company still has a strong hold in Brazil. However, an upcoming licensing round and a general feeling that no single company can cover the country’s offshore resources alone means that IOCs may soon see more opportunities to take part in Brazil’s pre-salt bonanza.

“We can see a good potential market in Brazil, especially in deep and ultra-deepwater,” said Dimas Calani, director of Petroserv SA, a Brazilian drilling contractor. The company has three dynamically positioned drilling rigs operating in the country; one is a fourth-generation semisubmersible, the Louisiana, and two are sixth-generation ultra-deepwater newbuilds, the Carolina drillship and the Victoria semisubmersible. All are operating for Petrobras under contracts running from five to 10 years, with an average dayrate of $440,000.

However, growth is not limited to Brazil. Across Latin America, frontier basins are emerging, with The Falklands, French Guiana, Guiana, Suriname and Nicaragua beginning or expanding initial operations even as more mature areas such as Mexico, Ecuador, Argentina and Colombia push forward. As a result, dayrates have been able to remain strong due to both local and worldwide increases in activity, Michael Acuff, senior vice president of contracts and marketing for Diamond Offshore, said. The company has 12 rigs – 11 semis and one drillship – operating in Brazil. “We really see Latin America as one big opportunity,” he said.

New Reservoir, New Technology

According to a Petrobras fact sheet, Brazil’s pre-salt is located up to 300 km offshore in water depths that can exceed 2,000 meters with total depth ranging from 5,000 to 7,000 meters. Particularly for Brazil and pre-salt, there’s also belief in the industry that the geology in Latin American countries mirrors that of West Africa. “With the discoveries in West African countries, industry believes Brazil is analogous to Angola. Then, as you go north in Africa, you compare the countries that meet up on the opposite side,” Mr Acuff said. “This has led to exploration programs that are testing the geology to see if it is in fact correlated to West Africa.”

Certainly, the pre-salt wells in Brazil present evident challenges to drilling and because most of the pre-salt wells must go through thick layers of salt and require better technology capability. For GE Oil & Gas, which in the last 30 years has produced and installed more than 1,200 wellhead systems and 180 subsea Christmas trees in Brazil, developing technologies optimized for pre-salt developments continues to be upfront and center, Mr Ferreira said. The company made a $32 million upgrade in 2012 to its Macaé facility, adding a service unit for drilling and subsea production equipment. It is also slated to open a $170 million global research center in Rio de Janeiro Brazil in 2014, with a portion that will be dedicated to oil and gas operations. The center’s research and development resources will also support growth in renewable energy, mining, rail and aviation industries with labs, offices and training.

“Technology is being developed as we speak,” he told Drilling Contractor during the GE Annual Meeting in Florence, Italy, in late January. That technology could be in seismic imaging, MPD or all of the above, because every “single day is a sort of a discovery,” he said, emphasizing that pre-salt discoveries are still comparatively new. “We’ve had technology sessions with Petrobras, where both teams sit down and discuss the technology bottlenecks that have to be addressed, so it’s not what we have today but what has to be invented,” Mr Ferreira said.

More partnerships between Petrobras and IOCs also will foster additional investment and technologies, said Alvaro Teixeira, recently retired executive secretary of the Brazilian Petroleum, Gas and Biofuels Institute (IBP), a private nonprofit organization founded in 1957 that works to make Brazil competitive and investment-attractive by fostering the development of the Brazilian petroleum industry through technical courses and events. Its 220-strong membership counts among its 56 local and international oil and gas companies, including Petrobras, Repsol, Shell, Exxon, BP, TOTAL and Statoil.

One of IBP’s major recent projects is partnering with OTC to hold the 2013 OTC Brasil conference in October in Rio de Janeiro. “OTC is the top event of offshore in the world because it’s the gathering of all the offshore industry of the world. The participation of this partnership of IBP and OTC could bring all the experiences in the world of offshore in Rio, the capital of deepwater offshore exploration and production,” he said.

“Not only does industry need to invest here, but they can bring technology. No country, no company has the monopoly over technology. It’s not easy to drill these wells,” Mr Teixeira said, noting that more than 30 billion bbls of oil have already been discovered in Brazil’s pre-salt. “It just needs to be developed to be confirmed, but we think we will discover in the next 10 to 20 years, more than 50 billion bbls of oil in the pre-salt.”

Another sign of investment in Brazil is the significant numbers of R&D centers that international service and oil companies, such as Schlumberger, Halliburton, Baker Hughes, BG and others, already have and continue to build around the Federal University of Rio de Janeiro campus. “The biggest R&D centers are in Rio,” Mr Teixeira said. “It’s unique in the world to have all of these research centers, as a cluster, just for addressing the technological challenges for the petroleum industry in pre-salt.”

Local Development with Investment in Shipyards

The current forecast for deepwater exploration in Brazil through 2016 is approximately 500 exploration wells, or a total of 800 including development wells, and an average of 2.5 wells drilled per rig each year, according to a Quest Offshore report. Ms Cook said Brazil has always been known as a large exploration area, reaching levels as high as 70% of total drilling. However, since 2011 exploration has declined to 60% of total drilling. “It’s still good, but there’s definitely been a shift out of exploration in mature basin areas as Petrobras focuses more on pre-salt, which takes more time.” The company also asserts that 2013 will be the first year in which no offshore newbuild rigs are actually moving into Brazil, mostly because the country has undertaken shipyard projects to build rigs locally.

Petrobras also finds itself reevaluating its rig needs. In November 2012, the company canceled the process of contracting five ultra-deepwater drilling rigs, capable of drilling in up to 3,000 meters of water, with Ocean Rig Group. According to a Reuters article, it was because Petrobras needed to drill fewer wells in the Santos Basin than originally expected. Last year, Petrobras’ proven oil and natural gas reserves in Brazil reached 15.729 billion bbls of oil equivalent, and its total oil and natural gas production in Brazil averaged 2.44 million bbls of oil equivalent per day in December 2012.

For local companies that want to bring in investment and technologies and for foreign firms that want to solidify their local base, partnership continues to be an important bridge. Odfjell Galvão is a recent project between Odfjell Drilling and Galvão Group, one of Brazil’s largest construction companies, to become a new Brazilian drilling contractor. Odfjell Galvão now has three ultra-deepwater drillships under construction at the Estaleiro Jurong Aracruz shipyard in Espirito Santo. Upon anticipated delivery in September 2016, they will operate for Petrobras under 15-year contracts. Odfjell Drilling also has another deepwater drillship, the Deepsea Metro II, contracted to Petrobras into 2015.

Bjørnar Iversen, CEO and president of Odfjell Galvão, notes that Brazilians are eager to build up the local shipyard and service industries. “They are now building yards up the coast, which means if we have trouble it’s easier to have it addressed. There’s been a challenge of capacities in Brazil, but they are now developing capacities for the oil and gas industry for the future.”

Mr Iversen believes that Brazil has huge potential going forward. “Brazil is a continent; it’s not a country. It’s so huge, and they have just started to drill here. It’s the beginning of the drilling era in Brazil. It’s not even the first chapter; it’s the pre-amble,” he said. “There are some huge areas still to be explored, and they have huge potential for the future. That’s why it’s not possible for one company like Petrobras to cover all of this. You have to invite someone else to help and to develop Brazil, and I think that will happen.”

An Eye on Regulations

The continued and large-scale development of pre-salt reserves in ultra-deepwater environments has translated into a new focus on regulations in Brazil. “It’s possible to face pre-salt challenges with a consistent regulatory framework that is capable of absorbing quick changes in technology while challenging the industry to improve operations,” said Raphael Neves Moura, general manager of operational safety and environment for the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP) the country’s federal agency responsible for the regulation of the oil sector.

While not in ultra-deepwater, two incidents offshore Brazil have brought E&P regulations to the forefront. In November 2011 and March 2012, Chevron Brasil Upstream Frade found oil seeping into their offshore operations in the Frade Field, located 370 km off the coast of Rio de Janeiro in the northern Campos Basin. The company has since suspended all exploration and development drilling in the field, with the exception of well abandonment activities.

“Although the investigation of the Frade incident has not indicated a relevant change in the regulations, ANP decided to undertake a careful examination on every single offshore well design to be drilled in Brazil to make sure companies are following the approved procedures and good engineering practices during the well construction phase,” Mr Moura said.

In general, he believes that the Brazilian approach to safety is based on the performance-based/goal-setting model, with few prescriptive requirements and a non-restrictive approach to technological innovations. This means that the operator is able to select the codes and standards and good engineering practices that will be applied for each project as long as they comply with the general provisions of ANP’s safety regulations, Mr Moura said. Nevertheless, all engineering systems are documented by the operator in the Operational Safety Documentation, subjected to ANP review and approval before offshore drilling commences, he added.

“We believe that a goal-setting approach is more effective on challenging the operator to demonstrate the continuous improvement of its safety management system.”

Optimism in Latest Bidding Round

In May, the Brazilian government will hold an 11th bidding round with almost 300 blocks – 122 onshore and 167 offshore – to be offered, not limited to the pre-salt. This will be Brazil’s first licensing round since 2008. “We’ve been stuck because there has not been a new licensing round for years. It’s been just the existing blocks being explored,” Petroserv’s Mr Calani said. The E&P blocks will be distributed over 11 sedimentary basins, five of them onshore: Barreirinhas, Ceará, Espírito Santo, Foz do Amazonas, Pará-Maranhão, Parnaíba, Pernambuco-Paraíba, Potiguar, Recôncavo, Sergipe-Alagoas and Tucano. Further illustrating the growing interest in Brazil’s onshore resources, Petrobras itself recently approved the creation of the Onshore Natural Gas Program to assess natural gas potential.

This licensing round is expected to open up the market to more foreign investments. “More international players will take a larger role in Brazil, creating an even better market,” Mr Iversen said. “It’s going to be interesting to see how this is being sold for the future because there’s been a scarcity of capital.” The new blocks are currently under environmental analysis, and their inclusion in the 11th bidding round is still subject to approval by the National Energy Policy Council.

Petroserv’s Mr Calani noted that there have been a few independents like OGX that have made vital discoveries in Brazil’s shallow water, but they remain sporadic. “The bulk is still deepwater and is the future for years to come with Petrobras leading the show.”

Even as the Brazilian energy market expands on the strength of pre-salt developments, the rest of Latin America is also nurturing rapid growth, including in Mexico, Ecuador, Argentina, Colombia and several emerging frontier areas like The Falklands, French Guiana, Guiana, Suriname and Nicaragua.

“Latin America is a national oil company-driven market, so we approach the region by political block,” Michael LaMotte, managing director, head of energy, Guggenheim Securities said. “You have the absolute control states like Venezuela and Mexico. Conversely, there are countries like Colombia that are attracting outside capital – even though the conventional resource potential is relatively small. Two of the region’s biggest countries, Argentina and Brazil, have started to migrate more toward control states, which we believe will slow the pace of drilling over the near and intermediate terms.”

Mr LaMotte noted that the rig count in Latin America is expected to average 450 this year, up from the 2012 average of 423. Most markets within the region should move sideways this year, he added, with the exception of Mexico, which alone is expected to account for about half of the region’s growth. “Colombia should be up by more than the region’s average as well; however, it is growing off of a relatively small base. And although the potential of the Vaca Muerta formation in Argentina is truly world class – for both natural gas and liquids – we expect growth in drilling to be fairly anemic this year, as operators continue to learn more about the resource.”

Countering the market growth in frontier areas, however, is the steady activity of the region’s NOCs. “The government controls both the regulatory and environmental agencies, and they dictate the pace of lease sales and partnering,” Mr Acuff explained. In frontier areas, the government regulatory framework is typically not as developed, which can speed up the process. “In several of these countries, there is not a history of oil and gas exploration so they’re interested in bringing in the IOCs to utilize their technology and experience,” he said.

In general, he continued, as more NOCs in Latin America go offshore, they will look for additional experience and expertise from IOCs. “That’s one of the areas that is driving the growth for the IOCs and the growth in Latin America,” Mr Acuff commented, adding that Diamond Offshore is focused on activities in Colombia, Nicaragua, Suriname and Guiana. “We’re hoping they are successful because it could be a very large market if they hit what they are targeting.”

A May 2011 report by the US Department of Energy identified Argentina as having the world’s third-largest shale resource base, behind China and the US. However, the drilling and completions model in Argentina is different from that of the US. “For starters, the Vaca Muerta is a stacked reservoir, with plenty of vertical well potential,” Mr LaMotte said. “Although the number of horizontal wells drilled in the country will continue to grow, the number of new rigs needed for the Argentina market is likely to translate into a handful each year for the next few years, as mobility is not yet a premium in the market like it is in the US.

“Compared to the advanced rigs in the US, the rigs in Argentina just don’t move around as much. They are on location a lot longer just because drilling times and completion times tend to be so much longer.”

The productivity of the services industry is another issue in the Vaca Muerta, Mr LaMotte continued. “Currently, frac crews are able to complete about one stage per day, whereas the same crew working in the Eagle Ford, for instance, could probably average about eight stages per day. That has to do with the availability of water, sand and proppant, rail and truck infrastructure, etc.”

Besides productivity challenges, another matter in Argentina is concentrated lease ownership, meaning millions of acres are often being leased by only a few operators. “In the US, one of the reasons why we saw activity take off so quickly is that you can put 100 operators and 30 contractors into a well-defined region, and let them figure the play out through trial and error. Because all of the companies learn from each other, the cost of any one company’s experimentation is relatively low, and the learning curve of the entire basin improves quickly,” Mr LaMotte said. “In a basin like the Vaca Muerta, a single operator isn’t going to blitz a million acres at the same time – they don’t have the human resource to address it – and from a returns standpoint, it risks too much capital. Consequently, the pace of activity will naturally be a lot slower.”

For conventional resources, one setback was the recent dispute between the Argentinian government and Repsol. In April 2012, Argentina’s president Cristina Fernández de Kirchner announced that the country would take back majority control of YPF, which was 57% owned by Repsol at the time. “The government of Argentina wanted to see the cash being generated by YPF reinvested in Argentina,” Mr LaMotte said. “Since the takeover of YPF, the company has stepped up investment locally, and we see ventures with large IOCs as incrementally positive over the long term.”

Last year, Ecuador’s economy was the second fastest-growing economy in Latin America, Fernando Navia, a trade commissioner for Ecuador, said at a licensing round road show in Houston on 4 February touting his country’s petroleum exploration opportunities. To encourage energy industry investments, Ecuador has been marketing its southeastern bidding round, where 13 oil blocks are up for licensing. Contracts are expected to be signed in Q3 this year.

“This is a very big day and a new era for Ecuadorean oil as a key driver of the national sustainable development,” Mr Navia said. The income generated by oil is distributed mainly to socio-economic investments, such as education, healthcare, social protection and infrastructure.

The Ecuadorean government also continues to work with local communities to ensure expectations are met as far as environment and safety. “Our reality in Ecuador is that communities and indigenous nationalities are supporting this bidding process. In these signed agreements, each community leader is agreeing with the government for $3.4 million of profits from these blocks to go toward programs for social development,” Andres Donoso Fabara, undersecretary for land management contracts allocated and hydrocarbon for Hydrocarbons Secretariat of Ecuador (SHE), said.

Until results are in from the 2013 bidding round, it’s believed that the country has the infrastructure and the capital but is limited by its resource potential. “They’re doing what they can with what they have,” Mr LaMotte said. “Growth is going to be modest as a result of the change from a production sharing system to a services agreement system, but it should continue to come from the reworking of old fields, where the priority is to grow production by raising recovery factors.”

Sharing the deepwaters of the Gulf of Mexico with the US, Mexico continues its step-out into deepwater, although the country’s political framework and processes still pose challenges. “Mexico is just PEMEX because of the way the laws are set up, so it’s a one-operator job,” Quest Offshore’s Ms Cook said. “They’ve brought in four rigs over the last two years that are brand-new ultra-deepwater rigs with average dayrates of half a million a day, and they have five rigs under contract now. Three have been working, one is getting ready to start, and all are drilling in ultra-deep.”

There have been only approximately seven deepwater discoveries over the past three years, with an average of one to 1.5 wells drilled per year, she continued. “PEMEX doesn’t have a lot of experience in deepwater, and they don’t have a lot of help. They’re doing it a lot themselves, and until the laws change, we see that to be very slow, but it looks like there could be something good there.”

With Mexico’s presidential election in July 2012, a lot of hope has been pinned on the campaign platforms of the country’s new leader, Enrique Peña Nieto, as well as many members of the Mexican Congress, that energy reform will take place in the next couple of years, Mr Acuff said. Diamond Offshore currently has five jackups operating for PEMEX and continues to look for new opportunities to add rigs to the Mexican market, particularly as PEMEX continues to step out into deeper waters. In April 2011, the NOC signed a five-year, $850 million contract for Seadrill’s West Pegasus ultra-deepwater semisubmersible, which would go on to drill the Supremus-1 discovery well in October 2012 while drilling with the rig.

“PEMEX in deepwater could be a big story,” Mr Acuff continued. “They’re continuously looking to add floating drilling rigs, so we’re excited about the area and hope they have success there to spur additional growth in Mexico.”