Troubled Brazil works to open pre-salt, ease regulatory restrictions

Amid lower E&P activity levels, Brazilian government is considering reforms on local content and allowing more operators in pre-salt; Petrobras is maintaining focus on optimizing pre-salt drilling/completion

By Kelli Ainsworth, Editorial Coordinator

As of July, Petrobras had 39 floating rigs on contract in Brazil. That compares with 60 at the beginning of 2015 and 42 at the end of that year, according to Rudimar Lorenzatto, E&P Executive Manager for the Brazilian national oil company. Despite this fall in activity, Petrobras remains heavily focused on the pre-salt. Of the 60 wells planned for 2016 and another 60 planned for 2017, 60% are expected to be in the pre-salt areas. “Pre-salt is the main focus in the future for Petrobras’ business plans,” Mr Lorenzatto said.

Further exploration, however, is being handled with an abundance of caution. “All major oil and gas companies are being forced to cut exploration budgets and reevaluate exploration strategies,” Mr Lorenzatto said. “There is currently a significant worldwide decrease in spud rates for offshore exploration wells, especially in deepwater environments.” In the short term, Petrobras will focus on exploration prospects with low risk and high potential returns, he added.

Adding to the market challenges stemming from low oil prices, Petrobras also continues to deal with aftershocks from the corruption scandal of 2014 and 2015. Moreover, Brazil remains mired in an economic and political crisis. In May, the Brazilian Senate voted to hold an impeachment trial for President Dilma Rousseff. She is suspended from her presidential duties until the trial concludes later this year, at which point she will either be reinstated or fully removed from office. Vice President Michel Temer is serving as Interim President.

While these events signal instability in the country, Fernando Ferreira, Energy Policy Analyst for the Rapidan Group, said he believes that these changes could actually be positive for Brazil’s E&P industry. While President Rousseff and the Worker’s Party took a very nationalistic approach to Brazilian energy policy, Vice President Temer, who hails from the Brazilian Democratic Movement Party, seems to have a more market friendly outlook.

“We think that the change in government is bringing about positive signals of change,” Mr Ferreira added. “I think that as long as they don’t revert back to a government with the same position as before, they’re likely to keep some of the regulatory changes that are being made.”

For one, Brazil is in the process of easing its stringent local content requirements. For example, the production-sharing contract for the pre-salt Libra field requires 37% local content during the exploration phase and 55% during development. Further, companies are required to buy as high as 65% of goods and services from Brazilian companies. Such requirements were already considered burdensome in the years prior, but now they have become even more onerous as several local shipyards have been shut down, whether due to implications with the corruption scandal or for other financial reasons. “Not only is there a loss of capacity, there’s a cost issue and there’s a timing issue. Projects would take longer to be completed that way,” Mr Ferreira said.

In addition to local content, the Brazilian legislature is also considering opening Brazil’s pre-salt fields to operators besides Petrobras. In 2010, the government started requiring that Petrobras hold at least a 30% stake and serve as the sole operator on all pre-salt projects. Under the proposal being considered, Petrobras would be offered the right of first refusal. The NOC could choose to operate a pre-salt development and hold a 30%-plus share, or it could pass on the opportunity and choose not to be involved in the development of that field. The Senate approved the legislation in February, but approval is still needed from the lower house and the president for it to be enacted.

“It’s virtually certain that it will pass, and as soon as it does, acting President Temer is ready to sign it,” Mr Ferreira said. “Once Congress approves the pre-salt reform, Temer is likely to announce an H217 auction of the pre-salt area – which will proceed even if price weakness continues into next year.”

Statoil acquires operated interest in Brazil’s Santos basin, including Carcará discovery

Statoil and Petrobras have agreed that Statoil will acquire Petrobras’ 66% operated interest in the BM-S-8 offshore license in Brazil’s highly prolific Santos Basin. The acquisition includes a substantial part of the Carcará oil discovery, one of the largest discoveries in the world in recent years.

Carcará was discovered in 2012, on the geological trend of the nearby Lula field and Libra area. It is a world-class discovery of high-quality oil of around 30° API and with associated gas in a thick reservoir with excellent properties. It straddles both BM-S-8 and open acreage to the north, which is expected to be part of a license round in 2017. Statoil is well positioned for operatorship of a unitized Carcará field following this transaction, and the license round will provide an opportunity to scale up the position in the field. Statoil estimates the recoverable volumes within the BM-S-8 license to be in the range of 700 million to 1.3 billion barrels of oil equivalent.

In addition to the Carcará discovery, BM-S-8 holds exploration upside that may significantly increase its resource base. The license is in its final exploration phase, with one remaining exploration commitment well to be drilled by 2018.

“Through this acquisition, we are accessing a world-class asset, and we strengthen our position in Brazil, one of Statoil’s core areas due to its large resource base and excellent fit with our technology and capabilities,” Eldar Sætre, Statoil President and CEO, said. “The Carcará field will significantly enhance our international production volumes in the 2020s and beyond. We are developing a strong Brazilian business with a broad portfolio, material production, high-impact exploration opportunities and excellent potential for long-term value creation and cash flow.”

The total consideration for the acquisition is $2.5 billion. Half of it will be paid upon closing of the transaction, with the remainder being paid when certain milestones have been met. These are partly related to the license award but mainly to the future unitization of Carcará. The effective date for the transaction is 1 July 2016.

Statoil and Petrobras are also in discussions regarding a long-term strategic cooperation. The focus will be in the Campos and Espírito Santo basins, as well as new cooperation within gas and technology projects in the Santos basin. DC

Staying competitive

Such a regulatory change would make pre-salt prospects more attractive to international partners, said Edson Nakagawa, Technical and Audit Director for Pré-Sal Petróleo SA (PPSA). The state agency was created to administer pre-salt production contracts. “Changes to the Brazilian regulatory framework would contribute to further increases to the competitiveness and the level of activities in the Brazilian pre-salt over the next few years,” he said.

Despite low oil prices globally and the political challenges in Brazil specifically, Mr Nakagawa said he believes that Brazil’s pre-salt fields remain an attractive investment for the time being. “While some E&P projects in other parts of the world have already been delayed in the face of lower oil prices, the projects in the Brazilian pre-salt fields are kept on the priority lists of companies,” he said.

Brazil’s pre-salt fields contain an estimated 37 billion to 46 billion BOE of recoverable reserves, Mr Nakagawa said in a presentation at the 2016 IADC Deepwater Drilling Conference, held 15-16 March in Rio de Janeiro. Daily pre-salt production from 53 wells averaged just over 1 million BOED in Q1 2016. This amounts to an average production of 20,000 BOED per well. “Brazilian pre-salt remains attractive due to the enormous volumes of oil resources combined with high-productivity wells, due to the high quality of carbonate reservoirs with extensive thick production zones,” Mr Nakagawa told DC after the conference.

Where the challenge lies is making sure that pre-salt remains globally competitive, especially now when operators are doing everything possible to lower their breakeven prices. “Based on long-term oil price history,” Mr Nakagawa said, “the industry should plan for new development breakevens to lie somewhere in the range of $20 to $40 per barrel.” There are very few significant oil reserves around the world that can be developed in this range, however. “With this view, PPSA is closely working with its partners to increase efficiency and reduce exploration and production costs,” he said.

Currently, PPSA is overseeing the production-sharing contract for the Libra Field in the Santos Basin. Under this contract, for every barrel of oil produced, approximately 15% will go to the country in the form of royalties. Then, after subtracting exploration and development costs, the remaining “profit oil” is divided among the participating companies based on their total share in the field.

In 2013, the field was awarded to a consortium made up of Petrobras, Shell, Total, China National Offshore Oil Corp and China National Petroleum Corp. So far, six exploration wells have been drilled on the field, and bidding is now under way for the 3D seismic survey. The first extended well test is anticipated in the first half of 2017, Mr Nakagawa said at the Deepwater Drilling Conference.

Over the past two years, PPSA has also negotiated and signed unitization agreements for the development of the Tartaruga Verde, Lula e Sul de Lula, Sapinhoá and Argonauta fields. These agreements allow operators to work together to develop newly discovered reservoirs that may extend into blocks that had already been leased. PPSA is also negotiating additional unitization agreements in the pre-salt areas.

A major challenge for PPSA in the coming years is the commercialization of Brazil’s oil and gas resources through contracted commercialization agents.

“Our role will be to manage and monitor the commercialization activities with the aim of maximizing the economic returns to the state,” Mr Nakagawa said. However, before any commercialization activity can take place, the National Council of Energy Policy (CNPE) must approve a commercialization plan. Brazil’s Ministry of Energy and Mines recently coordinated a group, which includes PPSA, to develop a policy proposal for the CNPE to evaluate.

Between the state’s share of the Libra field and current production estimates from the unitization areas, Mr Nakagawa said, PPSA will be responsible for managing between 400,000 and 600,000 BOED by the middle of the next decade.

“To meet this challenge, we are building an integrated management system, which will not only help us in managing the production-sharing contracts and unitization agreements but also the commercialization contracts,” he said. This system requires the development of operational procedures for PPSA’s management processes and computer systems to help automate parts of those processes. It will take an estimated two years to develop the system, Mr Nakagawa said.

Learning from experience

After five years of pre-salt production, Petrobras has built up a significant knowledge base that is being used to optimize the design, drilling and completion of wells in the pre-salt, Mr Lorenzatto said. “Petrobras has invested a lot in technology and process redesign,” he said. “The results up to now show significant impacts on well duration and cost reduction.”

Over the past three years, Petrobras has reduced the time required to drill and complete a pre-salt well by 33%, Mr Lorenzatto said, citing technology such as managed pressure drilling (MPD) and improvements to well design.

Negotiations with suppliers has also helped the operator to reduce the cost of pre-salt operations. A first round of negotiations had cut costs by 13%, and the company is now going through a second round of negotiations with suppliers, Mr Lorenzatto said.

He also emphasized the need for a stronger alignment between operators and contractors, saying it’s necessary to achieve further cost reductions. “In crisis time, the contractors can help Petrobras rethink the business process to be more safe and efficient.” Contractors can also help manage costs by improving crew competencies and rig surveillance, and Mr Lorenzatto specifically cited BOP reliability as an area that requires further improvement.

Partners in cost reduction 

Contractors, too, are striving to make pre-salt drilling both safer and more cost effective. Brazilian drilling contractor Queiroz Galvão Óleo e Gás (QGOG Constellation), which currently has nine rigs operating offshore Brazil, launched an initiative in 2013 called Programa BOP 100%. “This program aims to standardize and enhance the operation, maintenance and performance of the main well safety equipment, the BOP,” QGOG Constellation CEO Leduvy Gouvea said. Since its launch three years ago, the program has reduced companywide BOP downtime by 59%, he added.

Additionally, the contractor is working to obtain API Q2 certification for its rig fleet. This certification, introduced in 2014, is awarded to service companies in the oil and gas industry that have incorporated the latest safety standards and practices into their quality management systems. The goal is to ensure employee competency, risk assessment and contingency planning.

QGOG currently owns and operates six ultra-deepwater DP rigs with water depth ratings ranging from 7,900 ft to 12,000 ft. The contractor also has one deepwater semi that can drill in up to 3,600 ft of water and two mid-water semis for the 1,700-2,000 ft range. According to Mr Gouvea, most of this fleet is MPD-ready and equipped with BOP stacks capable of safely shearing most of the heavy casing strings typically used in the salt intervals of these wells.

“Pre-salt requires special approaches in terms of operational procedures and equipment,” he said. For instance, QGOG has developed special procedures for avoiding stuck pipe, severe circulation losses and drill string fatigue in pre-salt formations.

In addition to its offshore fleet, QGOG also owns nine onshore rigs. Five of these rigs are heli-portable and designed for remote locations.

As of July, all of QGOG’s offshore rigs were under contract, the majority of them with Petrobras. The onshore segment has been weaker, with some rigs idled.

“Market visibility for new contract opportunities has been impacted by clients’ ability to plan investments and excess supply in the drilling market. Internally we are focusing on cost containment and capital discipline. Our efforts also include measures on reducing operating costs and optimizing CAPEX without compromising safety and efficiency,” Mr Gouvea commented. However, he added, “Brazil remains among the largest oil and gas markets in the world. We continue to believe in the country’s potential.” DC

• As of July, Petrobras had 39 floating rigs on contract in Brazil. That compares with 60 at the beginning of 2015 and 42 at the end of that year.
• Petrobras plans to drill 60% of its wells in 2016 and 2017 in the pre-salt area.
• Brazil’s pre-salt fields still contain an estimated 37 billion to 46 billion BOE of recoverable reserves.
• Daily pre-salt production from 53 wells averaged just over 1 million BOED in Q1 2016. This amounts to an average production of 20,000 BOED per well.
• PPSA will be responsible for managing between 400,000 and 600,000 BOED by the middle of the next decade.
• In the past 3 years, QGOG Constellation has reduced companywide BOP downtime by 59%.