Brazilian pre-salt reserves - Confusão já é notícia internacional no mercado de petróleo e gás

Brazilian pre-salt reserves bring role of oil industry into question

Published: Jul 31, 2009

The tug of war between the present concession model and production sharing agreements

Peter Howard Wertheim

Rio de Janeiro—Since the discovery of potentially massive oil reserves in the "pre-salt" region off the coast of Brazil, the Brazilian government has been grappling with how to structure and regulate exploration, drilling, and the potential for a large influx of foreign investment. And the Latin colossus is being catapulted into becoming one of the world's largest exporters of crude.

José Sergio Gabrielli, Petrobras' president and CEO told us that Petrobras and its foreign partners plan to produce 5.7 million barrels of oil and gas per day by 2020 (more than half the output of Saudi Arabia). Such a feat would make Brazil's national oil company one of the five largest integrated energy companies in the world.

Last January Petrobras announced it has raised its investment plan by 55% from $112.4 billion for the 2008-2012 period to $174.4 billion for 2009-2013 period and investing $28.6 billion in the current year itself.

Of the total investments, Petrobras will allocate $104.6 billion for exploration and production, including the subsalt reserves, compared with $65 billion that was directed to E&P during the previous 2008-12 plan.

The investment plan represents an annual average of $34.9 billion, 90% ($157.3 billion) of which will be invested in Brazil (E&P, downstream, and abroad) and 10% ($16.8 billion) abroad.

This massive hike in investment comes at a time when oil companies around the world are cutting jobs and cutting costs.

Pre-salt area potential
Brazil's pre-salt region, located roughly 170 miles off the coast of Brazil in the Atlantic Ocean, is expected to range at least from Espírito Santo to Santa Catarina State, measuring 800 kilometers (497 miles) long and 200 kilometers (124 miles) wide.

In 2007, Petrobras announced the discovery of the Tupi field, with 5 to 8 billion recoverable reserves of light oil. The discovery was the first indication that the country could be catapulted into the select group of countries with substantial oil and natural gas reserves.

By nature of the region, extraction is potentially challenging and costly. However, when oil prices started to tumble, Petrobras officials repeatedly affirmed that pre-salt E&P was viable at $35 to $45 per barrel. Now that oil is hovering around $60 per barrel, those same officials are grinning ear to ear.

Marcio Rocha Mello, president of the Brazilian Association of Petroleum Geologists, the national branch of AAPG (US), and head of a private consultancy estimates reserves of up to 100 billion barrels in the pre-salt region. Using a $60 per barrel calculation, such predictions mean big dollars - roughly $6 trillion.

US friendly Brazil is potentially sitting on a gold-mine of oil and gas reserves. The US and other counties looking to move away from dependence on Middle Eastern oil and searching for new reserves to satisfy growing global energy demands are aware of the potential. They are also aware of the emerging power struggle.

The opportunity to forge a more extensive association and even a partnership with Brazil presently exists. Strengthening trade ties would be a good place to start. Under social democrat President Luiz Inácio "Lula" da Silva, Brazil has emerged as a regional powerhouse, competently leading international peacekeeping efforts in Haiti and acting as a "grown-up" restraining influence on a power-hungry, anti-US Hugo Chávez, said Ray Halser, PhD of the powerful conservative Heritage Foundation, in a speech delivered at the Foreign Affairs Committee of the U.S House of Representatives.

Production sharing vs. concession model
Since the discovery, the Brazilian government has been grappling with how to structure and regulate exploration, drilling, and the potential for a large influx of foreign investment.

The US and others are following the power struggle between those who want to maintain the present concession model and the production sharing agreement advocated by nationalist sectors of the government.

Minister Edison Lobão surprised the country on July 13 when he told reporters that the new oil regulations being devised by an inter-ministerial group could include the production sharing agreement in post salt areas.

The ministers have been meeting for a year, and, until Lobão's announcement, the production sharing agreement (PSA) was set to only apply to the pre-salt deep water blocks - mainly the Santos basin where Petrobras has had 100% success finding oil in drilled wells.

The argument was that since the probability of drilling a dry hole in the pre-salt region was slim, it was not fair to the federal government to maintain the concession model enabling companies to own the petroleum produced to sell as they wish.

Further, Lobão said the government might also add to the system "strategic areas that have large oil reserves." According to Lobão "any area onshore or offshore near or far away the pre-salt areas that have large concentration of hydrocarbons can come under the production sharing agreement."

How to define strategic areas?
A key problem is will be setting up criteria for defining strategic areas. 'Large volumes of petroleum' is not a precise definition. "What is large for one company might not be large for another one," a top oil executive told us under the condition of anonymity. "For an offshore area a large amount of petroleum is one thing. For a small onshore block it is another thing," he added.

Under the concession regime, the extracted oil belongs to the company that has the license for a certain area. The company then sells the oil, keeps the proceeds, and pays the federal government through taxes and royalties.

Under the production sharing system, all oil belongs to the federal government, and companies receive a fixed share of revenues or of oil.

"The country does not need to establish a new framework system, as the concession regime we currently have works fine," said Adriano Pires, director of consultancy firm Centro Brasileiro de Infraestrutura.

New state-owned oil company
Minister Lobão is in favor that a new Brazilian state-owned company to create a fund to invest in diminishing Brazil's crushing poverty. The new company would act as an equity company similar to Norway's Petoro and would not engage in E&P.

According to Lobão, the new proposals will be submitted to Brazil's President Luiz Inácio Lula da Silva, "as soon as possible, and the president will present them as a Constitutional amendment to Congress."

A return to monopoly?
Wagner Freire worked for Petrobras for 34 years and served as Petrobras' E&P director. He is now president of the Association of Independent Oil Companies (APBIP). He said he firmly believes that the adoption of the production sharing agreement will be deeply harmful to Brazil. "A country cannot have only one company, (referring to Petrobras). The name of the game is competition and what we are seeing is a possible return to Petrobras upstream monopoly."

A Lobão aide said cited divisions of opinion within the inter-ministerial group as to whether Petrobras, under the new regulations, should be granted areas without having to participate in the yearly National Petroleum and Biofuels Agency (ANP) auctions for areas to be explored by winning bidding companies.

One side believes that because there are companies in Brazil that are larger and have more money than Petrobras (e.g. Exxon), Petrobras would not have a fair chance to win auctions.

The side that believes Petrobras should participate in the ANP auctions points out that, since 1997 when the state-controlled company lost its upstream monopoly, it has been winning the lion's share of areas at auctions - primarily because Petrobras is seen as a leader in deep and ultra deepwater exploration and production technology. Even now, in a competitive environment, Petrobras produces most of the oil and gas in the country.

The tug of war in Brazil between those who want to maintain the concession model and nationalists mainly in the government and Petrobras reflects a diametrically opposed view of the role of oil and gas production as a factor of development of a society.

The defenders of the concession model, mostly multinational oil companies operating in Brazil, favor competition as key to oil discoveries and prosperity. In this scenario, the oil companies are mostly concerned about bottom line financials and keeping shareholders happy. At the same time, the companies are becoming increasingly environmentally sensitive and are engaging in social programs.

However, generally speaking, it is the role of governments to administrate societies so that citizens have the best public programs (health, education, etc.).

The worst global economic and financial crisis since 1929 has turned on its head some ideological sacred cows promulgated by the small state, least intervention in the economy propagandists. Suddenly governments are bailing out banks and financial institutions and generally entering into the market's sacred turf, to avoid an even worse international collapse.

Production sharing could raise more revenues for Brazil's government to invest in sorely needed social programs. The 60 million dollar question is whether revenues from production sharing regulations would be allocated for such programs.

History suggests that the abundance of natural resources doesn't necessarily turn into better living conditions for the people. Previous wealth booms in Brazil (sugar cane, gold and precious stones, rubber, and coffee) did not translate into better living conditions for the common people.

However, after six years in office and high public approval ratings, President Lula may prove history wrong. Unlike the previous booms, oil may be the new found wealth the country needs for its people.

Avoiding the oil curse
Like all countries with large volumes of oil, Brazil faces potential pitfalls that come with excessive dependence on oil revenues. Heavy dependence on oil revenues has caused serious economic problems in some oil exporting countries. Civilian chief of staff and chairman of Petrobras board of directors, Dilma Rousseff, said the Brazilian government is working to avoid the 'oil curse', that is, exporting crude and importing equipment.

Brazil plans to export value-added oil products instead of only crude oil. "Brazil has a sophisticated, diversified and powerful industrial base that can perfectly produce and consume value added products and provide skilled manpower to produce equipment," continued Rousseff.

Although it is not a secret that most private oil companies, especially multinationals, are in favor of maintaining the present concession model, such companies are staying quiet, at least in public, so as to not fan the fires of nationalism.

About the author
Peter Howard Wertheim is an international oil/gas journalist, based in Rio de Janeiro, Brazil. He and his wife Dayse Abrantes, also an energy journalist, are writing a book titled: "Brazil's oil boom in an international context." They can be reached at peterhw@frionline.com.br or daysew@frionline.com.br

OGFJ Associate Editor, Mikaila Adams contributed to the editing of this article.

FONTE: http://www.ogfj.com/index/article-display/6444410005/s-articles/s-oil-gas-financial-journal/s-e-__p/s-offshore/s-brazilian-pre-salt.html