Revised promises

Mark Adeosun

October 1, 2015

Brazil will need to drill around 300 development wells in deepwater in order to sustain and reach its production target. Douglas Westwood’s Mark Adeosun takes a look at what is at stake.

The Cidade de Paraty is a third generation FPSO vessel capable of processing 120,000 b/d of oil, associated gas treatment for 5 MMscm/d with compression and carbon dioxide removal and a water injection facility for 150,000 b/d. It is currently developing Lula NE, Santos Basin, offshore Brazil.  Photos from BG Group.

Petrobras has long been a pioneer in the adoption and deployment of deepwater technology. This has enabled the firm to build huge reserves of some 16 billion bbl of oil.

Converting these reserves to production, a bigger issue is that Petrobras has a history of setting ambitious targets with a poor record of meeting them.

The first oil output from Brazil’s giant Libra offshore area is now scheduled to flow in 1Q 2017, later than 2H 2016 as announced by Petrobras in June 2015. This delayed start-up date is one of the first signs that Petrobras will continue struggling to meet its own scaled-back targets as announced in its “2015-2019 Business and Management Plan.” Nevertheless, in July 2015, Petrobras set a new daily oil production record in its pre-salt basin of 865,000 b/d. It is pertinent to state that this production does not include natural gas extraction.

The Petrobras corruption scandal, unearthed in 2014, involving the exchange of bribes for inflated contracts with suppliers, will continue to impact the exploration and production sector [Read more – see page 70]. Blacklisted companies will be banned from the tendering process hereby losing significant industry experience achieved over the years. However, a more open tender process will improve Petrobras’ reputation and investors’ confidence in the long-term.

The Cidade de São Paulo, which started production in January 2013, is the second of 15 FPSO’s that will ultimately produce from BG Group’s big five discoveries in the Santos Basin.

The long delayed “2015-2019 Business and Management Plan” released in June is a reflection of the new reality for Petrobras. With collapsed oil prices and unfavorable exchange rates, Petrobras has slashed their expenditure plans by 40% from the plans announced more than a year ago.

Recognizing the upstream challenges, the company is now allocating 84% of its budget to exploration and production compared to 70% in the previous plan. The biggest cut goes to their refining and supply sector, which has seen its budget reduced by 67% compared to last year’s plan.

Petrobras recorded a steep decline in revenue in 2Q 2015, with a net profit of US$150.8 million from April to June, down 89% from the same period a year ago, which was prominently due to impairment of upstream assets. Over the last quarter, Petrobras’ net debt increased to $104.4 billion.

Domestic production decline rate from matured fields is a huge challenge with around 200,000 b/d of capacity eroded each year. Brazil’s huge deepwater potential remains constrained with Petrobras having to revise their production target for 2020, which now forecasts domestic oil output to increase to 2.8 MMb/d – 40% lower than its projection 12 months ago.

The scale and importance of Brazil in the overall offshore sector means that the impact of the latest spending revisions will be felt throughout the oilfield service industry supply-chain. Douglas Westwood (DW) expects offshore oilfield services (OFS) expenditure to amount to a total of $10 billion over the next five years, with rig and crew accounting for 75%.

The FPSO Cidade de Angra dos Reis, on location in the Santos Basin.

As the state-owned company continues with its divestment plan, major international oil companies such as ExxonMobil, Total, BP, and Shell continue to show interest in Petrobras’ producing oilfields as well as operating rights in Brazil’s coveted offshore pre-salt basin.

Shell is considering investing billions in Brazil. This is set to be a focal point after its planned acquisition of BG Group, even as it plans to sell huge chunks of its business to pay for the $70 billion deal, which will make Shell the largest foreign oil producer in Brazil’s deepwater oil and gas fields. Despite a comprehensive drive to cut expenditure in the face of persistently low oil prices, the acquisition of BG Group will transform Shell into the world’s biggest liquefied natural gas (LNG) supplier. The company has announced plans to sell around $30 billion in assets from 2016-2018, to improve its balance sheet and focus on its core deepwater oil and LNG business. Shell and BG’s combined oil production in Brazil is expected to attain 550,000 b/d by the end of the decade, from approximately 200,000 b/d at present.

Brazil’s huge deepwater oil reserves are set to become key sources for meeting growing global demand over the next few decades. As the industry continues to respond to the oil price environment, exploration activity is being curtailed. Operators’ cutbacks in exploration spending have resulted in cancellations/amendments of drilling rig contracts.

This appears to be the primary strategic response to low oil prices. However, DW expects drilling activity to recover in 2016 as many explorers seize the opportunity to drill at lower costs. DW predicts that over the forecast period, Brazil will need to drill around 300 development wells in deepwater in order to sustain and reach its production target. Furthermore, of the 29 new rigs being built by the company, many are under threat from either funding problems or yards withdrawing from the contracts.

DW will continue to take a conservative position on Brazil and the cut in production target now brings in line Petrobras’ expectations and our own “DW D&P” forecast.

Mark Adeosun joined Douglas Westwood in 2013, and has since conducted has conducted high-level research into various oil and gas projects, with a focus on offshore drilling and deepwater activity. He has undertaken market modeling and analysis, focusing on offshore markets and exploration and production activities. Adeosun has a BSc degree in geology and a Master’s degree from the University of South Wales in Geographic Information Systems.