The South American offshore boom

Kjetil Solbraekke, Rystad Energy

September 1, 2016

The South American offshore market is back on the heat map, due to Exxon’s major Guyana discovery and Statoil’s interest in Brazil’s Carcará, says Rystad Energy’s Kjetil Solbraekke.

Statoil took over as operator of the Peregrino field (FPSO pictured), offshore Brazil, in 2008. Photo from Statoil.

Things are heating up in South America. Exxon has confirmed the giant Liza discovery, offshore Guyana, and is expected to fast track the project towards sanctioning in 2017. Together with recent news that Petrobras’ divestment process has finally commenced on the Carcará discovery, with a sale to Statoil for US$2.5 billion, increases the expectations towards the offshore market in South America.

Liza is the northern most discovery on the Atlantic margin that runs from Northeast Brazil towards Guyana. This billion-barrel discovery together with approximately 20 upcoming deepwater exploration wells along the Atlantic margin in northern Brazil over the next 4-5 years shows significant potential for new discoveries in South America. Liza is the first field to be developed along the Atlantic margin, and it illustrates that offshore South America is much more than just pre-salt in Brazil. Potentially, the Atlantic margin will open up a new multi-billion barrel play in South America.

Nonetheless, there is also a very positive development in the pre-salt region. It is now 10 years since Petrobras discovered 8 billion bo in the Lula field, which is under 1000m of fossil salt in ultra-deepwaters off Brazil. Since then, Petrobras has found an additional 30 billion bbl, and some 15 billion bbl of pre-salt oil are now developed. This is only taking into account the part of the discoveries that are within the existing concessions and production sharing agreements (PSA) [Libra]. However, it is also well-known that significant volumes from existing discoveries expand into open or non-licensed areas, and this is expected to be the focus for the next license round in Brazil, also called the “Unitization Round.” However, it is assumed that before such a round can take place, the Brazilian government has to make some important adjustments to their petroleum policy.

Map of Brazil offshore. Image from Statoil.

Firstly, the Brazilian government has to loosen Petrobras’ monopoly as a pre-salt operator. This change of law is expected to happen shortly as the senate has already passed it and only needs to be approved by congress. This change will allow for greater involvement and operatorship by international oil companies in the huge pre-salt opportunities.

Secondly, the government has to confirm the continuation of current tax reliefs for the offshore development also called “Repetro.” This is a crucial tax relief on investments that could in itself be a show stopper for new investments in the sector.

Thirdly, the government is required to show more flexibility regarding the decisions on either PSA or normal concessions in the pre-salt area. Today, the law states that there should be PSA in all new pre-salt auctions, something that might complicate proceedings significantly when adding acreage to existing discoveries (the upcoming Unitization Round). A unitization process is implemented to simplify coordination between different consortiums or companies realizing that they have rights to the same reservoir. By awarding new area in an existing discovery with a completely different regulation will not simplify but significantly complicate a coordinated and cost efficient development of a common reservoir.

Lastly, Brazil requires a more realistic and functional local content policy. It is only fair to expect that an increasing share of the supplies for offshore developments can be and should be constructed in Brazil. However, this has to happen over time through strengthening of the local industry and building sustainable competitive suppliers. How to fix the transition to a new regime for local content is a very delicate matter; however, it is crucial in order to get new projects developed.

Left: Figure 1: Exploration wells along the Atlantic margin in Brazil. Right: Figure 2: Brazil long-term production outlook.

There are good reasons to expect progress on all these matters, however, we assume that companies will only feel more comfortable when the new government is confirmed to continue. The final vote on impeachment of President Dilma Rousseff is expected to be taking place by the end of August (as OE went to press). It is expected that Michel Temer’s, current interim president, administration will implement significant changes in oil and gas policies and try to solve the challenges mentioned above.

For Exxon, the Liza project is expected to move forward more smoothly. The current industry in Guyana is fairly limited; the economy is small, and the expectations for local content seems to be more realistic. For the Brazilian industry, a project like Liza should be seen as an opportunity to take advantage of the proximity to Guyana’s waters and to show international competitiveness. A successful local industry in Brazil should have exports of products and services as a clear ambition. Both the markets to the northwest of Brazil and in southern Africa should be strategically ideal for the offshore industry working out of Brazil.

If we look at the numbers of floating production, storage and offloading vessels (FPSOs), Brazil (including pre-salt), Guyana, and Southern Africa will demand 40-60 FPSOs over the next 10 years. Subsea systems and over 100 deepwater wells expected to be drilled will certainly assure a huge interest on the offshore market in Brazil.

If we look closer into the pre-salt fields in Brazil, we see several fields with more than 1 billion bbl in reserves, and this is before we have taken into consideration the volumes in the reservoirs, which are still in open acreage.

The fields predominantly show a breakeven oil price (10% IRR) between $40-80/bbl, with Lula at $40 and Carcará in the top range between $55-70/boe. There is certainly significant upside potential to the numbers in Carcará linked to getting increased recovery of reserves out of the field and also to evaluate a more efficient development with lower costs per barrel. An efficient development of the pre-salt also depends on the policies of the government.

Figure 3: Oil production from pre-salt wells in terms of number of months from start of production.

A last very important issue for Carcará is the “Unitization Round.” It is assumed that as much as 30-50% of the whole Carcará structure could be in open acreage and that this will be unitized with the existing Carcará license. This will make the development of Carcará even more robust, and would reduce the breakeven oil price even further. This could become a better investment opportunity than the giant Libra field.

The key strength of the pre-salt fields is the extremely high productivity in the wells as shown in Figure 2. Having wells producing up to

50,000 b/d with low decline rates is unique in the world of oil fields. By getting more diversity of operators one should expect a positive development on learning curves for drilling wells, and executing on project development. Brazil’s production is expected to increase to above 3 MMb/d within three years. The pre-salt is expected to be half of this volume and will continue to increase going forward. Given a successful oil and gas policy, Brazil could produce around

5 MMb/d within 10 years from now, placing it among the seven largest producers in the world.

The Liza field has a breakeven cost in the low range compared to the pre-salt fields in Brazil, and is expected to be sanctioned in 2017. The field is the first to be developed on the Atlantic margin and Exxon’s plans to develop the field is a strong proof of feasibility of developing deepwater fields outside South America. Maybe Liza will become a good and very relevant benchmark for the many developments in the pre-salt region in Brazil, and for the cost of developing a giant deepwater field in South America with very limited local content requirements.

The potential in South America is huge and with the Exxon discovery and Statoil’s acquisition it seems activity again is about to return to the continent.

Kjetil Sobraekke is senior vice president for South America at Rystad Energy, and he heads the firm’s Rio de Janeiro office. Sobraekke has more than 25 years of oil and gas experience in both Europe and South America. Since 2005, Sobraekke has lived in Brazil, where he previously served as CEO for Panoro Energy, and general manager for Norsk Hydro.