May 2017

Brazil E&P: From short-term slowdown to strong growth potential

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After the temporary slowdown in the short-term production caused by corruption scandals and FPSO delays, Brazil is set to increase output by bringing on stream a large resource base of sanctioned fields, and ramping up supply to around 3.7 million boe/d by 2020. This article assesses the outlook for the Brazil E&P industry, illustrated by three key drivers: production, exploration success and spending.

Figure 1 shows Brazil’s total production, split by life cycle and projects, from 2010 to 2025. Volumes from already producing fields are grouped under the “Producing” category, while supply from discovered but yet unsanctioned fields is given under the “Discovery” category. Fields that have already been sanctioned and are waiting to be put in production in the nearest future are highlighted separately on the graph. Total oil and gas production in Brazil reached 2.9 million boe/d last year and is expected to grow to 3.13 million boe/d in 2017. High level of investments made before the oil price collapse secured production growth potential for the years to come, and thus we forecast a yearly growth of 7% from 2016 to 2020, fully driven by sanctioned fields starting to produce in the short to medium-term. These include the Buzios project, phases 66-68 of Lula, Iara, Tartaruga and Mestica, as well as contribution from other smaller projects under development. 

Production in 2020 is estimated at 3.7 million boe/d in line with the latest business and management plan of Petrobras that had 2020 production estimate lowered from 5.3 million boe/d to 3.7 million boe/d as the result of project development delays. Post 2020, production growth potential is dependent on the large discovered resource base that needs to be timely developed. We currently expect a yearly production growth of 3% between 2020-2025 assuming the start-up of projects like Sepia, Libra, and Marlim to name a few. Libra is the largest discovery anticipated to start to deliver first volumes from 2022 and grow output to 400 thousand boe/d by 2025.

Figure 2 shows the discovered volumes for Brazil from 2005 to 2016. By far the best year for exploration in Brazil was 2010, when around 13 billion boe were discovered (almost all offshore, mostly in the Santos Basin). The Libra and Buzios discoveries make up over 90% of the 2010 discovered volumes. Other large discoveries include the Lula field (2006 and 2009), as well as Iara, Jupiter and Sapinhoa discoveries (2008). Since 2010, there has been a visible reduction in discovered volumes. 2012 was an exception to the trend, when Petrobras made the Carcara and Pao de Acucar discoveries (now Statoil-operated). Although almost no new resources were found since then, significant production contributions are expected from the discoveries that have been made in the past twelve years. Most of recent discoveries are not yet sanctioned, with the exception of Lula, Sapinhoa, the early phases of Buzios and the Atapu South and Berbigão fields (Iara project), with the latter expected to be put on production next year.

Figure 3 displays the total spending in Brazil over the period 2010-2025. Investments (capex and exploration capex) decreased by 19% last year and are forecasted to fall by an additional 13% yearly from 2017-2018. Total capital spending is thus anticipated at $21 billion this year decreasing to $18 next year. Production start-ups of fields within the Lula and Sapinhoa projects (where a large part of the development cost has already been incurred), as well as corruption allegations and lower oil prices, are the main triggers for decreasing investments in 2016-2018.

The turnaround is expected from 2019 when capital expenditure in Brazil is forecasted to start to increase growing by 13% yearly to 2025. Thus, spending is estimated to recover to around $23 billion by 2020 and grow further to $42 billion by 2025. The Libra, Iara (Atapu North) and Pao de Acucar are among the discoveries contributing significantly to this growth. The operating costs (opex) are expected to grow to $20 billion by 2020 and increase to almost $27 billion by 2025. This is primarily driven by the required spending for the phases of the large projects such as Lula and Sapinhoa that either started producing in the last couple of years or are expected to come online by 2018.

Conclusion

Brazil’s oil and gas output is expected to grow to 3.7 million boe/d by 2020, with the Lula and Buzios projects playing a leading role in the growth. Post 2020, production growth potential is dependent on the timely development of the large discovered resource volumes that are yet to be sanctioned. Thus, E&P investments are expected to recover post 2019 to support this growth, as key projects such as Iara (Atapu North), Pao de Acucar and the later phases of Libra are approved.

 

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