August 17, 2016
Author: Kjetil Solbrække, SVP South America
Publisher: Offshore Engineer
The South American offshore market is back on the heat map. Exxon has confirmed the giant Liza discovery 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 Carcara discovery, a divestment to Statoil for 2.5 billion USD, increases the expectations towards the offshore market in South America.
Liza is the northern most discovery on the Atlantic margin that runs from North East 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 in South America is much more than just pre-salt in Brazil. Potentially, the Atlantic margin will open up a new multibillion barrel play in South America.
Nonetheless, there is also a very positive development in the pre-salt region. It is now 10 years ago since Petrobras discovered 8 billion barrels of oil in the Lula field, which is located under one thousand meters of fossil salt in ultra-deep waters off Brazil. Since then, Petrobras has found almost 30 billion additional barrels, and some 15 billion barrels 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 PSA (Libra). However, it is well known that also 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.
Firstly, the Brazilian government has to loosen Petrobras’s 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 Production Sharing Agreements (PSA) or normal concessions in the pre-salt area. Today the law states that it 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). Only bureaucrats and lawyers would appreciate a solution where one would have to have a unitization process between different companies with their positions in two different tax regimes when exploiting the same 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.
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 is expected to be taking place by the end of August. It is expected that the Temer administration will implement significant changes in oil & gas policies and try to solve the challenges mentioned above. The outlook, if the impeachment is not approved by the Senate, is much more uncertain and will be seen as negative for the economy in general and the oil & gas industry specifically.
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 to 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 the Guyana 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 in the North-West 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 FPSO’s, Brazil (incl. pre-salt), Guyana, and Southern Africa will demand 40-60 FPSO’s over the next 10 years. Subsea systems and over 100 deep-water wells expected to be drilled will certainly assure a huge interest on the offshore market in Brazil.
In addition to this, comes the potential from new discoveries including the once expected to be found along the Atlantic margin in the north of Brazil.
If we look closer into the pre-salt fields in Brazil, we see several fields with more than 1 billion barrels 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 and 80 USD per barrel, with Lula at 40 and Carcara in the top range between 55-70 USD/boe, respectively. There is certainly significant upside potential to the numbers in Carcara 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 is also depending on the policies of the government (ref. above).
A last very important issue for Carcara is the “Unitization Round”. It is assumed that as much as 30-50 % of the whole Carcara structure could be in open acreage and that this will be unitized with the existing Carcara license. This will make the development of Carcara 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 barrels per day with low decline rates is quite. By getting more diversity of operators one should expect a positive development on learning curves for drilling of wells, and executing on project development. Brazil’s production is expected to increase to above 3 million barrels per day 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 & gas policy, Brazil could produce around 5 million barrels per day 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 deep-water 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 deep-water 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.
Julia Weiss, VP Marketing
Phone: +47 48 29 87 61
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