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Brazils Subsalt
Discoveries
A Complex Path to First Oil Production
Decision Brief
CERA
An IHS Company
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or information provided to a client. 2008, All rights reserved, Cambridge Energy Research Associates, Inc., 55 Cambridge Parkway, Cambridge,
Massachusetts 02142. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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BM-S-011,
Block 1
BM-S-009,
Block 2
BM-S-021
BM-S-008
BM-S-024
BM-S-009,
Block 1
BM-S-011,
Block 2
Tupi
Carioca
Caramba
Bem Te Vi
Jpiter
Guar
Iara
1-RJS-656 (1-BRSA-618-RJS)
1-SPS-055 (1-BRSA-594-SPS)
1-RJS-652 (1-BRSA-559-RJS)
1-SPS-052A (1-BRSA-532A-SPS)
1-SPS-051 (1-BRSA-526-SPS)
1-SPS-050 (1-BRSA-491-SPS)
1-RJS-628A (1-BRSA-369A-RJS)
Discovery Well
24 May 08
27 Mar 08
9 Dec 07
25 Oct 07
17 Sep 07
4 Apr 07
30 Sep 05
1 Jan 05
Spud Date1
ongoing
ongoing
Jul 08
3
18 May 08
10 Dec 07
Jul 07
4 Oct 06
Jul 07
End
Drilling
Date
8 Aug 08
Discovery
Discovery
Discovery
25 Jan 08
13 Jun 08
Discovery
Discovery
Appraising
Appraising
Appraising
Status
6 Mar 08
3 Dec 07
7 Aug 07
10 Jul 06
22 Jul 05
Discovery
Announced2
BM S 010,
Block 1
Contract
Parati
Discovery
Name
Table 1
2,230
2,141
2,187
2,138
2,239
2,135
2,126
2,038
Water
Depth
(meters)
6,225
6,137
5,618
6,773
5,350
6,668
6,000
7,628
Total
Depth
(meters)
Oil, gas
Oil, gas
Gas,
condensate
Oil
Oil, gas
Oil, gas
Oil, gas
Oil
Hydrocarbon
Type
September 2008
Table 2
Santos Basin Blocks with Subsalt Discoveries/Potential:
Ownership Structure
Discovery
Bidding
Name
Contract
Round
Operator
Parati
BM-S-010, Block 1
2
Petrobras 65%
Tupi
BM-S-011, Block 1
2
Petrobras 65%
Carioca
BM-S-009, Block 2
2
Petrobras 45%
Caramba
BM-S-021
3
Petrobras 80%
Jpiter
BM-S-024
3
Petrobras 80%
Bem Te Vi
BM-S-008
2
Petrobras 66%
Guar
BM-S-009, Block 1
2
Petrobras 45%
Iara
BM-S-011, Block 2
2
Petrobras 65%
BM-S-022
3
Exxon 40%
Other
Partners
BG 25%, Partex 10%
BG 25%, Galp Energia 10%
BG 30%, Repsol YPF 25%
Galp Energia 20%
Galp Energia 20%
Shell 20%, Galp Energia 14%
BG 30%, Repsol YPF 25%
BG 25%, Galp Energia 10%
Amerada Hess 40%,
Petrobras 20%
September 2008
2008, Cambridge Energy Research Associates, Inc.
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be approximate at this stage as there has been insufficient appraisal activity to develop a
complete understanding of reservoir characteristics over such a large area, and still less an
understanding of the dynamic behavior of the reservoirs.
Despite this uncertainty, the National Petroleum Agency (ANP), the industry regulator, and
other Brazilian analysts indicate that the entire subsalt play could hold up to 56 billion
barrels of oil equivalent (boe) resourceson a par with the total for the UK portion of the
North Sea. At 5 to 8 billion barrels the Tupi field would be twice as big as the Roncador
field in the Campos Basin, which is the largest Brazilian field developed to date (see
Figure 2). Indeed at this scale Tupi would be the largest field discovered since Kashagan
in Kazakhstan in 2000.
Changes to Brazils upstream policy are in the cards. The improvement in prospectivity
may lead to amending fiscal terms for existing as well as new licenses. The scale of the
discoveries and the resulting call for personnel, equipment, and services will affect local
content policies, employment prospects and the ability of the Brazilian services industry to
compete for exports. It will also have an impact on the oil import/export status of Brazil
4
September 2008
2008, Cambridge Energy Research Associates, Inc.
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itself. Expectations in Brazil and among importing nations regarding the scale of the new
reserves and future oil export volumes are high. But if history is any guide, this could be a
roller-coaster ride. Appraisal results are likely to include both negative and positive surprises.
An undertaking of the scale proposed to develop these new resources may well be hit by
cost and schedule overruns, especially with todays pressures on personnel, equipment, and
services in the E&P sector.
A Road map for Future CERA Studies and Reports
This Private Report lays out a road map for subsequent CERA reports and research that will
examine the challenges and opportunities arising from the exploitation of Brazils subsalt
play, including analyses of
The regulatory and fiscal framework for the subsalt discoveries. The Brazilian
government is considering changes to the current exploration and production (E&P)
regulatory framework, at least for the acreage included in the subsalt play. Various
options are currently under discussion and will have different impacts on the pace of
the sectors development and on Brazils economic and social development. CERA
will evaluate the opportunity, compared with other emerging provinces, for Brazil to
retain the maximum economic benefit including the benefits and risks of fiscal and
legislative changesproduction-sharing agreements versus concession agreements,
nationalization, and the fiscal load that can be borne by the subsalt developments.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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The technology opportunity. The development of the subsalt resources will require
major technological innovation and many first-of-a-kind solutions. This may provide
opportunity for Brazil eventually to become a significant exporter of energy-related
equipment and services based on the critical mass it could develop. CERA will evaluate
the likely learning curves and their impact on program implementation, technology
leverage, and other issues.
The timing and investment requirements. The subsalt discoveries will require a staged
development approach and large-scale investments. CERA will assess the supply chain
implications in terms of capital, personnel, services, equipment, and other parameters
(versus Brazils current and future execution capacity both in quantity and quality).
The associated gas challenges. While oil reserves will provide the main driver for
development, the associated gas reserves in the subsalt play will offer additional
opportunities and challenges. CERA will analyze the various technical alternatives
and challenges for marketing the subsalt gas. We will also analyze through a scenario
approach the possible outlooks for a natural gas balance in Brazil and in the region.
The impacts on global oil supply. Although Brazils liquid productive capacity
may expand significantly above current expectations, the scaling back of investment
plans elsewhere may affect the rise in global output resulting from the discovery of
this giant new oil and gas province. CERA will analyze the oil capacity outlook for
Brazil and its contribution to global supply, including the potential offsetting impact
of reprioritization of Petrobrass (and other companies) investment plans.
Possible Changes to Upstream Legal and Fiscal Terms
The goals surrounding potential policy changes to Brazils upstream are similar to those of
opening the Brazilian upstream sector in 1997: increased upstream investment and revenues
and the benefits of economic growth such as improved health care, better education, and
greater employment opportunities. This time around, however, the stakes are larger, and the
choice of development model for the oil and gas sector in Brazil will need to be considered
in terms of its possible impact on development of Brazils hydrocarbon resources, and on
the subsalt play in particular. For example, it may seem superficially attractive to reserve the
high potential subsalt play for Petrobras as a national champion. However, this might raise
legal concerns. More likely, if the subsalt is to be reserved for a national player, it would
result in a new, wholly state-owned company. CERA understands that such a company would
be the right holder for the government interest and could then contract for the exploration
and development of the resources (perhaps along the lines of Argentinas Enarsa; Indonesias
Pertamina in its early days; or, as an alternative, of Norways Petoro). This approach could
allow the benefits of diversity of approaches and execution capacity that the involvement
of international companies might bring. This is especially true given the very tight markets
for people and hardware (including rigs) in which costs are escalating worldwide.*
*See the CERA Special Report Capital Costs Analysis ForumUpstream: Market Review.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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It is instructive to compare the rates of production buildup from Brazil and the US Gulf of
Mexico in water depths greater than 1,000 m. The reserve bases are broadly comparable,
but the latter grew faster and higher, in part because of the diversity of approaches and the
associated innovation (see Figure 3).
Some signs of change in Brazil appeared even before the more recent announcements of the
success in the subsalt play. The offer of fewer but more focused new frontier and mature areas
in the formerly suspended eighth round possibly hinted at future changes in Brazilian upstream
policy. However, the obvious turning point was the governments decision to withdraw the
most attractive areas of the ninth bid round soon after confirmation of the possible scale of
the Tupi discovery.* Tupi triggered an immediate debate about the application of the current
upstream model to the high-potential subsalt trend. In the meantime the ANP has postponed
the tenth licensing round until the situation is resolved. A ministerial committee is studying
the legal and regulatory reform proposals for Brazils upstream sector in light of the new
subsalt discoveries. The committee will make a preliminary report on September 25, before
handing its recommendations to President Luiz Inacio Lula da Silva on September 30.
The ultimate outcome of this debate is difficult to gauge. The successful results obtained
in the ninth round coupled with further successes in the subsalt play will likely push the
Brazilian government to modify the upstream fiscal terms.** The debate is between those
that desire more state control of the resources and those that believe radical changes could
*See the CERA Insight Brazils Ninth Bid RoundOr What Is Left of It.
**See the CERA Insight A New Face for Brazils Oil Sector? Lessons from the Ninth Bidding Round.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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undermine needed investment. Petrobras already has a major investment program involving
an impressive portfolio of domestic and international developments, but it has stated that it
will repatriate much of its talent to focus on the development of Tupi and its satellites in
the subsalt. It will take some time to readjust priorities to design and execute the optimum
outcome for Petrobras and Brazil. However, such realignment may constrain the positive impact
on global production expectations since investment in the subsalt will be at least partially
offset by compensating reductions in investments elsewhere in the Petrobras portfolio.
In any case Petrobras, like other oil and gas companies, is already facing challenges in
bringing existing projects onstream. Delays of one or two years have been fairly common,
particularly with some larger Campos Basin projects. A decade ago, delays of up to a year
and cost overruns of around 25 percent were typical for megaprojects.* Today, the escalation
of costs and shortage of suitable rigs, yard space, and skilled people have combined to
exacerbate the situation globallyand Brazil is not immune.
Lessons will no doubt be learned from recent operational setbacks in some Gulf of Mexico
projects, and Petrobras has a clear history of developing solutions to new and challenging
problems. The cost base of the Brazilian subsalt developments is expected to lie between
$20 and $30 per boe. This implies breakeven prices of more than $60 per boe after taking
into account the time value of money and the fiscal burden. There will be pressure not just
to prevent continued cost escalation but also to reduce these figures. Open source approaches
have typically proven to be more effective accelerators than monopolies, and innovation is
a numbers gamefive independent research centers investing $200 million each are more
likely to come up with an answer than one center investing $1 billion. For example, decoding
the human genome benefited from the number of different competitors in the race and
was achieved far more quickly than even the most optimistic forecasts.
Even if Brazil does not consider a significant change in the sectors legal and regulatory
model, it is at least reconsidering its fiscal terms. Resource-rich countries must decide how
they benefit more from high prices for their resources. For example, if oil production makes
up a significant proportion of gross domestic product (GDP), then the damage that high oil
prices cause to the nonoil GDP may be small compared to the boost that high oil prices
provide. On the other hand, if oil production is only a small portion of the economy, high
oil prices may cause more damage to non-oil GDP than the benefit of higher oil prices
warrants.
Prior to the subsalt discoveries, the Brazilian economy probably fell into the latter category
high oil and gas prices would be a net negative. With the potential scale of the new oil
and gas resource base, there is probably not yet an incentive to limit oil sector activity in
order to maximize prices nor sufficient drivers to infect the Brazilian economy with Dutch
Disease (generally referring to the harmful effects to other sectors of the domestic economy
from sizeable revenue from a single commodity export industry). CERA will analyze the
level of fiscal take that the sector can bear. Upside ambitions must be weighed against the
negative impact that changes will have on Brazils reputation for stability, which has made
Brazil an increasingly favored location for investment, and on the pacing and timing of
investment.
*Source: Independent Project Analysis Inc., 2003.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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CERA will be examining the impact on the Brazilian economy of increased levels of activity
in the oil and gas sector and the relative contribution that the sector can make. Based on
the cost and investment projections from the scenarios that CERA will develop, we will
evaluate the impact of different fiscal regimes and sector development models. This will
provide an indication of the impact on economic development for Brazil arising out of the
newly increased endowment.
Conquering New Frontiers: The Technology Opportunity
Subsalt E&P activity is not unusual in the oil industry. Significant volumes of gas in northwest
Europe are produced from horizons underneath salt. In the Gulf of Mexico major new subsalt
plays have been opened up over the past decade as companies began to develop techniques
for shooting and interpreting seismic to resolve structures beneath thick salt layers. In Brazil
pilot oil production has already started from the subsalt in the Jubarte field in the Esprito
Santo Basin to the north of the new discoveries (see Figure 1b).
However, these new discoveries mark major advances in technological innovation. At Tupi
drilling through a 2 km thick salt layer presented significant challenges that are being
overcome as experience develops.* Furthermore, the dolomitic reservoir will likely be
complex and difficult to characterize. The initial well was drilled to a total depth of 6,000
m and produced 2,900 barrels per day (bd) on test through a restricted choke; expectations
are that production wells could flow as much as 10,00020,000 bd.
The development of Tupi and other subsalt discoveries will face many important challenges,
including,
Reservoir characterization. Definition of facies and determination of vertical and
lateral reservoir attributes from well and seismic data. Evaluation of reservoir drive
mechanisms and feasibility of gas and water injection.
Flow assurance. Control of paraffin deposition in long pipelines, as well as hydrates,
and scale.
Well engineering. Execution of high deviation of the wells, slow penetration rates,
hydraulic fraccing of horizontal wells, and materials selection to deal with the high
carbon dioxide (CO2) content.
Gas handling. Laying and operating a gas pipeline larger than 18 inches in water
depth of 2,200 m over long distances (300 km) or alternatively other commercialization
approaches, including liquefied natural gas, gas-to-liquids, offshore power, and
others.
Subsea engineering. Riser design for 2,200 m of water, and dealing with high pressures,
high CO2 content, and thermal insulation.
*The discovery well at Tupi cost $240 million, yet subsequent wells in the area have been much less expensive, and
Petrobras has an ultimate, ambitious target closer to $30 million each.
September 2008
2008, Cambridge Energy Research Associates, Inc.
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September 2008
2008, Cambridge Energy Research Associates, Inc.
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of further appraisal required to determine the ownership interests in such potentially vast
accumulations could impose significant delays on the development program if any field is
found to extend beyond the boundaries of current licenses.
It is impossible to be precise about the scale of these new discoveries, but there are
several indications that Petrobras has a high level of confidence that it has discovered a
major new resource. Firm plans for the phased development of Tupi have been reported as
summarized above. Additionally on May 20, 2008, Petrobras, in a press release along with
government support, announced it was tendering for 40 deepwater and ultradeepwater drill
ships and semisubmersibles and 24 support vessels to be delivered through 2017, indicating
a commitment of approximately US$30 billion.
CERA will be preparing an assessment of the overall investment requirements for a range
of possible outcomes in the subsalt play that will include the supply chain implicationsthe
call on personnel, services equipment, capital, and other elements. Viewed in conjunction
with current and projected capacity in Brazil, this analysis will provide a picture of the
challenges that Brazil faces.
Dont Forget about Natural Gas
Amid the focus on the expanding oil potential, there has been a significant addition to
Brazils gas resource base that may alter the prospects for natural gas imports not only for
Brazil but for the whole Southern Cone. Indeed, gas reserves from Tupi alone could amount
to 4.5 trillion cubic feet (Tcf), an increase of 22 percent over Brazils current proved and
probable reserves of 20.4 Tcf. If the Jpiter gas condensate discovery is confirmed to be
around the same size as Tupi, assuming 5 boe, Brazils current proved and probable gas
reserves could well double. Even without considering Jpiter, the gas output of Tupi alone,
which could reach 1,000 MMcf per day after 2015, would be sufficient to replace the whole
of Brazils imports from Bolivia.
However, the path for gas development is probably more technically complex than that
for oil. The marketing of the gas in the subsalt play will require innovative solutions and
probably high costs, due to the depth of the accumulations and the distance from the coast.
Various options are already being evaluated in addition to a traditional subsea pipeline or
to reinjection: offshore liquefaction and offshore large-scale power generation. CERA will
analyze the various technical alternatives and challenges for marketing the subsalt gas. We
will also examine the consequences for regional gas balances resulting from Brazils growing
gas resource base.
Taking It with a Grain of Salt: Possible Outlooks for Global
Supply
The results of the early exploration program have been positive. But data are sparse and
incomplete, and caution must be exercised until more appraisal wells are drilled and
production test data become available. A comparison with Brazils Mexilho field, also in
the Santos Basin, is a good example of how problematic initial reserve estimates can be on
September 2008
2008, Cambridge Energy Research Associates, Inc.
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11
both the upside and downside.* Announced in April 2003 at 2.5 trillion cubic feet (Tcf),
Mexilhos reserves were revised upward to 14.8 Tcf in September 2003, after just three
wells were drilled. In the following years Mexilhos reserves have been gradually revised
downward to around 6.1 Tcf.
Even before the announcement of the likely scale of Tupi field resources, Brazil was
already expected to lead productive capacity expansion in Latin America over the next five
years.** In the longer term Brazils position will become even stronger, supported by the
new discoveries. At its plateau the Tupi field could produce around 1 mbd, which represents
56 percent of current Brazilian oil consumption. By 2020 the subsalt play could contribute
significantly to Brazilian net oil exports, which are expected to reach 1.5 mbd (see Figure
4). While fields currently in production will continue to decline there is a large inventory
of new projects under development and under appraisal outside the Santos Basin subsalt
play that will compensate.
With Petrobras holding an interest in every significant component of Brazilian capacity growth,
the decisions that it makes will be critical. As noted above, Petrobras may repatriate many
of its experts from international operations to support the increased effort offshore Brazil.
The future capacity profile will depend on the overall capital investment program. As part
of our research into global oil productive capacity, CERA will be evaluating the outlook for
*See the CERA Alert Santos Basin Gas Find May Triple Brazilian Reserves.
**See the CERA January 2008 Latin America Energy Watch The Strategic Risks of Oil in Latin America: Geopolitics
Shape Investment Flows.
12
September 2008
2008, Cambridge Energy Research Associates, Inc.
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Brazil. However, in addition, we will be examining in detail the net effect on oil supply of
the subsalt discoveries and the complex interactions among investment priorities.
Conclusion: A Need for Measured Enthusiasm?
The subsalt play may have reset the bar for the Brazilian upstream in terms of potential
resources, complexity, and the future scale of production. Uncertainties remain concerning
field sizes and likely long-term reservoir performance since Petrobras is still at the early
stage of exploring and appraising the area. The number of discoveries in the subsalt play
provide strong encouragement, but there is a long way to go. Major investment will be
required before material volumes of sustainable production can be established. Like most
giant fields being developed today, these fields will be developed in multiple stages requiring
increased levels of skilled personnel, equipment and services, and major capital resources.
While Petrobras will likely be able to build on its world-class deepwater operational skills,
it already has a world-class inventory of both domestic and international assets that will
compete for these scarce resources. The result may be that the net impact on future oil and
gas production is not as large as currently expectedeven if Brazils share of the global
total increases.
In the event that further major discoveries are announced, Brazil will likely need to decide
whether it is better to become a major exporter or to slow the pace of development, at
least for now, given the difficulties with managing oil rents in a constructive way. Although
Venezuela and to some extent Mexico continue to be textbook cases for Dutch Disease,
Brazils large and diversified economyand the size of its populationshould help it escape
that fate.*
Nevertheless, an overly optimistic expectation of a windfall from subsalt production could
lead to some policy changeswith the aim of taking advantage of the huge revenues to be
gained at current high oil prices. Despite the considerable potential unfolding in the Santos
Basin subsalt play, a complex spectrum of above- and below ground risks is already apparent,
and likely changes in Brazils upstream model are already being consideredquite possibly
a source of delay, especially in the context of the existing Hydrocarbons Law, which took
four years to materialize.
CERA will address each of these key issues in a series of future reports: the oil sector
regulatory model, including the benefits and risks of legislature and fiscal changes, the supply
chain and challenges, the technology leverage and the opportunity for Brazil to become a
significant exporter of energy-related services, and the impact on global oil supply and the
regional gas balance.
Brazils upstream sector is expandingbut how big and how quickly? Much will depend on
how Brazil and Petrobras respond to the challenges. Whatever the answers, the subsalt play
offshore Brazil will be a continuing focus for the oil industry during the coming decade as
this major new province moves from discovery to development. n
September 2008
2008, Cambridge Energy Research Associates, Inc.
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13