Offshore in depth
It’s easy to feel sympathy for Brazil after the series of calamities that it has experienced over the last 18 months. The country suffers from a severe, lingering recession, driven largely by the fall in commodity prices since 2014. The poor economic conditions and a huge corruption scandal involving Petrobras, the country’s most prominent company, ruined the political fortunes of Brazil’s first woman president, Dilma Rousseff, who was impeached on Aug. 31, 2016.
Her Worker’s Party is in disarray after being deeply implicated in the bribery scandal that siphoned $2 billion from Petrobras and its suppliers. Executives have been imprisoned, the judge in charge of the investigation was killed in a plane crash, and hardly any public official seems free of scandal. The Zika virus infected more than 200,000 Brazilians, causing tragic birth defects in many newborns. Brazil managed to pull off the 2016 Olympics without serious difficulties, but six months later the costly sports venues—many in poor neighborhoods that could use public investment—have been abandoned, vandalized and looted. Photos of stagnant swimming pools and uprooted stadium seats have become Internet memes.
Unintended consequence.Once the cornerstone of the Brazilian economy, Petrobras is now saddled with $120 billion in debt. After deep cuts, it plans to lay off 12,000 more employees. The laws that required Petrobras to own a 30% interest in every deepwater field had the unintended consequence of constraining offshore exploration and development. Petrobras no longer has the financial resources to take the lead on every capital-intensive project off its coast, and the law prevented projects from going forward without its involvement.
One solution is to make it easier for foreign companies to invest in Brazil’s prized pre-salt fields, which boast lifting costs of just $8/bbl. In October 2016, Brazil’s National Congress voted to change the regulations, removing Petrobras’ 30% ownership requirement for every production sharing agreement. Under the new law, projects can proceed with or without Petrobras’ participation, so the Brazilian government can collect revenue for new leases and production on up to 300 new prospects, and Petrobras can be selective in its investments.
Another proposed law would reduce the local content requirements (up to 85%) for equipment, vessels and services, with the goal of increasing competition and reducing costs. The country’s local suppliers and labor unions are vehemently opposed to this change, but with the decline of the Worker’s Party, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP), Brazil’s industry regulator, is likely to grant Petrobras waivers to acquire a foreign made FPSO for Libra field in the Santos basin.
Shell increases its footprint. Royal Dutch Shell already made a major commitment to Brazil’s offshore sector with its 2016 acquisition of BG Group, giving Shell the largest holdings by a foreign company in the country. During a visit to Brazil soon after the regulatory changes, Shell CEO Ben van Beurden announced that the company planned to invest $10 billion in the country over the next four years, to develop blocks Shell already holds, and to participate in pre-salt auctions planned for 2018. Beurden told the Financial Times that Shell’s Brazilian deepwater assets are “where the lowest break-even prices can be realized. This is the most resilient part of our portfolio.” Shell expects its Brazilian production to double from 450,000 boed to 900,000 boed over the next decade.
Statoil takes Caracá. Statoil is another international player that is increasing its Brazilian portfolio. In August 2016, Statoil agreed to purchase Petrobras’ 66% stake in the Carcará offshore prospect for $2.5 billion. The blocks hold between 700 MMboe and 1.3 Bboe. Statoil will invest at least $10 billion to develop the field and expects first oil in 2020, just as major fields in Norway begin to decline.
Closed in November 2016, the Carcará deal was part of Petrobras’ plan to sell $15.1 billion of assets by the end of last year. At the time of the sale’s announcement, Petrobras CEO Pedro Parente—who had assumed his role in June, in the wake of the corruption scandal—admitted that “we are in a period where we need cash.” He also pointed out that the Carcará field is distant from Petrobras’ other offshore developments and could not be tied back to existing infrastructure. And importantly, the sale to Statoil gives Petrobras some needed financial flexibility, since it is no longer obligated to invest the estimated $12 to $13 billion needed to fully develop the field.
Total alliance. Petrobras also forged an alliance with Total SA, with an MOU signed in October 2016. The two companies were already investment partners in 19 E&P projects worldwide, including several in Brazil, plus deepwater fields in Nigeria and the Gulf of Mexico. As part of the alliance, Total agreed in December to acquire $2.2 billion of Petrobras’ upstream and downstream assets, including interests in the Iara region’s fields and Lapa field, for which Total will become the operator. The two companies also plan to work together in developing technical solutions for long subsea tie-backs, reservoirs with high CO2 content, and geosciences data management.
The voluminous, low lifting cost reserves of Brazil’s pre-salt fields will likely attract serious interest in the upcoming lease auctions for four new areas adjacent to Tartaruga Verde and Sapinhoá fields, the Gato do Mato prospect and Carcará. Petrobras’ pre-salt reservoirs are estimated to contain 176 Bbbl of recoverable reserves. The company’s pre-salt production is approximately 1.59 MMboed. 
