Bob Williams
Executive Editor
HOUSTON, May 5 -- International oil companies (IOCs) operating in Brazil's upstream sector since its demonopolization in 1997 are disappointed with exploratory results there thus far.
More importantly, they fear that an increasingly onerous fiscal and regulatory regime will squelch what remaining lure the country has for future exploration and development investment.
That consensus view was delivered by three executives each representing IOCs active in Brazilian E&D in presentations at the opening session Monday of this year's Offshore Technology Conference in Houston.
The message was a sobering one for a country whose E&D investment opportunities, particularly in the deep water, have been among the world's most highly touted in recent years. The three executives pointedly noted that Brazil risks losing out in the competition for foreign E&D capital to the world's other two leading deepwater hotspots, West Africa and the US Gulf of Mexico.
Disappointing results
IOCs' disappointment with E&D results from the frenzied activity of the first 5 years of a monopoly-free upstream sector in Brazil does not stem from lack of exploratory success in geologic terms, according to Stephen P. Thurston, with ChevronTexaco Overseas Petroleum Inc. (COPI).
Indeed, operators drilled 59 wells that were geological successes out of 122 total drilled in the so-called Brazil salt basin (comprising the Campos, Santos, and Espirito Santo basins) from September 1998 through 2002.
But only two of those have been declared commercial successes, said Thurston, who coauthored a paper on Brazil's evolving deepwater risk-reward profile with COPI's Thomas R. Bard.
The lack of commerciality stems from the fact that the Brazilian discoveries have been poorer than expected in terms of reserves and in terms of crude quality—shortcomings magnified by their occurrence in deep water.
The 57% exploratory well geologic success rate notwithstanding, the commercial success rate for the postmonopoly period was a paltry 2%, Thurston noted, compared with 30% and 16%, respectively, in the deepwater Gulf of Mexico, a respective 62% and 16-27% for deepwater Nigeria exploration; and a respective 70% and 63% for deepwater Angola. Another 15 finds could mature into commerciality off Brazil, resulting in a 17% commercial success rate, he noted.
Now-diminished expectations contrast sharply with the almost giddy fervor with which foreign operators approached the Brazilian deep water, following a decade marked by a string of giant deepwater fields discovered in the Campos basin by Brazilian state oil company Petroleos Brasileiro SA (Petrobras).
In another presentation, Unocal Corp.'s Andrew L. Fawthrop noted that operators investing in Brazilian exploration in the past 5 years expected success rates approaching 30% and field sizes of 500 million-1 billion bbl of oil with gravities of >25° API.
"Except for Petrobras's giant (300-700 million bbl of oil) Jubarte field discovered in 2001, no significant commercial deepwater discovery has been made since the Roncador field in 1996, despite more than 100 wildcat wells drilled since mid-1997," Fawthrop said. "Other, smaller discoveries are not commercial under current fiscal terms."
Fawthrop said that Unocal "expects that future deepwater discoveries in Brazil will be. . .250-500 million bbl of oil, in water depths of 3,200-6,500 ft, and relatively heavy oil with API gravity below 20°.
Opportunity profile
Thurston compared Brazil's "opportunity profile" today and at the opening of its E&D sector to foreign investment in 1998-99. He made that comparison on the basis of four key elements to sustain an E&D investment: commercial resource opportunities, competitive terms and conditions, stability of terms and conditions, and viability of operating conditions.
That opportunity profile has been diminished not only by the lack of commercial success but also by the fact that "the most likely discoveries" will not be "globally competitive under current fiscal terms," Thurston said. He cited the complexity and proliferation of taxes in Brazil as well as a lack of stability in terms¿"harmful fiscal changes made after the concessions were awarded."
Coming in for special condemnation was a tax imposed, just before Round 4, by the state of Rio de Janeiro of 18% on the same list of deepwater production equipment exempted from special taxation under a temporary federal tax initiative known as Repetro.
Thurston also called for the government to establish "clear regulatory procedures and policies; a predictable, reliable, and efficient environmental licensing process; and resources dedicated to operational safety and emergency preparedness."
While Brazilian regulatory agencies and the National Petroleum Agency (ANP) made significant progress in this regard last year, he said, there remain concerns over staffing levels in regulatory offices to handle development programs.
And the new Brazilian government's insistence on local content requirements for construction of offshore oil and gas facilities could have a "significant impact," Haney said.
Thurston noted an increasingly cumbersome fiscal and regulatory regime is deflating industry interest in opportunities whose terms were deemed suitable for the kind of higher-crude-quality, bigger-reserves fields Petrobras seemed to find routinely during the 1980s and 1990s, in the core Campos basin area that it continues to dominate.
He cited the disappointing results of ANP's Round 4 licensing tender, held last year, when the average winning bid was only $1,473/sq km vs. $3,500-4,125 in the first three rounds.
"We believe this dramatic change in Round 4 was not a case of the 'full plate syndrome' or simply the quality of the acrage offered, but in fact due to the overall industry changing its perception of the potential resource and commercial opportunities in E&P in Brazil," Thurston said.
Still attractive, but. . .
Shell Brasil Ltda.'s John Haney, in a presentation coauthored by the same company's Michiel Koot, offered a critique of the Brazilian investment opportunity similar to those of Thurston and Fawthrop, while averring that his company "still sees Brazil as attractive," given Shell's "deepwater edge."
"There is no doubt that the opening up of the upstream sector was successful," Haney said, citing the involvement of more than 40 investor companies, expenditure of more than $1 billion for exploration alone, acquisition of 320,000 line km of 2D seismic and 120,000 sq km of 3D seismic, and drilling of some 200 offshore wells.
"However, the offshore exploration results since the opening of the sector have had mixed results. Some 110 technical discoveries have been reported, but most are believed to be small to modest-size accumulations of generally low-gravity crude oil or gas," he said.
Haney noted that "technology is key" to unraveling much of the concern over commerciality of the Brazilian discoveries, marked as they are by complex geology and hydrocarbon systems, low gravities, and dispersal of reserves.
But just as important is a government willing to offer relief from increasingly onerous fiscal terms, he contends.
"New taxes may be seen as insignificant by those imposing them, but taken together, they tend to erode an already marginal investment." Haney said.
More drilling ahead
Thurston also noted that the full extent of the first exploratory drilling efforts off Brazil has yet to be realized, with all of the wells drilled and discoveries made thus far from a "preliminary" round in 1998—the so-called ANP Round 0, which mainly entailed offerings of Petrobras farmouts and relinquished acreage. Round 1 was held in 1999, Round 2 in 2000, and Round 3 in 2001; Round 5 is slated to be held this August.
He predicted that drilling activity on the Round 1 blocks will increase substantially in 2003-04 as they make the transition from the primary seismic period to first exploratory drilling. Subsequent rounds will yield similar flurries of drilling activity.
However, a surge in the number of farmout opportunities and acreage relinquishments points to an increasing risk profile for the Brazil salt basin. And given the increasing competition for E&D capital, there is a narrowing window of opportunity for operators to make investment decisions on their Brazilian portfolios.
Thus the country's worsening risk-reward profile should compel the government to reconsider soon its fiscal terms governing deepwater E&D.
It all adds up to a situation where "the risk has gone up, while the reward has gone down," Thurston said.
