Multinationals lining up for Brazil's boom

Multinationals are lining up for the rush to begin for investment in Brazil's newly demonopolized petroleum sector.

Most of the initial focus is on upstream joint ventures, especially in the prolific deepwater Campos basin off Rio de Janeiro state.

But companies also are pursuing downstream investments in Brazil as well (see related story, this page).

Much of the initial negotiations for projects have been under way for months, even though the new National Petroleum Agency (ANP) only recently disclosed how much of Brazil's sedimentary basins was going to be reserved for state petroleum company Petroleo Brasileiro SA (Petrobras) and how much would be set aside for foreign and domestic private investment (OGJ, July 13, 1998, Newsletter).

At least one firm, Shell Brasil SA, has disclosed plans to invest about $200 million in oil exploration and production during the next 3 years, said Phil Hanson, the company' s E&P vice-president. The company, a unit of Royal Dutch/Shell Group, recently formed an E&P department with a staff of 12 people in response to the petroleum demonopolization law passed by Brazil's Congress in August 1997.

Shell has operated in Brazil for the last 85 years, its Shell do Brasil affiliate ranking second in refined products distribution after Petrobras marketing subsidiary BR Distribuidora.

Shell strategy

According to Hanson, Shell Brasil is principally interested in exploiting petroleum in deep waters of the Campos basin, where the bulk of Brazil's oil reserves is located.

Hanson said, "We are negotiating joint exploration agreements with Petrobras, particularly for the Campos and Santos basins."

He acknowledged the possibility of Shell becoming a minority shareholder with other foreign companies in association with Petrobras, and noted that even a single operation in deep waters can cost $1-2 billion.

Hanson feels that these high investments are justified, especially in the Campos basin, source of about 70% of Brazil's total oil production of about 1 million b/d.

After achieving a world record for deepwater oil production last year, at 1,709 m, in Marlim Sul oil field, Petrobras is now working for a new record, at a water depth of 1,853 m, in the Campos basin's Roncador oil field. Roncador is targeted to go on stream by March 1999.

Petrobras' deepwater technology is somewhat compatible with Shell's deepwater efforts in the Gulf of Mexico, added Hanson, and for this reason, the two companies can join their know-how for successful future exploration and production efforts.

Petrobras partnerships

Earlier this summer, Shell Brasil Pres. David Pirret and Petrobras Pres. Joel Mendes Renno signed a protocol of intentions to consider future partnerships in exploration and production, transportation, refining, marketing, distribution infrastructure, natural gas, thermoelectric power, and technology.

Renno said that Petrobras is also negotiating partnerships with other domestic and international petroleum companies to increase its investment capacity. The Petrobras chief estimates that investments just in association with foreign companies could reach $10 billion, of which $5.3 billion will be allocated for oil exploration and production.

Also in the summer, Petrobras signed two partnership contracts, one with Shell do Brasil and one with Ipiranga, a private Brazilian refined products distributor. They are the first in what is expected to be a long series of such agreements.

The partnership with Ipiranga will allow Petrobras and Ipiranga to share terminals, pipelines, tank farms, and other distribution facilities. The two companies will also study possible joint construction of such facilities.

The deal with Shell is broader in scope but less immediate in application. Petrobras and Shell will study possible joint implementation of strategic projects in areas such as exploration, drilling, refining, transportation infrastructure, and electric power distribution. Petrobras declined to disclose any financial data regarding these partnerships.

Pirret told the local press recently that the company intends to invest about $5 billion in the country, but did not detail where these investments would be made.

End of monopoly

Petrobras's 43-year monopoly over exploration, production, refining, distribution, and export and import of oil effectively ended in July.

Almost a year after Brazil's Congress passed a law allowing private sector investment in all parts of the industry and creating ANP, the agency decreed that 92.9% of Brazil's sedimentary basins will be removed from Petrobras's control and put up for bidding for companies from Brazil and abroad.

Brazil has about 6.4 million sq km of sedimentary basins, only about 0.2% of which is producing hydrocarbons. Petrobras had originally requested the control of 10.5% of all basins, but ANP allowed it to retain only 7.1% (458,532 sq km). According to ANP, the percentages of areas denied to Petrobras are as follows: exploration, 32.9%; nonproducing, but slated for or under development, 27.8%; and producing, 8.1%.

Petrobras capabilities

David Zylbersztajn, ANP's executive director, said that, in deciding which oil fields would remain in Petrobras's hands, ANP took into consideration the company's financial and technical capacities to explore the areas.

Petrobras declared a financial capacity of $10.3 billion for the next 3 years, the period determined by ANP for start-up of commercial production in fields controlled by Petrobras but that are still in the development stage.

If Petrobras is unable to produce these fields within this period, the company will have to return them to ANP. But, if Petrobras is successful, it will be granted a 30-year concession by ANP. To prove its financial capability to do so, Petrobras was allowed to take into consideration funds coming from future partners for investment in these fields.

Campos basin

Zylbersztajn said that Petrobras would be allowed to retain control of 51.9% of the prolific Campos basin, which currently accounts for about 70% of Brazil's total crude oil output of about 1 million b/d. Petrobras retained supergiant fields such as Marlim (the largest producer), Albacora, Bijupira-Salema, and Roncador.

Roncador is a highly promising field, still in the development phase, that Petrobras discovered in 1996 with a wildcat drilled in 1,853 m of water. According to Petrobras, Roncador has estimated reserves of 1.3 billion bbl of crude.

However, Petrobras lost two areas north of the Campos basin, another in the eastern part of the basin near the Marlim block, three to the south near Espadarte and Caratinga fields, and two in shallow waters (less than 100 m). ANP also kept a block near Roncador field, denied all requests by Petrobras to explore the Parnaiba and Pernambuco-Paraiba basins, and rejected requests for exploring 63.6% of the Ceára basin.

Renno has assured that his company will participate in tenders for some of the blocks that were removed from its control by ANP. Petrobras maintains control over reserves estimated at 16 billion boe, because ANP did not remove from the company any producing area or areas in the development phase in the Campos basin.

Investment opportunities

ANP's technicians divided the basins that will be put out for bidding to the private sector in the following categories:

• Mature basins such as Sergipe, Alagoas, and Espirito Santo, where ANP expects to attract investors that do not expect a high rate of return.
• Emerging basins, with oil fields already discovered but lacking the infrastructure to come on stream, such as Cumuruxatiba (Bahia state), Santos (Sao Paulo state), and Solimoes (Amazon).
• High-risk areas that would only interest large investors, or those considered "frontier" areas, including the Amazon, Parana, and ultradeepwater regions.

Mines and Energy Minister Raimundo Brito said that ANP began the process of securing a consulting company to help it establish a model for tenders of properties taken away from Petrobras. According to Brito, bid notices are expected to be published by yearend. By that time, the government will have sold a minority stake in Petrobras, comprising 31.7% of voting stock-equal to 18.5% of total capital-leaving Petrobras with the minimum stake necessary to retain control. The stake to be sold is valued at around $5 billion but is expected to command a considerable premium over that, say oil analysts.

The minister pointed out that, to secure the constitutional amendment that opened parts of the oil industry to the private sector in 1995, the government inserted a clause promising that Petrobras would not be privatized.

Renno confirmed that Petrobras will maintain a production target of 1.2 million b/d of crude oil by 1999 and 1.5 million b/d by year 2000.

Financing deals

Earlier this summer, Renno announced that Petrobras signed two project financing agreements.

One is with the Japanese trading companies Itochu Corp. and Mitsubishi Corp., worth $2.1 billion, that grants a mandate to the Japanese firms to arrange for financing contracts with Japan's Export-Import Bank for developing Barracuda and Caratinga fields in the Campos basin, to support production of 300,000 b/d.

Another contract, worth $1.8 billion, was signed with the trading companies Mitsui & Co. and Marubeni Corp. for financing development of Espadarte, Voador, and Marimba fields, also in the Campos basin, to support a projected output of about 200,000 b/d of crude oil.

A similar mandate is being negotiated with Enron Corp., Houston, worth $500 million, to arrange financing for development of Bijupira-Salema field, also in Campos basin. Petrobras sources say the company is negotiating abroad to develop another project finance scheme for Roncador field that calls for investments of $2 billion.

Meanwhile, Petrobras and Brazil's National Economic & Social Development Bank (Bndes) recently signed a $1.5 billion project financing contract with ABN Amro/Rothschild (AAR) for a project to increase crude oil output from supergiant Marlim oil field in the Campos basin. Marlim is producing 230,000 b/d.

The contract proposed by AAR includes the creation of a special-purpose entity to form a consortium with Petrobras to increase Marlim's output to 500,000 b/d. Petrobras, Bndespar (a Bndes subsidiary), and private Brazilian investors will come up with $200 million, while $1.3 billion will be raised through bonds issued abroad, said Renno. The total $1.5 billion is expected to be raised by yearend 1999.

Partnership agreements

According to Renno, Petrobras is also negotiating partnerships or joint ventures for exploration and production with BG plc (formerly British Gas plc), Mobil Corp., Exxon Corp., Texaco Inc., and Argentina's YPF SA, among others.

In the Campos basin, Petrobras is negotiating five partnerships. For Albacora Leste field, Petrobras is negotiating with Exxon, Shell, Texaco, Marubeni, and Japan Petroleum Exploration Co. Ltd. For Block 2 in the Campos basin, Petrobras is in an advanced stage of negotiations with Elf Aquitaine-expected to be the operator-Shell, and Total.

Together with Amerada Hess Corp., Petrobras is negotiating partnerships in one area in the Santos basin and another area in the Campos basin. In one area, Amerada is expected to be the operator, with the remaining interest held by Kerr-McGee Corp., and in the other, Texaco would be operator, with the remaining interest held by Brazilian company Odebrecht SA. In addition, Petrobras is negotiating possible production partnerships with Mobil and Unocal Corp. in the Espirito Santo basin.

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