Brazil's state oil company is embroiled in a national dispute over its role in the country.
The central issue is whether to continue the monopoly established for Petroleos Brasileiro SA on Oct. 3, 1954 or continue moves toward privatization and free market reform.
The new president of Petrobras, Eduardo de Freitas Teixeira, at 36 the company's youngest head ever, has continued the tone of his embattled predecessor by attacking the state oil monopoly concept and defending the return of risk contracts for private domestic and foreign companies.
Risk contracts were abolished under Brazil's new constitution in 1988.
Although a wave of deregulation and economic reform swept President Fernando Collor de Mello to power last year, monopoly is still a sacred cow in Brazil, supported by powerful interests.
PETROBRAS ROLE
Petrobras is Brazil's largest company with gross annual revenues of $16 billion and a net stockholder equity of $8 billion.
Company sources estimate that more than 10% of Brazil's gross domestic product is directly or indirectly related to Petrobras activities.
Petrobras and subsidiaries employ 67,000 people, which translates to about 3 million indirect jobs. The Association of Petrobras Engineers (Aepet) claims that 10 million Brazilians depend directly or indirectly on the petroleum industry.
The organization also says that no other oil company in the world buys so much domestically as does Petrobras. About 2,000 suppliers of materials and equipment and 5,000 service companies depend upon Petrobras.
Ozires Silva, infrastructure minister for mines, energy, and transportation, and former Petrobras president, also has called for return of risk contracts for oil exploration and production through constitutional amendment.
"This is the only way to reduce the country's dependence on oil imports, due to Brazil's scarce financial resources, (in order to augment) Petrobras investments for increasing domestic production," Silva said.
At present Brazil produces about 670,000 b/d, equal to almost 50% of the country's consumption.
FINANCIAL WOES
Brazil's financial woes have worsened sharply since the beginning of the Persian Gulf crisis.
Teixeira, an economist, estimates Brazil's oil import bill in 1990 at about $5 billion. About $2 billion of that total would have represented the increase in oil prices beginning in summer 1990.
Petrobras estimated that during January-October 1990 Brazil spent $3.6 billion for imported crude and products, up about 26% from the same period in 1989. The country was importing about 180,000 b/d of crude from Iraq and Kuwait before an international embargo removed those countries' exports from the market.
Most of those imports have been replaced with supplies from Iran, Africa, and South America-particularly Venezuela, which increased its exports to Brazil to 92,000 b/d from 20,000 b/d.
The problem with Venezuela's crude is that it is ultimately more expensive for Brazil than the crude from the Persian Gulf.
That's because the heavier gravity crude is costlier to process and requires increased runs to get the same products yield, freight costs are higher because Venezuela uses smaller capacity tankers than do the gulf exporters, and Brazil is unable to get barter deals for its goods and services-especially the case with Iraq-because Venezuela insists on payment in dollars.
Since imposing Latin America's most drastic economic stabilization plan in spring 1990. the Collor administration now faces higher inflation rates and criticism from business, labor, and international bankers for dragging out negotiations on foreign debt payments in arrears.
Inflation in 1990 shrank from 84% in March to 8% in May but jumped to almost 20% in November, largely because of higher crude oil prices.
Oil industry officials generally are pleased with efforts to deregulate fuel prices. However, many are concerned about falling economic activity in first half 1991, projecting a GDP drop of 2% for the year while inflation remains at 15% for much of the year.
At the same time, real interest rates will probably remain relatively low next year because of tight monetary controls. Refiner/marketers are already maintaining lower stocks because of reduced demand.
A top Economy Ministry official said, "If we relax our monetary and fiscal policies we may find ourselves facing a new bout of hyperinflation. But if we press on with the policies as planned, we may fall into a deep recession."
PETROBRAS CASH SQUEEZE
Defenders of increased domestic investments say that if the federal government, which controls the company's budget, had allowed a budget hike of $350 million Petrobras asked for 2 years ago for investment in deepwater Campos basin projects, Brazil would now be producing an extra 200,000 b/d.
Petrobras is still being squeezed by subsidies to support government controlled fuel prices.
Since oil prices jumped in fourth quarter 1990, the average price Petrobras paid for crude shot to as high as $33.56/bbl while the average price it received for domestic products sales was $15.62/bbl.
The company complains that despite price hikes its oil products price levels are still not compatible with adequate return on capital invested. But the government is obliged to keep a lid on prices in line with its anti-inflationary measures.
Petrobras' spending target of $16.9 billion breaks out as $2.5 billion in 1991, $3.1 billion in 1992, $3.4 billion in 1993, $3.7 billion in 1994, and $4.2 billion in 1995. Of that total, Petrobras has earmarked $12.2 billion for exploration and development.
Spending of $9 billion for 1991-93 correspond to the $3 billion/year Petrobras spent in 1981-83, when Campos basin discoveries helped Brazil pass the 500,000 b/d mark.
Petrobras pointed out that after 1994, cash flow generated by new projects going on stream could then sustain the added E&D investment.
REDUCING DEPENDENCE
Brazil's oil focus now is on reducing dependence on oil imports by increasing domestic production.
After 2 years of near stagnation on E&P work because of deep budget cuts, the government reversed itself on oil policy in the wake of the Persian Gulf crisis by approving revived spending for development of supergiant Marlim field-hitherto the victim of budget cuts-in the deepwater Campos basin (OGJ, Sept. 10, 1990, p. 21).
Brazil currently produces 670,000 b/d of crude, up 8.6% from 1989's average, and imports about 600,000 b/d. Its proved reserves of crude total about 2.8 billion bbl. Including probable and possible reserves in existing fields roughly doubles that number, yielding an estimate of sustainable production of 900,000 b/d.
Petrobras says that without increased E&D spending, Brazil's crude output will drop to about 400,000 b/d by 1995. However, domestic consumption is expected to rise to 1.4 million b/d by that time.
Critical to Brazil's production outlook is development of Marlim and another Campos basin supergiant field, Albacora. Petrobras estimates the two could be producing 340,000 b/d in 1995 and 700,000 b/d when fully developed by about 2000.
Petrobras claims the projects would be profitable at $19/bbl. At that price level, Petrobras says, the rate of return on investment would be 54%/year and payout in 24 years.
RISK CONTRACTS DEBATE
Silva says that if Brazil wants to double its crude production in a short time, it can't afford the investment required.
Petrobras Exploration and Production Director Joao Carlos de Luca says that unless Petrobras invests $16.9 billion the next 5 years to push oil production to 1 million b/d by 1995, its oil imports will jump sharply thereafter.
Silva would like to see these investments come from risk contracts.
"The poor results attained by companies that participated in risk contracts, which lasted from 1977 to 1988 with investments of around $1.5 billion, were due to Petrobras having granted high risk areas to foreign companies," he said.
At a meeting of Olade in early November, Silva said, "The risk contract model of that time was conceived to fail," adding that "Petrobras had reserved for itself acreage with real potential for success."
Aepet Pres. Diomedes Cezario de Silva disputed Silva's claims, citing an Aepet study.
"During the 13 years in which risk contracts were permitted, 243 agreements were signed with 35 of the largest oil companies in the world," the study said. "And more than 80% of Brazil's sedimentary basins were made available to these companies for oil exploration and production. With the exception of Pecten Brazil, an affiliate of Shell Oil Co. that found the first accumulation of hydrocarbons in the Santos Basin in 1984 and started development drilling from a production platform installed in Merluza field-a gas/condensate discovery off Sao Paulo state, no other foreign company struck oil or gas."
Risk contracts in effect before 1988 were allowed to continue.
E&P RENEWAL
Despite Brazil's problems, there are signs of renewed oil and gas exploration and production activity in the country.
Brazil has the fifth largest sedimentary basin area in the world and there remains much to be explored.
Petrobras onshore exploration will focus in the Potiguar basin in Rio Grande do Norte State, Solimoes basin in Amazonas state, and Parana basin.
Petrobras is anxious to discover oil and gas in Parana basin, where it will return after an absence of 9 years, because it is in the south central portion of the country, which accounts for most of the nation's oil and gas consumption.
In 1990, Petrobras drilled 11 wells in Sergipe-Alagoas basin, 14 in Espirito Santo basin, and two in the Lower Amazon basin. In all, 122 wells-88 onshore and 34 offshore-were drilled in 1990 vs. 111 in 1989.
At year-end 1990, more than 4,500 b/d of oil were produced in the Amazon. Petrobras hopes to increase Amazon production to 12,000 b/d by yearend 1991 (OGJ, Feb. 12, p. 15). That calls for another 17 wells, bringing the Amazon total to 35.
SANTOS BASIN ACTION
Petrobras is highgrading oil prospects in the Santos basin, where it recently discovered reserves estimated at 400 million bbl.
The discoveries were made on blocks previously held under risk contracts by British Petroleum Co. plc and a combine of Shell Oil Co.'s Pecten International Co., Chevron Corp., and Marathon Oil Co.
The 350,00 sq km Santos basin lies off Rio de Janeiro state's southern coast, Sao Paulo and Parana states, and northern Santa Catarina state. This represents a total area of 350,000 square km. The area considered prospective for hydrocarbons totals 130,000 square km.
Oil and gas exploration in the Santos basin got under way in the late 1960s with the first seismic surveys undertaken by Petrobras. The first Santos basin wildcat, 1-PRS-1, was drilled off Parana state in 1970.
A new exploration phase started in 1976 with the signing of the first risk contract in the Santos basin. Since then, foreign companies have drilled 29 wildcats, resulting in one commercial gas/condensate strike, Merluza, and five noncommercial hydrocarbon shows.
PECTEN ACTIVITY
A Pecten Brazil official said Merluza production is expected to start up in the early 1990s with a $370 million project.
Merluza lies in 430 feet of water about 115 miles from Sao Paulo.
Pecten installed a platform on Merluza Block ACS 14 and at presstime was drilling the fourth of six planned development wells. Average drilling time is 65 days. The 16 in., two phase offshore pipeline to a coastal processing plant has been completed, and construction has begun on a 16 in., 180 km onshore pipeline to the refinery at Cubatao.
Merluza produces from Upper Cretaceous Itajai sandstone at a depth of about 14,764 ft. Condensate gravity is 44, and the gas has 9% methane content.
Pecten didn't disclose reserves or production estimates, but Petrobras estimated Merluza reserves at 303 bcf of gas and 10.6 million bbl of condensate. In addition to its work offshore, Pecten Brazil drilled dry holes in the Amazon and relinquished its acreage there.
A Pecten official said a critical problem faced by foreign companies operating in Brazil are excessive costs and poor quality seen among domestic service and supply companies.
He pointed out that despite tariffs, importing equipment from the U.S. was still 20-50% cheaper than buying in Brazil. The official called for deregulation of the service/supply sector and lifting import barriers.
OTHER SANTOS BASIN ACTION
When foreign companies relinquished their risk contract areas to Petrobras in 1986, the Brazilian company renewed its exploration campaign in the Santos basin.
That led to the 1988 discovery of Tubarao field off Santa Catarina state on a block previously held by a foreign operator. Tubarao is in 475 ft of water 170 km offshore.
The discovery well flowed 3,500 b/d of 48 gravity oil and 300 Mcfd of gas from pay at 15,092-747 ft. Petrobras estimates reserves at 50 million bbl of crude and 212 bcf of gas.
In 1990, Petrobras drilled a discovery 12 km south of Tubarao on a block previously held by BP.
Its 1-BSS-55 flowed 1,800 b/d of 43 gravity crude and 39 Mcfd of gas from pay 15,419-747 ft.
Petrobras estimates reserves in the field, named Estrela do Mar, at 75 million bbl of crude and 106 bcf of gas.
The third field in Santos basin, Coral, was tapped by 1-BSS-56 170 km from the coast and 13 km south of Estrela do Mar on a former BP block.
The discovery well flowed 1,600 b/d of 39.5 gravity crude and 23.6 Mcfd of gas from pay at 15,419-16,306 ft. Petrobras estimates Coral reserves at 155 million bbl of crude and 212 bcf of gas.
In addition to delineating the three fields, Petrobras plans three more wildcats in the Santos basin southern area known as the Tubarao pole: The 1-BSS-57, 12 km northeast of Tubarao, with postulated reserves potential of about 60 million bbl, the 1 BSS 58, 30 km east of Coral, and the 4-BSS-59, 5 km east of the Coral discovery well.
De Luca notes that the recent Santos basin discoveries have pushed the Santos basin in second place after the Campos basin among Brazil's petroleum provinces. The basin's identified reserves represent more than 10% of Brazil's oil reserves and 30% of gas reserves outside the deepwater Campos and Amazon areas.
De Luca also cited the Santos basin's relatively shallow waters, proximity to shore, and higher gravity crudes as factors in its growing prospectiveness.
TECHNOLOGICAL ADVANCES
Petrobras, renowned for its prowess in deepwater technology, is pressing advances on other oil industry technological frontiers.
The company has stepped up its use of 3-D seismic in exploration, delineation, and development work. Once limited to the offshore, 3-D has been employed successfully in the Urucu area of the Solimoes basin in Amazonas state and in the Cacumba Island area of the Espirito-Santo basin.
Petrobras also has embarked on a horizontal drilling campaign. to date, it has drilled three horizontal wells onshore. It expects to introduce horizontal development drilling offshore, in Bonita and Enchova fields in the Campos basin.
One of the horizontal wells was drilled in Fazenda Belem field in the northeastern state of Ceara. So far, more than 400 vertical wells have been completed in the field, some of them used for gas injection. Fazenda Belem pay is only about 1,280 ft deep. Wells in the field have shown no problem with sanding, drilled with an average mud weight of 9 lb/gal.
In 1984, Petrobras drilled a high angle well in the eastern part of the field using the same mud weight as in the vertical wells. In 1988, it drilled a high angle well with a 500 m long horizontal section in the northern part of the field. The second high angle well used the same mud weight as the preceding well.
Copyright 1991 Oil & Gas Journal. All Rights Reserved.
