Advancing Evolution

This sponsored supplement was produced by Focus Reports.

Publisher: Ines Nandin
Project Director: Chiraz Bensemmane
Editorial Coordinator: Fraser Wallace

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Scientists exploring the New Hebrides trench in the Pacific Ocean recently gained further understanding of the inhabitants of the deepwater environment by sending an ROV (remotely operated vehicle) the 7,000m distance to the sea floor. The creatures that encountered were similar to animals adapted to other deepwater trenches, but at the same time appeared in different numbers and in different forms: they were subtly adapted to this local environment. A certain type of eel was particularly abundant because the area is especially nutrient poor; this type of eel is able to cope with infrequent meals, scavenged from the sea floor. Unlike the animals of the New Hebrides trench, Brazilian operators do not currently face a lack of commercial sustenance, but there is still the need to ensure one's company is best suited to dealing with the local business environment.

Speeding up integration of new ideas and concepts into the Brazilian oil and gas industry is one way that policy makers are expediting the industry reshuffle that will allow best use of hydrocarbon resources across the country. There is an imperative to gain the skills that Brazilian industry can use to ease access to resources. Lowering costs and increasing capabilities must be married with the Brazilian government's desire to increase the capabilities of local industries through use of local content regulation (LCR).

This dual ambition creates both opportunity and market turbulence, which can help or hinder companies operating in Brazil to varying degrees.

Almir Barbassa, the CFO for Petrobras, details the wealth flowing from equipment already installed: "The first FPSO at the Lula field is producing more than 100,000 bpd with four wells. The production rate per well averages 25,000 bpd, although the platform itself was built to receive six producing wells. Two of them are idle because there is no room on the FPSO due to the amazing productivity of the other wells."

Barbassa also gives an idea of the success Petrobras has already had from the pre-salt fields: "The success rate of the wells we drilled in the pre-salt stands at 85 percent. We have a fleet of 40 new generation rigs able to drill in waters up to 2000m depth and a total of 69 floating rigs working for Petrobras."

The CFO of Brazil's national giant goes on to describe the current opportunities that Brazil's biggest operator, with 76 percent market share, is taking advantage of: "Today we are working to develop the existing fields. Petrobras is installing more than 30 oil rigs between 2013 and 2018. Most of the capex needed to build this equipment has already been deployed – not only the USD 42 billion for the transfer of rights, but the development of 20 FPSOs, each costing USD 1.5-1.8 billion. If we include the cost of adding wells to the FPSOs, each module requires USD 5-6 billion before starting production. We are paying for future production today."

Barbassa estimates output of 4.2 million bpd, plus 1 million bpd in gas equivalent by 2020.

The break-even figure for pre-salt production is USD 40-45 per barrel of Brent crude, and with the price of oil currently over USD 100 per barrel, pre-salt fields have the capacity to be very lucrative for Brazil and the oil and gas sector. Local and international companies are eager to engage with this opportunity too.

Milton Costa, executive secretary of the Brazilian Petroleum Gas and Biofuels Institute (IBP) also predicts much pre-salt activity. He thinks that the first priority, however, must be reducing drilling costs: "Drilling operations need to be further optimized. This is work in progress. The pioneer wells in pre-salt cost up to USD 200-300 million, but in Lula, Petrobras is now drilling for some USD 70-80 million, less than three months from the start of operations."

Brazil has been very lucky, as the pre-salt discoveries came just after the techniques for deepwater extraction had been fully developed and learned in the Campos Basin.

Costa predicts significant challenges, though not insurmountable ones: "Petrobras has a huge financial challenge in the next three to four years. They have to put the last systems in the Campos Basin in production and add pre-salt projects. When production goes up, they will start to generate a lot of cash flow, and in four years will be in a very good position to face all the other investments."

Presalt pull

There is an increasing diversity and abundance of businesses in the Brazilian oil and gas sector. As Brazil's industrial capabilities and capacities grow, so more business niches appear. Understandably, many companies have arrived to work accessing the pre-salt resources, an opportunity on a scale previously unfathomed. However, native efforts to extract these resources cannot be forgotten either, for of course Brazilians are eager to take their stake of this prize.

Queiroz Galvao, an industrial conglomerate originating in the state of Pernambuco, is an example of a thriving Brazilian consortium. This enterprise is now consolidating its position with a swelling presence in the Brazilian oil and gas sector.

"The company developed over the years to be one of the largest groups in Brazil," explains Antonio Augusto de Queiroz Galvao, chairman of Queiroz Galvao Oil and Gas. "At the moment, the business is a diversified enterprise. Oil and gas is certainly one of our growth drivers [and] in particular has grown significantly since 1980 through the foundation of a then small onshore drilling company, Queiroz Galvao Oil and Gas (QGOG)." Today, the company also operates offshore, and assets include 12 floating drilling units, eight operating, and four under construction. "One, the Brava Star, will be completed this year in Korea," Galvao reveals. "It is a top-range and well equipped unit built by Samsung.'

Queiroz Galvao also constructs vessels. Galvao details that this includes "FPSOs, as our business has a 37.5 percent stake in the South Atlantic Shipyard. On this site, oil tankers and drilling rigs are being fabricated."

This diversification has also seen the group form and float Queiroz Galvao Exploration and Production (QGEP) on the Sao Paulo stock exchange. This company is the operator on block BS-4, in Atlanta Field, at a depth of 1,500m.

Galvao is unequivocal about why Queiroz Galvao is present in Brazil's oil and gas sector: "The resources in the pre-salt fields are substantial, and production will increase rapidly; oil and gas resources will undoubtedly be central to Brazil's future success."

Gas, an opportunity with spark

Pre-salt oil is one of a number of hydrocarbon sources that are attracting companies from abroad to Brazil. Around 12 percent of activity in Brazil's oil and gas sector is onshore, attracting international companies and enabling the emergence of local players.

Geogas, a company providing compression and treatment of natural gas services is one local competitor.

Last year in Maranhão, Valerus Geogas, completed 12 miles of gas pipelines feeding a gas treatment unit over 90,000m2 in area supplying an electric power station, a milestone project for the company. "The key for growing our client list is turnkey solutions – complete from start to finish," says Paulo Lopes, director of Valerus Geogas Consortium.

Valerus Geogas has attempted to finesse its production and operational procedures. Lopes emphasizes efficiency: "Prefabrication is a specialty of Valerus Geogas [meaning] one can attend to several stages in the production process simultaneously, rather than proceeding in a lumbering, slow manner." Valerus Geogas also seeks to develop local fabrication facilities, typically sourcing more standardized equipment in this manner. Only the core equipment then requires transport, cutting down on the cost and time taken up by logistics. "The company is capable of delivering a project in a third of the time that might be expected from traditional approaches."

Key considerations in Brazil

Three businessmen give their thoughts on considerations of import in the Brazilian market.

1. Petrobras' favor is worth wonders

Luiz Braga; VP- Geomarket Director Latin America, CGG:

"CGG have been working in Brazil for a long time, and the approval of Petrobras over that period has been a great tool in validating CGG's technology to the market." He continues: "Petrobras are technology leaders offshore; when they state that a technology is a useful one, other operators listen. This has been of great use to CGG."

Petrobras are the key player in Brazil (and are the seventh biggest energy company in the world) with a 76 percent market share. They dominate the market, and other participants in the Brazilian market must learn to deal with them.

2. Think like a Brazilian

Ian Wilkinson; Socio-Director, Petrolink:

"Brazil is not an easy market for overseas companies to enter; understanding the divergence between Brazil and Europe is essential to succeed. The catch-all phrase of ‘cultural differences' is key to business strategy and prominent amongst all the issues which must be considered by any business seeking to enter the Brazilian market."

3. Attack risks from all sides

Nilo Chagas de Azambuja Filho; Chief Technical Exploration Officer, HRT:

- by diversifying:

"Acquiring assets already producing is a costly but low-risk strategy, particularly when compared to straight up exploration. The latter, however, is far cheaper. Both exploration and production are important. The Polvo field [HRT recently acquired a 60 percent stake] is part of HRT's diversification strategy and will allow HRT to move from being a non-operating company to a fully-fledged operator."

- by gaining partners:

"Having a partner is it allows more aggressive drilling of wells in the field, by reducing risk and sharing further investment. This is towards the aim of increasing production."

Exterran is another commercial unit focused on Brazil's gas resources. Fernando Costa, country manager, highlights his company's value proposition: "Exterran highlights its technical expertise to the wider market by providing services aimed at satisfying [clients'] requirements."

Costa describes how his company deals with Brazil's large size and the location of gas reserves: "We also ensure our services engage with opportunities such as electricity production near locations where gas is being extracted from the ground." At the moment, Brazil's limited pipeline network means transmitting and selling electric power generated through gas combustion is key to creating a market for gas, extracted far from pipeline networks.

Costa highlights that the Brazilian gas compression business is immature, and many opportunities have yet to emerge as demand grows: "the main units are the engines, compressors and coolers and it is not possible to obtain these readily in Brazil. Demand at the moment does not encourage traditional global producers to take up manufacturing these units locally and for this reason, we must keep importing this equipment."

He displays confidence that the market will provide this demand: "Sao Paulo is a good example as it has greatly expanded its gas network and so the path to developing gas has a precedent. The potential for this market is huge because Brazil's gas resources are growing."

Lopes cites one reason for this growth: ‘"Onshore concessions are being granted which is increasing the pace of operations across the country."

Hungry Hunters

Following the first block auctions in five years, and the issuing of concessions, opportunities have also increased for companies searching for Brazil's hydrocarbon resources, both onshore and offshore.

An innovative, native company with a unique product, Oil Finder provides remote software solutions allowing clients to locate seafloor sources of oil from satellite imaging of seeps (natural or otherwise) on the surface. In a ‘competitive test run' held in cooperation with Petrobras, areas indicated by Oil Finder to have oil resources had a 65 percent chance of having traces of petroleum chemicals in the seabed compared to 25 percent in areas which oil finder did not indicate a ‘find' was likely.

Manlio Mano, executive director of Oil Finder, summarizes: "Oil Finders' technological advantage will allow companies to speed up locating oil, meaning production will happen faster."

More traditional survey companies are capitalizing on opportunities arising following the 11th and 12th rounds of auctions for concessions in the Brazilian market too.

CGG, an integrated geoscience company providing leading geological, geophysical and reservoir capabilities is headed in Brazil by Luiz Braga, VP- Geomarket Director Latin America. He states: "Two of the main reasons for CGG's success following 2013's bidding rounds were the company's technology and strategy for advancing the process of delivering results to clients."

Braga illustrates CGG's applicability offshore: "In offshore, CGG is pioneering new technologies as well, clearly with Brazil's significant focus on this area for new development, companies such as CGG must pay attention to this sector. Ensuring operators are able to fully understand their wells as production is ongoing will need a degree of emphasis, and CGG seeks to address this requirement." CGG has reduced its own risk by proactively securing a contract backlog through 2014 and new auctions are expected in 2015.

Risk avoidance not only drives CGG's strategies, but also that of the wider surveying industry and multi-client survey in Brazil has become the norm as the operator transfers risk to the surveying party.

Trunk Routes

Operators demand countless services, from surveying, to delivery of parts and equipment required to sustain consistent operation - downtime is lost revenue. Renata Pereira, executive director at BRASCO, a logistical onshore and offshore support company states: "[BRASCO] is positioning itself to pick up the greatest market share from the 11th round of auctions. It is a manner of business drive, and having the proper competencies to deal with customer demands as they arise."

Pereira states the logistics industry is central to the growth of Brazil's community of businesses: "Efficient transport over longer distances needs to become the norm." She concludes that truly coordinated supply chains, from site of production to point of use are vital for Brazil's ambition.

Calixto Deberaldini, country manager of GTM do Brazil, a leader in Latin America in the distribution of chemical inputs, raw materials, and provider of logistics services, sees opportunity in supplying the Brazilian market: "Handling and importation costs in Brazil are higher, freight rates are pushed up by poor road infrastructure." While many would view this as a disadvantage, Deberaldini highlights that GTM uses experience and technical capabilities to ameliorate these further costs.

GTM is a recent entrant to Brazil, and Deberaldini articulates the company's strategy to seize market share: "GTM has so far introduced a limited number, between five and ten products to Brazil to ensure that these gain a solid reputation and a respectable market share within the E&P sector. These products are used in drilling, cementing and well stimulation operations." He predicts future success for GTM: "GTM expects to shift 50,000 tons of material in Brazil by 2015. The focus on international transport and high volume capacities means GTM is able to be highly competitive across its diverse product portfolio."

GTM achieves this focus on high volume transit through its sister company, Panachem, based in Houston which aims to connect GTM to suppliers across the world, ensuring that GTM has access to the lowest prices in the market for transport. This a core strategy for GTM which allows the company to mitigate the high cost caused by the poor quality of infrastructure and actual size of Brazil.

Navigating the regulatory framework

Logistical supply is far from the only hurdle encountered in Brazil. All participants in the market are affected heavily by government efforts to regulate development. Petrobras, for example, is the sole operator of pre-salt projects, even though this restricts Petrobras from deploying assets elsewhere. LCR is a common complaint of companies entering Brazil from abroad, but local players can find it a hindrance too- Daniel del Rio, country manager at Westshore do Brazil, a shipbroker, highlights Brazilian regulation, whilst aiding businesses at home, also has a cost: "the protection provided by these rules to Brazilian operators simply removes the imperative on ship owners and shipyards to reduce costs. In this way, Brazilian regulation fails Brazilian industry; Brazil should have the ambition to be internationally competitive."

Not everyone is unhappy however. Patricia Coelho, President of Asgaard Navegacao, an offshore services company, explains: "my vision of an internationally operating Brazilian shipping company will be achieved under the umbrella of what I describe as ‘The Brazilian Jones' Act' (Brazilian law 9,432), which protects Brazilian flagged vessels." This law means contracting companies must give precedence to locally established companies. Coelho's business benefits from current policies in place in Brazil, but this is not the case for every participant in the Brazilian oil and gas sector.

Clearly, many local suppliers of goods and services are in a better position, shielded in part from the forces of international competition.

Håkon Ward, former general manager of Kongsberg Oil and Gas Technologies Brazil (KOGT) (now Vice President for Engineering Services; Software & Services), a company providing technology, products and services for surveillance, integration, and analysis of drilling and production operations, highlights the need for international companies to "get close" to the Brazilian market to deal with local regulation. "Over recent years competition has increased, and regulation and tax systems have become more challenging. For these reasons the importance of having a local presence in Brazil remains clear; any company needs to be in close proximity to the market and its clients in Brazil, KOGT being no exception."

One company that realized this early on was Technip. Adriano Novitsky, CEO for the Brazilian subsea division states: "The company has been growing since starting in Vitoria 25 years ago. With the pre-salt resource emerging, Technip realized the opportunity and moved to construct a new facility in Acu. Our company decided five years ago to increase R&D capabilities in Brazil. The company has a technology center based at Vitoria, and another here in Rio de Janeiro. In Vitoria, a lab undertakes dynamic and static tests to evaluate the reaction of the pipe to conditions that might be found offshore."

Technip's SVP for Latin America, Jose Jorge Araujo emphasizes the result of this early move for the business is that "the company has continuously been working on one large project of this sort after another since 2003, when work was undertaken on the P-52, Brazil's first locally built semi-submersible."

Another company less delighted with the local content requirement regulation (LCR) is Repsol-Sinopec. José Maria Moreno, CEO, states: "LCR is our greatest concern because it actively prevents the procurement of FPSOs from abroad, which would allow production to progress more swiftly."

Despite this perceived obstacle, Moreno is clear why Repsol-Sinopec is in Brazil: "In 2005, however, pre-salt resources were discovered and this changed how companies, including Repsol, viewed Brazil entirely. The pre-salt contain over 500 billion barrels of oil."

"There are technical challenges to reaching these larger, highly valuable resources, however the industry has now managed to reduce costs and this resource is commercially highly attractive."

Repsol-Sinopec has various operations in Brazil, including the Pao de Acucar field discovered in block- BM-C-33 in the Campos Basin. There, Repsol-Sinopec is the operator with a 35 percent share alongside Statoil and Petrobras. Of a number of deposits, Pao de Acucar is the company's most important, featuring a band of oil 500m deep.

A company in Brazil that finds itself in the middle of this dance between regulation and partnership is Sete Brasil Participações. João Carlos Ferraz, CEO of Sete Brazil, states that the company's "order book will boost Brazilian shipyards and consists of 29 ultra-deepwater automated design type rigs, capable of operating in the most difficult of conditions."

Sete's order book is enormous, and offers Brazil a clear path to an enhanced industrial sector. "These rigs will also utilize 55 – 65 percent local content, and BNDES will advance 80 percent of the finance," Ferraz adds. "Given that our company will fuel whole sections of the economy, it was always entirely likely that BNDES would support our efforts in this manner. Local content and producing here in Brazil [was] the reason Sete Brazil was created. Without local content rules, there would be no need for Sete Brazil to exist."

Petrobras and Sete Brazil are central to the growth of Brazilian local industries; they give them shelter and sustenance in the form of contracts. As the IOCs add their muscle to the Brazilian oil and gas sector, further development and cooperation will become possible. It is clear that the industries associated with oil and gas in Brazil will do very well in the long run, and LCR certainly adds to local demand, bolstering local suppliers. It is also clear that international companies can still add significant strength to local efforts and many of the technologies and techniques that international players can bring to Brazil are core to bringing down costs associated with extraction, key to Petrobras' dream of producing 4.2 million barrels of oil per day in 2020.

Team work makes the dream work

Brazilian policy makers are certainly aware that new ideas can expedite access to the value of Brazil's pre-salt resources, as well as ensure maximum value is taken from existing fields, onshore and offshore. For this reason, companies operating in Brazil are obliged to invest a portion of their revenue in research and development. Alongside indigenous research bodies, such as the Centro de Pesquisas Leopoldo Américo Miguez de Mello (CENPES), incoming experience is again assisting to push Brazil's ambition forward. Kjetil Solbrække, President at SINTEF, a research institution originating in Norway, explains his institute's particular strength: "SINTEF has a very proficient group of staff working here in Brazil on flow assurance [which] is one of the technological areas that has brought Norwegian abilities in extracting oil forward a great deal. It allows more oil to be directed to the same number of processing plants. This offers huge financial savings on oil extraction in the presalt resources."

Nelson Leite, President of FMC Technologies, a technology solutions provider, indicates foreign entities offer more than technology: "IOCs offer further investment as well as novel experience: the participation of more IOCs in the Brazilian market would be of great benefit in realizing the country's ambitions for production. The involvement of IOCs together with Petrobras on the Libra field is an excellent development because all these players will bring their own experiences to the table; new technologies can and will assist them in achieving their aims."

João Ferraz of Sete Brazil agrees with the idea that foreign companies working alongside their Brazilian counterparts is beneficial: "Sete Brazil is an equity investment company, and does not desire to become a drilling company." The presalt domain is a huge resource: "Petrobras will require a huge amount of everything in a very short period of time. Service providers operating in Brazil will have to initiate a very fast track increase in capacity, and without stimulation to grow or assistance, they would likely fall behind Petrobras' demands for equipment and services.

"Sete Brazil comes not to replace existing players, but to support them, offer its strong balance sheet and assets to help service companies who could not keep pace with Petrobras' requirements. A joint venture business model is advantageous to both parties and offers a route to rapidly providing the capacity to extract Brazil's oil and gas resources."

Denis Palluat de Besset, managing director of Total E&P Brazil, extolls the opportunities he sees from connecting with other players. Speaking of the Libra consortium, he remarks: "a deepwater champion has been created. The level of experience and ability within this consortium is astounding and furthermore, the power the Chinese bring to the consortium too, means that Libra will generate significant kudos for all involved parties."

Felipe Lopes, general manager at Sotreq, a Caterpillar dealer, attests to advantages cooperation and collaboration has for equipment companies. Having access to Caterpillar's international brand gives Sotreq recognition, whilst Sotreq's local knowledge and high quality repair system for Caterpillar products as part of an international chain reinforces that brand. "Not long ago, [Caterpillar] opened a factory in Brazil to build small generator sets, and we used this as a precedent to argue that large engines such as the 3500 units- Sotreq's cash cow in the offshore market- should also be produced here," he explains.

Lopes highlights the value of other commercial links too: "Sotreq remains principally a Caterpillar dealer, however, for some contracts, it is important to have the ability to add some extra capacities to the finished offering." For this reason, Sotreq also works alongside Vulkan do Brasil, the Brazilian affiliate of the Germany-based mechanical transmission technology company.

Expansive Ambition

International companies are eager to become involved in extracting Brazil's hydrocarbon resources and equally, Brazilian oil and gas companies now are beginning to look at openings beyond the ‘safe port' created by the Brazilian regulatory system. They might not have the protection offered by LCR, as it directs more volume to Brazilian businesses, but the opportunities out with the country are clearly worth a degree of risk

These opportunities extend beyond solely extracting hydrocarbons. Marcelino Jose L. Nascimento, chairman of Bravante, a company operating in the Platform Supply Vessel (PSV) shipbuilding and bunker supply business (currently restructuring) sourced a number of its PSVs outside Brazil, in the United States. "Bravante decided to source part of its fleet in the USA because the shipbuilding industry there is reputable and respected, and vitally to our business also has some very attractive financing packages," he says. "We received one of the lowest interest rates on our fiscal package - a 23 year bond at 3.6 percent interest each year. This was a very good opportunity."

Companies looking to wider horizons include both small players and some of Brazil's commercial champions: Queiroz Galvao Oil and Gas for example has a letter of intent to drill in Paraguay and will be moving a drilling unit there in the near future. Galvao, QGOG's chairman says: "We want to make our company international however, and expand where we can. Growing the company means that we must be a player in more than one country."

Small companies too, wish to expand. Oil Finder's Manlio Mano states: "alongside University College of Los Angeles (UCLA), Oil Finder looked at moving further afield, into international markets. Currently, Oil Finder has a unique offering which is particularly valuable at the pre-bid stage. There are around ten auctions globally each year and this gives our business great scope to market its product through multi-client bids."

Brazilian companies show an eagerness to overcome additional costs of production and to reach the international market. "CAPEX in Brazil is extremely high, and because everything is tailor made for Petrobras this means that an internationally competitive vessel must be highly developed, offering premium services," states Asgaard's Patricia Coelho. "Petrobras is highly demanding, and Asgaard has responded to this by equipping its fleet with Rolls Royce engines for example. This means that our vessels are equipped to deliver services to any company, in any location."

The future of the Brazilian oil and gas sector looks bright; and through increased local demand, likely to invigorate the country's wider manufacturing base too. Policy makers looking to the future however, still need to tailor regulation to enable Brazilian businesses to thrive in any oil environment.