Ava G. Leone
In late 2007, the Brazilian oil giant Petróleo Brasileiro S.A., better known as Petrobras, announced the discovery of light sweet crude oil preserved under a canopy of salt in the Tupi field 290km off the coast of Rio de Janeiro. That announcement marked the beginning of what is proving to be a massive expansion of the country's energy producing capabilities. At the time of the Tupi discovery, Brazil's proven oil reserves were approximately 14Bbbl and the post-salt resources of the Campos Basin were nearing their end. Tupi, with estimated reserves between 5 billion to 8 billion barrels of 28°- 30° oil, increased Brazil's energy reserves by more than 50%, but Brazil's good fortune did not stop there. A few months later, in early 2008, Petrobras discovered reserves in another pre-salt field, Jupiter, just to the east of Tupi. Most recently, the National Petroleum Agency has announced an estimated 33Bbo in the Carioca field, also located in the Santos Basin. Although Petrobras and BG, who owns a share of the Carioca field, have both been more cautious in speculations about its reserve estimates, these wells and the thirteen other exploratory wells drilled in nearby areas have yielded oil of the same quality, pointing to the existence of one large chain of reserves in the Santos, Campos and Espirito Santos basins.
The Brazilian government seems particularly sanguine about the newfound resources and has abandoned earlier oil and energy plans to accommodate development of the new fields, 20% of which are thought to be natural gas. There is also much speculation that the new discoveries will transform Brazil into a major exporter of energy in just a few years' time. In all, Petrobras has drilled fifteen oil fields in the pre-salt sequence and each one has revealed oil and hydrocarbons. The exploration and identification of these fields is a technological triumph in and of itself, yet much more advanced technology and higher investments in the industry will be needed for Brazil to maximize the potential of its pre-salt reservoirs. This paper will describe the unique challenges facing production of Tupi and the surrounding fields, give a brief overview of the technical advancements that have already been made, and conclude by highlighting the significance of Brazil's new finds to its domestic and international politics.
The Significance of Brazil's Pre-salt Play
There have been many instances of overexcitement at the discovery of oil fields whose proven reserves ended up being far smaller than the initial estimates. Thus, it is important to consider the scope of Brazil's new finds as well as the accuracy of given reserve estimates. If the estimated reserves of the Tupi field at 5-8Bbbl are correct, covering a surface area of 200 x 800 kilometers it is the second largest field discovered in twenty years and the largest offshore field. Since the initial pre-salt exploration began in 2005, there have been several consecutive discoveries of light oil in the pre-salt sections of the Santos, Campos, and Espirito Santo basins. Most of the pioneering exploration has been done by Petrobras but international oil companies (IOCs) such as ExxonMobil, Royal Dutch Shell, BG Group Plc, and Galp Energia own 25% of the concessions in Tupi and the neighboring area, known also as the "Sugar Loaf." The ability to locate and assess these fields is itself a technical achievement, as their position underneath the salt shelf poses a particular obstacle to geologists and it has only been within the past decade or so that the technology to explore in such geological depths within deepwater has been developed.
In order to identify potential reservoirs, imaging must be reliable. Salt tends to absorb seismic energy thereby complicating the imaging process. The most advanced innovation in exploration technology is the use of a wider spacing in seismic acquisition. Combining the use of geochemical and geological data, 3D seismic imaging and 3D reservoir modeling, reserves have been confirmed in the Santos, Campos, and Espirito Santo basins. Jose Formigli, executive manager of the newly formed department of Pre-Salt Exploration and Production for Petrobras, has estimated that the combined cluster in the Santos basin will produce 1.126 million Bbbl by 2017, and this is not including nearby Jupiter Field. Marcio R. Mello of HRT & Petroleum in Rio de Janeiro estimates the Tupi reservoirs alone to be in the range of 10Bbbl.
The salt of the Santos, Campos and Espirito Santo basins reaches depths of 2,000 meters, and acts as a massive sealant working to preserve the liquid phase of the hydrocarbons. Because of the depth of the fields and their high temperature, there is a high likelihood of large gas reserves. According to Formigli, the Tupi field alone contains natural gas reserves ranging from 179 billion to 256 billion cubic meters, a figure well over 50% of Brazil's current reserves. Such an increase will have a major impact on the Brazilian economy and perhaps even on its relationship with other countries. Presently, Brazil imports approximately half of its total natural gas consumption from Bolivia but would likely decrease that dependence as the new gas is brought online. The volume of expected natural gas production has encouraged Brazil to concentrate efforts on finding more efficient ways of using the gas both domestically and on the international market. Petrobras' director for Gas and Energy, Maria das Gracas, has mentioned the possibility of offshore gasification plants to facilitate production. At last month's Oil and Gas Expo in Rio de Janeiro, Francisco Nepomuceno Filho, E&P corporate executive manager for Petrobras, said that Brazil planned to increase production by 350% and had completed construction of two new pipelines which have already led to a 25 million cu m/d increase.
Technical difficulties
Petrobras has proven itself to be capable of the advanced technology needed to drill, test and evaluate pre-salt rocks. In order to confront the difficulties associated with pre-salt production, it has created a new research department within the company and has begun to reach out to international partners. It is likely that the international firms who stand to benefit most are those that had pre-existing contracts with Petrobras, such as Halliburton. The technical challenges to pre-salt exploration are numerous but assessing the character of the reservoirs and identifying energy resources are among the most fundamental challenges associated with production. Tupi and its surrounding fields pose a unique technical and economic challenge to production due to the reservoirs' location beneath 2000-3000 meters of seawater, another 2000 meters of rock formations and finally another 2000 meters of salt. Petrobras is currently conducting one extended well test to monitor the reservoir's interior characteristics.
The offshore drilling conducted in the Gulf of Mexico (GoM) in sub-salt reservoirs offers some guidance as to how to best explore at such depths, but fundamental differences exist that make pre-salt exploration much more complicated. First of the all, the reservoirs in GoM are much younger (ranging from the Paleocene to Pleistocene eras) than the deposits in Brazil, which are shallow water cretaceous carbonate deposits. The salt formations differ as well. In GoM the salt basins are made up of allochtonous Jurassic age salt deposits, meaning that the salt has moved from its original position to create a canopy near to the surface with the oil left underneath. The cretaceous salt in Brazil, however, is authochotonous. In other words, it has not moved as far away and is mostly still attached to the place of its original deposition. Thus, the canopy formed over GoM's reservoirs makes them "sub-salt" while Brazil's reservoirs are located below both the salt and pre-formed rock.
The inability to predict geo-mechanics of the reservoirs complicates long- term production planning, as well. There has never been sustained production at the depths that characterize Brazil's pre-salt fields so no one can say with any degree of certainty what impact the depletion of oil from one reservoir will have on its neighbors. Due to the pasty consistency of the salt layer, well engineering in pre-salt fields also differs considerably. Complications arise from slow penetration in the sedimentary layer of the reservoir, deviation of wells once they penetrate the salt zone, and well-bore materials that are resistant to high CO2 content. While rock is difficult to drill through, once the drilling has occurred the rock remains steady thereby allowing the drill head to maintain its position. Salt, though easy to penetrate, is soft and unstable. Recovery possibilities are also problematic to assess. There is a concern about whether or not pumping gas or water into the reservoirs is technically feasible. Hydraulic fracture, a method used to increase or restore the flow of oil from the reservoir to the well, may not be an option considering the pasty consistency of the salt layer.
Once the wells have been drilled, engineers will face additional challenges as they attempt to maintain consistent flows from pre-salt reservoirs. Because oil is preserved under the salt shelf, more pressure is required for extraction. Additionally, given the already high temperature of materials located so close to the earth's center, cooling will occur much more rapidly. Controlling the decomposition of hydrate is necessary to prevent blockage, but is made difficult due to the inability to precisely gauge temperatures. This rapid change of temperature as the oil moves up the pipes and begins to clear the rock layer will create paraffin that can clog up pipelines. Insulating or heating the pipes remedies this, but insulation materials may prove too heavy for pipes of the length that will be required by the pre-salt fields. A large build-up of paraffin could temporarily shut down production and be extremely costly for a firm who that has to replace pipes. Companies are now exploring titanium as an alternative, which may circumvent the weight issue but is a much more expensive substitute.
Issues of manpower and subsea engineering are factors, as well. Jose Formiglio has identified the eventual construction of DCUs (Dry Completed Units) as a key component of Petrobras' long term production plan, but for the time being Petrobras will rely on FPSOs (Floating, Production, Storage and Offloading vessels) in order to get the most flexibility in well-head positioning while the precise characteristics of reservoirs are still being determined. The company is currently working on plans for the construction of a plant to build the FPSOs domestically, and is seeking to hire petroleum engineers for FPSO production as well as highly skilled workers to build the new pipelines that will transport natural gas. In addition to human capital needs, there is a shortage of rigs capable of production in these deepwater areas. There are a limited number of rigs in the world capable of production at the depths required by the pre-salt fields. Petrobras has streamlined its process for the negotiation of long-term contracts in an effort to ensure that it has the rigs and services necessary to meet its pilot goal of bringing Tupi on-stream by 2010.
The plans for exploration in Brazil's pre-salt reservoirs has led to the development of new technology in several areas, including deep water, pre-salt, flow, high pressure-high temperature (HP/HT) and wells. There are very few countries producing in similar depths, and not many of them do so profitably. A rather surprising exception is the relatively small producer Oman, where Brazil has turned for guidance in developing new technologies. Nevertheless, there are major differences between Oman's production in pre-salt and those planned for Brazil. Although Oman is producing at a profit, it is doing so in very small quantities that will be dwarfed by planned exploration in Brazil's offshore basins. Further, Oman's production is in reservoirs that are much older geologically than that of Brazil, implying that certain adjustments in technology will have to be made.
Cost and Profit
The technological challenges are by no means insurmountable but will require Petrobras and the Brazilian government to make massive investments in research and development, which is already being done. In fact, if Brazil faces a prohibitive factor in its pre-salt production, it will be cost. When the quantities of reserves were being confirmed and made public, the price of oil on the international market was around or above $100 per barrel. The international financial crisis has already put downward pressure on oil prices, and it is likely that they will continue to fall in the face of a pending economic recession. In an initial assessment it was said that for Brazil to make a profit on pre-salt exploration and production the price of oil needed to remain above $30-$35 a barrel. More recently, Energy Minister Edison Lobao has mentioned $40-$50 a barrel would be the minimum threshold for profitability.
Naturally, estimates of production cost vary depending on the source. Due to several unknowable factors, (for example, long-term well behavior) it is impossible to pinpoint a precise figure but perhaps we can get a general idea of the scale of investments that will be undertaken by Brazil. The Espírito Santo reserves, such as Jubarte, are shallower than Tupi and thus will be less expensive to produce. Jubarte itself is located 4,550 meters below sea level and underneath 200 meters of salt, compared to Tupi's location of 6,000 meters under water and 2,000 meters under salt. One estimate of overall production costs for the Tupi field alone is $100 to $200 billion. If Carioca proves to be as large as many believe it is, the costs of production there could be much higher than Tupi. The good news is that costs have already decreased, just in the short time since Tupi was first tested. Petrobras spent an entire year and $240 million on the first exploratory well drilled into the reservoir. The most recent ones have been completed in just 60 days and cost approximately $60 million. It would seem that Brazil and Petrobras in particular are betting that oil prices remain above their minimum profit threshold. Only weeks ago, Petrobras announced the order of ten new platforms for deepwater exploration that is set to begin in the Santos Basin between 2013 and 2016. This will come on the heels of Tupi's pilot production, which is set to begin in 2010 and will mark the dawn of a new era for Brazil's economy.
What Pre-Salt Means for Petrobras, Brazil
The company deserving the lion's share of the credit for Brazil's potential oil bonanza is Petrobras, which was created in 1953 by the Brazilian government but has since seen a majority of its equity sold to the private sector although the government maintains the majority of voting shares and effectively controls the company. Petrobras maintained a monopoly over Brazil's energy sector until 1997 and is still one of the largest companies in the Americas. After putting up the initial capital to explore Tupi and other pre-salt areas, Petrobras now fears that the government will take actions that significantly reduce its market share. Almost immediately after Petrobras announced the Tupi discoveries, the Brazilian government removed 41 exploration blocks in the Tupi region from a planned auction signaling to IOCs that the rules of the game were going to change. Citing the need to invest heavily in education and health as well as the general maintenance of the country's economic resources, the government set up an inter-ministry committee to consider the best means of utilizing Brazil's increased revenue from the potential oil boom as part of the country's long term development plan. According to President Luiz Inácio Lula da Silva, the commission will present its findings and recommendations to him on October 31, 2008, at which time he will decide upon a course of action. If he opts for changes in the oil and energy laws, they will have to go through Congress, which could mean serious delays. ANP, the country's oil regulator, initially drafted a bill that would change energy laws, limiting the potential influence of outside investors in the new fields but the government has since been keen to reassure current investors that it will honor all existing contracts. It is likely, however, that new rules would restrict IOCs' ability to bid on new concessions.
There has been much speculation that the government will either increase its shares in Petrobras, nationalize the company altogether, or create an entirely new government-owned company to manage the pre-salt reservoirs. If a new firm is created, it will be subject to the approval of Congress, a consideration that may push the government to pursue other alternatives. The creation of a new firm is the most likely scenario if the government decides to pursue a production-sharing model whereby it owns the oil but pays companies from the proceeds. Under the current system, the companies own the oil they discover and produce but pay royalties and taxes to the government. It is also possible that the government opts to continue with the current system but raises the price of oil company concessions. In any case, another likely outcome is eventual Brazilian investment in off shore sovereign wealth funds.
The finds in Brazilian pre-salt clusters stand to have far reaching economic and political impacts. The strategic advantage increased natural gas reserves gives Brazil in its relations to politically unstable Bolivia has already been mentioned. Furthermore, it is likely that Brazil will join OPEC once production begins at Tupi in 2010. The need to protect the new fields has already led to a partnership with France, to whom Brazil turned for assistance with the construction of a nuclear-powered submersible that will defend the pre-salt basins from attack. Finally, reserves have been confirmed beneath salt shelves off the shores of Angola, Gabon and Congo. If Brazil continues to lead the drive in pre-salt technological development, exploration and production costs will fall, potentially spurring more widespread investment in West African plays as well as pre-salt exploration elsewhere. If this happens, a reigniting of the peak oil debate is inevitable.
Brazilian Basins Hosting Pre-Salt Oil Reserves
Appendix II.
Tupi's Salt Layers
Appendix III.
Map of Tupi Reservoir
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