This article is extracted from PESGB Monthly Newsletter, November 2006 and republished with permission.

Brazil — Competitive Landscape and Current Opportunities

By Michael J. Dyer – Director Americas – IHS – Houston, Texas

Brazil’s general global competitive position has improved over the last several years as a result of the stabilized fiscal and political regimes as well as from significant discoveries made by Petrobras over the last five years. The current E&P opportunities are varied and include the upcoming ANP Round 8. Although there are a wide variety of opportunities available for companies of all sizes, the greatest reward opportunities will materialize only where new ideas and play types are developed in the high risk frontier basins. To gain a better perspective of current opportunities a few examples of successful entry strategies will be reviewed as will the current information on an exciting new exploration play Petrobras and partner BG discovered in the Santos Basin.

Competitive Landscape: The IHS PEPS worldwide rankings based on fiscal regime, political stability, and oil and gas discovery volumes, currently rates Brazil as the 2nd most attractive place in the world for investment opportunities. Petrobras dominates the industry and will have the best competitive advantage for years to come but companies can find niches and can be successful both onshore and offshore. However, Brazil is not without some continuing nagging problems involving environmental permitting, some tax issues, and increasing political tinkering in the administration of the oil and gas industry as well as the lack of a transparent gas market. A number of companies have lost money in Brazil since 1998 due to problems encountered with IBAMA, the environmental agency responsible for issuing exploration and development activity permits. Some areas onshore and some offshore on the shelf have been very problematic for companies to obtain permits. A comprehensive gas law has been debated and worked on for over two years but has not been passed due to other political scandals that took precedence during the 2006 election year. Until a gas law is passed it will be difficult for other companies to compete effectively in this segment of the Brazilian industry dominated by Petrobras. BG, ENI, and Shell are the only other companies with a significant position in distribution assets in the country and a way to market any produced gas unless it is through Petrobras and its marketing terms.

Brazilian Bid Rounds: Brazil opened its oil and gas sector in 1998 and through 2005 a total of seven bid rounds have been held (Table 1). Through the seven bid rounds almost all major and independent companies in the world have participated in the bid rounds to some extent. The major companies, with the exception of Shell, have not participated in the bid rounds to any great extent since the ANP Round 3 due to perceived instabilities in the political and fiscal regimes and environmental permitting problems. This void was filled by large independent companies notably Kerr-McGee, EnCana, Statoil, Devon, El Paso, Repsol-YPF, and BG. The seven bid rounds have resulted in 594 blocks being awarded covering 433,000 sq km with total bonus bids of US$ 1.42 billion and total work commitments estimated at US$ 7.06 billion. As can be noted in Table 1 below, the average block size has decreased but the average winning bid/sq km has remained fairly constant. One of the key strategies in the more mature offshore basins has been for companies to partner with Petrobras in order to pick up the most desirable blocks with little or no competition in the bidding. One interesting and ironic change to the bidding rules for the upcoming November 2006 ANP Round 8 is that the Ministry of Mines and Energy implemented a change limiting the number of bids that one company can make in one sector of a basin, only three to four bids per sector are now allowed, in order to prevent companies from leasing up entire sectors. This affects Petrobras more than other companies and will force it to seek out more partners in order to be able to bid on large areas. Another change to the bid round was the dramatic reduction in number of blocks from 1,153 originally announced to be on offer to 284. This was the result of political tinkering with the bid round by the CNPE, the National Petroleum Advisory Council with direct links to the President. There are some legal questions regarding this controversial change to the bid round and it is hoped that it was just an election year aberration and not a permanent process that will be implemented in upcoming rounds. Shell is the only major to have participated in most of the bid rounds and is producing approximately 25 Mbo/d net from the Bijupira-Salema fields it acquired through the acquisition of Enterprise Oil. Shell has two other development projects in the planning stages but both are high cost expensive deepwater heavy oil development projects.

Successful Entry Strategies: Several successful entry strategies in Brazil during the past several years are notable, two involving large independents offshore in the shelf area of the Campos Basin and two involving independent companies onshore and offshore.

Devon won the BM-C-008 Contract in the Campos Basin during the ANP Round 2 in 2000 and EnCana was awarded the BM-C-007 Contract. These companies have followed the Texas independents’ strategy of entry which is that you find oil where it already has been found. Both blocks taken by these companies had previously drilled, abandoned, non-commercial discoveries made by Petrobras and both projects were offered on a farm-out basis to industry during 2001-2002. Only EnCana was able to attract a partner in Kerr-McGee to its BM-C-007 Contract. EnCana sold its position in the contract to Hydro Oil and Energy during 2005 and Kerr-McGee merged with Anadarko.

Devon Energy do Brasil declared its BM-C-008 Block separate pool discoveries drilled in the Campos Basin commercial during July 2005 and the field was named Polvo (Octopus) with recoverable reserves estimated at about 50 MMbo from the Albian Quissama Dolomite Member of the Macae Formation and Turonian Carapebus turbidites. Devon will set a 50 Mbo/d fixed platform in the field during January 2007 to produce 19°-20° API gravity oil into a leased FPSO. The company plans to tie-in 13 wells to the platform and FPSO in a water depth of 105m. Cost estimates for the development are estimated to be about US$ 250-300 million. Devon and lone partner SK have spent an estimated US$ 100 million on exploration efforts so far.

During September 2006, Hydro Brasil Ltda operator with 50% working interest and 50% partner Anadarko, announced initial development plans for the Peregrino Field in the BM-C-007 Block in the southern Campos Basin. The conceptual plans for the development of the field involves the setting of two fixed platforms 8km apart linked to an FPSO that has a capacity to process 100 Mbo/d and storage for 1.25 MMbo. The partners have until 15 September 2007 to declare commerciality. On 16 August 2006, EnCana closed the sale of its 50% working interest and operations in the BM-C-007 Block and the Peregrino Field in the southern Campos Basin to Hydro Oil and Energy for US$ 350 million. Kerr-McGee (now Anadarko) indicated recoverable reserves are estimated to be about 250-450 MMbo 14° API gravity.

The smaller independents that have made successful entries in Brazil include Brazalta, a Canadian independent, who purchased working interest from inexperienced onshore Brazilian producer W Washington and Norwegian based Norse Energy also acquiring working interest from Brazilian companies in offshore production concessions.

Calgary based BrazAlta Resources signed a joint venture agreement covering four production concessions in the onshore Reconcavo Basin during 3rd quarter 2005 with Brazilian W. Washington. BrazAlta has a 47.5% working interest in the Fazenda Sao Estevao, Fazenda Rio Branco, Santana, and Sauipe Production Concessions while W. Washington will retain a 47.5% working interest. The total transaction value of US$ 4.78 million paid for proven reserves of 611,551 bo and current production is about 330 bo/d. Brazalta wants to drill 10-12 wells in 2006 and shipped a drilling rig from Houston to Brazil in order to undertake this program. Also the two companies acquired a total of 31 exploration concessions within the Reconcavo and Sergipe-Alagoas basins in the last two ANP licensing rounds and could merge all of these assets together.

Norwegian Norse Energy originally acquired working interest in several production concessions in the offshore Santos Basin in 1999 through JV agreements with Petrobras and during January 2006 it paid US$ 14 million to increase its position. Norse Energy also purchased working interest from two different operators involved in production concessions and exploration contracts in the offshore Camamu-Almada Basin during 2005 to 2006. In total Norse Energy acquired five contracts in the Camamu-Almada Basin since mid 2005 for about US$ 85 million. The main acquisition is the 10% interest in the Petrobras operated BCAM-040 Exploration Concession and the Manati Production Concession enclave that will begin production during late 2006. The Manati Field discovery well was drilled by Petrobras in 2000, see Figure 1 cross-section and Figure 2 map location. This field is interesting for several reasons and has some exploration significance for the rest of the Brazilian offshore margins.

Petrobras discovered the Manati Field with the 1-BAS-128-BA (1-BRSA-14-BAS) wildcat in the BCAM-040 Block in the Camamu-Almada Basin during October 2000. Recoverable P+P reserve estimates are 885 Bcfg and 6.42 MMbc from two different reservoirs. Petrobras completed the 7-MNT-1-BAS in the 23 sq km Manati Field during May 2006 and the partners found 262m of net pay in the Sergi Formation for the largest net gas pay ever discovered in Brazil. The Manati Field is a paleogeomorphic fault block high bounded to the east by a 1,500m down to the basin fault and to the west the high is truncated by the Tinhare paleocanyon which is filled with the rift sequence Valangian Morro do Barro Formation shales. The principal reservoir of the Manati Field is the Tithonian Sergi Formation and in the discovery well the formation was 418m thick with 187m of gas pay and 153m considered net pay with porosities of 15-28% and water saturations of 22% to 26%. This zone tested an average of approximately 17.65 MMcfg/d through a 24/64" to 32/64" choke over a three day test period during late October 2000. The Sergi Formation represents pre-rift lacustrine fluvial and eolian reworked coarse grained sediments with up to several darcies of permeability. A secondary reservoir in the well is the Berrisian Itaipe Formation and this zone has 12m net pay of about 18% porosity.

Santos Basin frontier exploration play: Petrobras and BG made a very intriguing light oil discovery in the ultra-deepwater Santos Basin BM-S-011 Contract after reaching a 6,000m TD on the 1-RJS-628A (1-BRSA-369A-RJS) rank wildcat, see Figure 3. Even though it is approximately 1,800km north, the Manati Field in the Camamu-Almada Basin, may be a rough analogy to what Petrobras discovered in the Santos Basin. The pre-rift to rift sequence that is productive in the Manati Field may be similar to what Petrobras has found in the Santos Basin according to press reports. Petrobras had light oil shows of 30° API gravity in unidentified zones 90m thick, speculated to be pre-rift sandstones, below a 2,000m salt pillow, and it reportedly covers an area of up to 400 sq km. The Barremian, Lower Aptian Guaratiba Formation subsalt fluvial and lacustrine rift stage sediments were believed to be the primary objectives and the oldest known sediments in the Santos Basin; however, the possibly productive sandstones encountered in this wildcat could be older pre-rift sediments. This could have implications for many offshore basins in Brazil that have seen very little exploration work in the subsalt pre-rift section. Petrobras and partners are planning the drilling of up to 10 additional wells in this new play. The unknown factor is how far the productive sandstones may extend and this will not be known with certainty until more wells are drilled. Petrobras has drilled only three wells targeting this new play in succession down slope, all three encountering oil shows and reportedly sediments not previously encountered in the Santos Basin. The large amounts of 2D and 3D seismic acquired over the vast, undrilled, ultra-deepwater area of the Santos Basin was the key to opening up this play as was some very innovative play concepts and the courage of Petrobras’ and BG’s management to take the risk to drill the very expensive and technologically challenging wells.