brazil ´s discoveries

7/24/2019 Brazil s discoveries

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CERAAn IHSCompany

CERA

Advisory

ServiceSouthe Coe Eegy Global Ol

Brazils SubsaltDiscoveries

A Complex Path to Fst Ol Poducto

DECiSiOn BriEF


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For clients with access to CERA.com,the following features related to this report may be available online:

downloadable data (excel le format), downloadable, full-color graphics, author biographies,

and the Adobe PDF version of the complete report.

TERMS OF USE. The accompayg mateals wee pepaed by Cambdge Eegy reseach Assocates, ic. (CErA), ad ae ot to be edstbuted

o eused ay mae wthout po wtte coset, wth the excepto of clet teal dstbuto as descbed below. CErA stves to be

suppotve of clet teal dstbuto of CErA cotet but eques that (a) CErA cotet ad fomato, cludg but ot lmted to gaphs,

chats, tables, gues, ad data, ae ot to be dssemated outsde of a clet ogazato to ay thd paty, cludg a clets customes,

acal sttutos, cosultats, o the publc; ad (b) cotet dstbuted wth the clet ogazato must dsplay CErAs legal otces ad

attbutos of authoshp. Some fomato suppled by CErA may be obtaed fom souces that CErA beleves to be elable but ae o way

waated by CErA as to accuacy o completeess. Abset a specc ageemet to the cotay, CErA has o oblgato to update ay cotet

o fomato povded to a clet. 2008, All ghts eseved, Cambdge Eegy reseach Assocates, ic., 55 Cambdge Pakway, Cambdge,

Massachusetts 02142. no poto of ths epot may be epoduced, eused, o othewse dstbuted ay fom wthout po wtte coset.

ABOUT THE AUTHORS

PETER M. JACKSON, CErA Seo Decto, Ol idusty Actvty, s a wdely espected authoty o

ol ad gas poducto ad upsteam developmet. He combes expetse wth pactcal expeece

some of the wolds most mpotat poducto aeas. At CErA he s esposble fo global ol capacty

outlooks woldwde. A majo compoet of hs eseach s examg cuet teds ad challeges

poductve capacty ad eseves dstbuto as well as foecastg whch aeas wll become a focus

fo exploato ad poducto (E&P) dusty vestmet ove the ext te yeas. He was pcpal

autho of CErAs 2007 epot Bumpy Road AheadGlobal Liquids Capacity to 2017. Hs most ecet

pape, Finding the Critical NumbersWhat Are the Real Decline Rates for Global Oil Production?, was

a mpotat cotbuto to udestadg the futue of ol supply. He has also played a majo ole

developg CErAs ew E&P Teds Foum. D. Jackso has 22 yeas of E&P expeece wth what weeBtas two leadg depedet ol compaes, Btol ad Etepse Ol, as a geologst ad maage.

Wth Etepse he was Pesdet ad Geeal Maage of Etepse Ols Gulf of Mexco busess,

whee he gaed extesve expeece wth deepwate developmet. He seved as Chef Geologst fo

Etepse, esposble fo the woldwde vew of pospects ad developmet, dug the peod that

Etepse was the wolds lagest depedet ol compay. He also gaed extesve kowledge of

E&P pojects whle wokg the Uted Kgdom, idoesa, ad italy. D. Jackso holds a BSc fom

St. Adews Uvesty ad a PhD fom Edbugh Uvesty.

SYLVIE DAPOTE, CErA Assocate Decto, has 15 yeas of expeece as a eegy ecoomst ad

fo ove 10 yeas has focused o Lat Ameca eegy ssues. She specalzes South Ameca

atual gas secto developmets, wth patcula expetse supply-demad dyamcs, egulatoy

ssues, gas maket tegato, coss-bode ppeles, ad gas-powe covegece. Po to jogCErA Ms. DApote maaged he ow cosultg compay, Pysma E&T Cosultoes, based Bazl,

cayg out pojects ad studes the aeas of eegy polcy ad plag, gas ad powe maket

aalyss, ad copoate stategy. Pevously Ms. DApote was Head of the Lat Ameca Pogam

wth the iteatoal Eegy Agecy (iEA) chage of motog ad aalyzg Lat Ameca eegy

ssues, cludg maket teds fo ol, gas ad powe, as well as eegy polces ad egulato. She

is the author of South America Gas: Daring to Tap the Bounty ad cotbuted to seveal othe iEA

publcatos. Ms. DApote pevously woked as a eegy cosultat fo the WEFA Goup, Lodo,

specalzg coal ad powe, ad fo the Ogasato fo Ecoomc Coopeato ad Developmet

Pas. She holds a MSc fom the Uvesty of rome, La Sapeza, ad a MSc fom impeal College,

Uvesty of Lodo.


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2008, All ghts eseved, Cambdge Eegy reseach Assocates, ic.

55 Cambdge Pakway, Cambdge, Massachusetts 02142.

no poto of ths epot may be epoduced, eused, o othewse dstbuted ay fom wthout po wtte coset.

BRAZILS SUBSALT DISCOVERIES: A COMPLEX PATH TO FIRSTOIL PRODUCTION

KEY IMPLICATIONS

Bazls upsteam s emegg as oe of the moe mpotat log-tem gowth aeas fo wold

ol esouces ad poducto. The potetal scale of the dscovees that have bee made the

subsalt play Bazl s pomptg much dscusso about the lkely mpact ad the futue ole of

these esouces the teatoal ol makets. Aleady, Bazls eegy authotes ad poltcas

ae cosdeg possble chages to the upsteam egme (cludg to the scal tems), wth

mpotat cosequeces fo futue vestmet Bazls upsteam secto ad the pace of actvty.But s the tmg ght?

Lage-scale developmet ad poducto of the subsalt play wll face majo challeges, ad success

hges o key ea-tem decsos:

Defining the scale. Lmted appasal (ad eve moe lmted well testg) of the play ad ts

complex geology leaves oom fo majo supses to both the upsde ad the dowsde.

Prioritization and timing. Developmet of the dscovees wll eque majo pesoel,

sevce secto suppot, ad captal esouces. Petobas aleady has a wold-class vetoy

but faces the evable task of ebalacg ts potfolo followg such lage-scale addtos

fom the subsalt.

Choosing the right legal and fiscal framework for the new discoveries. Bazla authotes

ae aleady cosdeg a wde age of optos, fom estctg access to teatoal

ad pvate compay vestmet the subsalt, to ceasg govemet take oless

lkelymatag the status quo. Each oe has dffeet mplcatos fo futue upsteam

developmet tems of tmg ad vestmet pattes.

A major exporter. Exstg elds ad ew pojects assue Bazl of ol self-sufcecy the

medum tem. Wth Tup osteam Bazl could expot as much as 1.5 mllo baels pe day,

but ot befoe 2017 at the ealest.


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September 2008 1 2008, Cambdge Eegy reseach Assocates, ic.

no poto of ths epot may be epoduced, eused, o othewse d stbuted ay fom wthout po wtte coset.

CERADecision Brief

BRAZILIAN SUBSALT DISCOVERIES: A COMPLEX PATH TO FIRSTOIL PRODUCTION

by Peter Jackson and Sylvie DApote*

REDEFINING THE PLAYING FIELD

Brazils upstream sector is getting much bigger. The Tupi discovery in 2006 demonstratedthat the Santos Basin subsalt might be a major oil and gas province in its own right. Sincethen, further wells in the adjacent blocks show that the Brazilians have unlocked a majorworld-class play (see the box Milestones and Expectations: Tupi and Other Discoveries).The discovery of Tupi, a major technological achievement, has launched a new era forBrazils oil industry. The exploration program in the Santos Basin has so far yielded eightdiscoveries and one successful appraisal well (see Table 1). These discoveries have confirmedPetrobrass leading role in deepwater activity globally and its commitment to further developits technical capabilities to be a leading world-class energy company (see Table 2).

There is limited data about the discoveries to date; only a handful of wells can be usedto calibrate the sizes of the discoveries, and some of these wells have not been fullyevaluated. Reported resource volumes must be considered very preliminary. Even with afull suite of formation evaluation results for each well, the reserves estimates would only

*In collaboration with Carla Maria de Souza e Silva.

Milestones and Expectations: Tupi and Other Discoveries

The subsalt faway of the Satos Bas exteds alog the Bazla coast some 800 klometes

(km) fom the state of Espto Sato the noth dow to Sata Cataa. The pospectve

aea s up to 200 km wde wate depths of up to 3,000 metes (m). i novembe 2007

Petobas aouced the completo of fomato tests at the Tup dscovey, a ultadeepwateaccumulato the subsalt play of the Satos Bas (see Fgues 1a ad 1b). Cuetly beg

evaluated by a jot vetue betwee Petobas (opeato), BG, ad Galp Eega, Tup has

estmated ecoveable eseves at betwee 5 ad 8 bllo baels of medum gavty cude ol

(2830 degees APi) wth a hgh gas-ol ato (1,100 to 1,200 stadad cubc feet pe bael).

Jpte, the gas ad codesate dscovey block BM-S-24 aouced late Jauay 2008,

has bee descbed as potetally smla sze to Tup. Aothe ecet aoucemet efoces

the vew of sgcat potetal the subsalt play: dllg the BM-S-11 block (iaa) has

comed the dscovey of a sgcat d of lght ol the subsalt laye wth a estmated

ecoveable esouce of 3 to 4 bllo baels.

Dscovees have also bee made at Caoca, Caamba, Bem Te V, Paat, ad Guaa, but

esouce estmates ae speculatve at best. Addtoal udlled pospects such as Suga Loaf,

iguaco, ad Ogum ae located towad the south of Tup ad appea to cluste aoud a massvebase salt stuctue. The loomg block expato dates ad the ablty to moblze addtoal

dllg uts the ea futue have esulted Petobass ot testg ethe the Caoca o

Bem Te V wells. istead, t has pefeed at ths stage to dll utested pospects the aea

to meet lcese commtmets ad eta as much aceage as possble. The pecepto of hgh

value the uallocated aceage the mmedate aea also caused the efamg of the th

lcesg oud eale ths yea.


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2 September 2008

CERA Decision Brief

2008, Cambdge Eegy reseach Assocates, ic.


Table1

Sant

osBasinSubsaltDiscoveries

Discovery

name

Contract

DscoveyWell

SpudDate1

End

Dllg

Date

Discovery

Announced2

Status

Water

Depth

(metes)

Total

Depth

(metes)

Hydocabo

Type

Paat

BMS010,

Block1

1rJS617D(1BrSA329DrJS)

1Ja05

Jul07

22Jul0

5

Appraising

2,038

7,628

Ol

Tupi

BM-S-011,

Block1

1-rJS-628A(1-BrSA-369A-rJS)

30Sep05

4Oct06

10Jul0

6

Appraising

2,126

6,000

Ol,gas

Carioca

BM-S-009,

Block2

1-SPS-050(1-BrSA-491-SPS)

4Ap07

Jul07

7Aug0

7

Appraising

2,135

6,668

Ol,gas

Caamba

BM-S-021


17Sep07

10Dec07

3Dec0

7

Discovery

2,239

5,350

Ol,gas

BemTeV

BM-S-008

1-SPS-052A(1-BrSA-532A-SPS)

25Oct07

18May08

6Ma0

8

Discovery

2,138

6,773

Ol

Jpte

BM-S-024

1-rJS-652(1-BrSA-559-rJS)

9Dec07

Jul083

25Ja0

8

Discovery

2,187

5,618

Gas,

condensate

Gua

BM-S-009,

Block1


27Ma08

ongoing

13Ju0

8

Discovery

2,141

6,137

Ol,gas

Iara

BM-S-011,

Block2

1-rJS-656(1-BrSA-618-rJS)

24May08

ongoing

8Aug0

8

Discovery

2,230

6,225

Ol,gas

Souce:iHS,CambdgeEegyreseachAssocates,Petobas,AnP.

notes:iaddto,dllgsexpectedtostatattheedofSeptembe2008b

lockBMS022,adjacettoblockBM

S009.

1.Spud:statofthewelldllg

opeato.

2.Dscoveyepotedtotheeg

ulatoyagecyAnP.

3.Deepegatthswellstatedo21July2008adsogog.


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CERADecision Brief

Table 2

Santos Basin Blocks with Subsalt Discoveries/Potential:

Ownership Structure

Dscovey Bddg Othe

name Contract Round Opeato PatesPaat BM-S-010, Block 1 2 Petobas 65% BG 25%, Patex 10%

Tup BM-S-011, Block 1 2 Petobas 65% BG 25%, Galp Eega 10%

Caoca BM-S-009, Block 2 2 Petobas 45% BG 30%, repsol YPF 25%

Caamba BM-S-021 3 Petobas 80% Galp Eega 20%

Jpte BM-S-024 3 Petobas 80% Galp Eega 20%

Bem Te V BM-S-008 2 Petobas 66% Shell 20%, Galp Eega 14%

Gua BM-S-009, Block 1 2 Petobas 45% BG 30%, repsol YPF 25%

iaa BM-S-011, Block 2 2 Petobas 65% BG 25%, Galp Eega 10%

BM-S-022 3 Exxo 40% Ameada Hess 40%,

Petobas 20%

Souce: iHS, CErA, Petobas, AnP.


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4 September 2008

CERA Decision Brief



be approximate at this stage as there has been insufficient appraisal activity to develop acomplete understanding of reservoir characteristics over such a large area, and still less anunderstanding of the dynamic behavior of the reservoirs.

Despite this uncertainty, the National Petroleum Agency (ANP), the industry regulator, andother Brazilian analysts indicate that the entire subsalt play could hold up to 56 billionbarrels of oil equivalent (boe) resourceson a par with the total for the UK portion of theNorth Sea. At 5 to 8 billion barrels the Tupi field would be twice as big as the Roncadorfield in the Campos Basin, which is the largest Brazilian field developed to date (see

Figure 2). Indeed at this scale Tupi would be the largest field discovered since Kashaganin Kazakhstan in 2000.

Changes to Brazils upstream policy are in the cards. The improvement in prospectivitymay lead to amending fiscal terms for existing as well as new licenses. The scale of thediscoveries and the resulting call for personnel, equipment, and services will affect localcontent policies, employment prospects and the ability of the Brazilian services industry tocompete for exports. It will also have an impact on the oil import/export status of Brazil


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CERADecision Brief

itself. Expectations in Brazil and among importing nations regarding the scale of the newreserves and future oil export volumes are high. But if history is any guide, this could be aroller-coaster ride. Appraisal results are likely to include both negative and positive surprises.

An undertaking of the scale proposed to develop these new resources may well be hit bycost and schedule overruns, especially with todays pressures on personnel, equipment, andservices in the E&P sector.

A ROAD MAP FOR FUTURE CERA STUDIES AND REPORTS

This Private Report lays out a road map for subsequent CERA reports and research that willexamine the challenges and opportunities arising from the exploitation of Brazils subsaltplay, including analyses of

The regulatory and fiscal framework for the subsalt discoveries. The Brazilian

government is considering changes to the current exploration and production (E&P)regulatory framework, at least for the acreage included in the subsalt play. Variousoptions are currently under discussion and will have different impacts on the pace ofthe sectors development and on Brazils economic and social development. CERAwill evaluate the opportunity, compared with other emerging provinces, for Brazil toretain the maximum economic benefit including the benefits and risks of fiscal andlegislative changesproduction-sharing agreements versus concession agreements,nationalization, and the fiscal load that can be borne by the subsalt developments.


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6 September 2008

CERA Decision Brief



The technology opportunity. The development of the subsalt resources will requiremajor technological innovation and many first-of-a-kind solutions. This may provideopportunity for Brazil eventually to become a significant exporter of energy-relatedequipment and services based on the critical mass it could develop. CERA will evaluatethe likely learning curves and their impact on program implementation, technology

leverage, and other issues.

The timing and investment requirements. The subsalt discoveries will require a stageddevelopment approach and large-scale investments. CERA will assess the supply chainimplications in terms of capital, personnel, services, equipment, and other parameters(versus Brazils current and future execution capacity both in quantity and quality).

The associated gas challenges. While oil reserves will provide the main driver fordevelopment, the associated gas reserves in the subsalt play will offer additionalopportunities and challenges. CERA will analyze the various technical alternativesand challenges for marketing the subsalt gas. We will also analyze through a scenarioapproach the possible outlooks for a natural gas balance in Brazil and in the region.

The impacts on global oil supply. Although Brazils liquid productive capacitymay expand significantly above current expectations, the scaling back of investmentplans elsewhere may affect the rise in global output resulting from the discovery ofthis giant new oil and gas province. CERA will analyze the oil capacity outlook forBrazil and its contribution to global supply, including the potential offsetting impactof reprioritization of Petrobrass (and other companies) investment plans.

POSSIBLE CHANGES TO UPSTREAM LEGAL AND FISCAL TERMS

The goals surrounding potential policy changes to Brazils upstream are similar to those of

opening the Brazilian upstream sector in 1997: increased upstream investment and revenuesand the benefits of economic growth such as improved health care, better education, andgreater employment opportunities. This time around, however, the stakes are larger, and thechoice of development model for the oil and gas sector in Brazil will need to be consideredin terms of its possible impact on development of Brazils hydrocarbon resources, and onthe subsalt play in particular. For example, it may seem superficially attractive to reserve thehigh potential subsalt play for Petrobras as a national champion. However, this might raiselegal concerns. More likely, if the subsalt is to be reserved for a national player, it wouldresult in a new, wholly state-owned company. CERA understands that such a company wouldbe the right holder for the government interest and could then contract for the explorationand development of the resources (perhaps along the lines of Argentinas Enarsa; Indonesias

Pertamina in its early days; or, as an alternative, of Norways Petoro). This approach couldallow the benefits of diversity of approaches and execution capacity that the involvementof international companies might bring. This is especially true given the very tight marketsfor people and hardware (including rigs) in which costs are escalating worldwide.*

*See the CERA Special Report Capital Costs Analysis ForumUpstream: Market Review.


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CERADecision Brief

It is instructive to compare the rates of production buildup from Brazil and the US Gulf ofMexico in water depths greater than 1,000 m. The reserve bases are broadly comparable,but the latter grew faster and higher, in part because of the diversity of approaches and theassociated innovation (see Figure 3).

Some signs of change in Brazil appeared even before the more recent announcements of thesuccess in the subsalt play. The offer of fewer but more focused new frontier and mature areasin the formerly suspended eighth round possibly hinted at future changes in Brazilian upstreampolicy. However, the obvious turning point was the governments decision to withdraw themost attractive areas of the ninth bid round soon after confirmation of the possible scale ofthe Tupi discovery.* Tupi triggered an immediate debate about the application of the currentupstream model to the high-potential subsalt trend. In the meantime the ANP has postponedthe tenth licensing round until the situation is resolved. A ministerial committee is studyingthe legal and regulatory reform proposals for Brazils upstream sector in light of the newsubsalt discoveries. The committee will make a preliminary report on September 25, before

handing its recommendations to President Luiz Inacio Lula da Silva on September 30.

The ultimate outcome of this debate is difficult to gauge. The successful results obtainedin the ninth round coupled with further successes in the subsalt play will likely push theBrazilian government to modify the upstream fiscal terms.** The debate is between thosethat desire more state control of the resources and those that believe radical changes could

*See the CERA InsightBrazils Ninth Bid RoundOr What Is Left of It.**See the CERA InsightA New Face for Brazils Oil Sector? Lessons from the Ninth Bidding Round.


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8 September 2008

CERA Decision Brief



undermine needed investment. Petrobras already has a major investment program involvingan impressive portfolio of domestic and international developments, but it has stated that itwill repatriate much of its talent to focus on the development of Tupi and its satellites inthe subsalt. It will take some time to readjust priorities to design and execute the optimumoutcome for Petrobras and Brazil. However, such realignment may constrain the positive impact

on global production expectations since investment in the subsalt will be at least partiallyoffset by compensating reductions in investments elsewhere in the Petrobras portfolio.

In any case Petrobras, like other oil and gas companies, is already facing challenges inbringing existing projects onstream. Delays of one or two years have been fairly common,particularly with some larger Campos Basin projects. A decade ago, delays of up to a yearand cost overruns of around 25 percent were typical for megaprojects.* Today, the escalationof costs and shortage of suitable rigs, yard space, and skilled people have combined toexacerbate the situation globallyand Brazil is not immune.

Lessons will no doubt be learned from recent operational setbacks in some Gulf of Mexicoprojects, and Petrobras has a clear history of developing solutions to new and challenging

problems. The cost base of the Brazilian subsalt developments is expected to lie between$20 and $30 per boe. This implies breakeven prices of more than $60 per boe after takinginto account the time value of money and the fiscal burden. There will be pressure not justto prevent continued cost escalation but also to reduce these figures. Open source approacheshave typically proven to be more effective accelerators than monopolies, and innovation isa numbers gamefive independent research centers investing $200 million each are morelikely to come up with an answer than one center investing $1 billion. For example, decodingthe human genome benefited from the number of different competitors in the race andwas achieved far more quickly than even the most optimistic forecasts.

Even if Brazil does not consider a significant change in the sectors legal and regulatory

model, it is at least reconsidering its fiscal terms. Resource-rich countries must decide howthey benefit more from high prices for their resources. For example, if oil production makesup a significant proportion of gross domestic product (GDP), then the damage that high oilprices cause to the nonoil GDP may be small compared to the boost that high oil pricesprovide. On the other hand, if oil production is only a small portion of the economy, highoil prices may cause more damage to non-oil GDP than the benefit of higher oil priceswarrants.

Prior to the subsalt discoveries, the Brazilian economy probably fell into the latter categoryhigh oil and gas prices would be a net negative. With the potential scale of the new oiland gas resource base, there is probably not yet an incentive to limit oil sector activity in

order to maximize prices nor sufficient drivers to infect the Brazilian economy with DutchDisease (generally referring to the harmful effects to other sectors of the domestic economyfrom sizeable revenue from a single commodity export industry). CERA will analyze thelevel of fiscal take that the sector can bear. Upside ambitions must be weighed against thenegative impact that changes will have on Brazils reputation for stability, which has madeBrazil an increasingly favored location for investment, and on the pacing and timing ofinvestment.

*Source: Independent Project Analysis Inc., 2003.


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CERADecision Brief

CERA will be examining the impact on the Brazilian economy of increased levels of activityin the oil and gas sector and the relative contribution that the sector can make. Based onthe cost and investment projections from the scenarios that CERA will develop, we willevaluate the impact of different fiscal regimes and sector development models. This willprovide an indication of the impact on economic development for Brazil arising out of the

newly increased endowment.

CONQUERING NEW FRONTIERS: THE TECHNOLOGY OPPORTUNITY

Subsalt E&P activity is not unusual in the oil industry. Significant volumes of gas in northwestEurope are produced from horizons underneath salt. In the Gulf of Mexico major new subsaltplays have been opened up over the past decade as companies began to develop techniquesfor shooting and interpreting seismic to resolve structures beneath thick salt layers. In Brazilpilot oil production has already started from the subsalt in the Jubarte field in the EspritoSanto Basin to the north of the new discoveries (see Figure 1b).

However, these new discoveries mark major advances in technological innovation. At Tupidrilling through a 2 km thick salt layer presented significant challenges that are beingovercome as experience develops.* Furthermore, the dolomitic reservoir will likely becomplex and difficult to characterize. The initial well was drilled to a total depth of 6,000m and produced 2,900 barrels per day (bd) on test through a restricted choke; expectationsare that production wells could flow as much as 10,00020,000 bd.

The development of Tupi and other subsalt discoveries will face many important challenges,including,

Reservoir characterization. Definition of facies and determination of vertical andlateral reservoir attributes from well and seismic data. Evaluation of reservoir drive

mechanisms and feasibility of gas and water injection.

Flow assurance. Control of paraffin deposition in long pipelines, as well as hydrates,and scale.

Well engineering. Execution of high deviation of the wells, slow penetration rates,hydraulic fraccing of horizontal wells, and materials selection to deal with the highcarbon dioxide (CO

2) content.

Gas handling. Laying and operating a gas pipeline larger than 18 inches in waterdepth of 2,200 m over long distances (300 km) or alternatively other commercialization

approaches, including liquefied natural gas, gas-to-liquids, offshore power, andothers.

Subsea engineering. Riser design for 2,200 m of water, and dealing with high pressures,high CO

2 content, and thermal insulation.

*The discovery well at Tupi cost $240 million, yet subsequent wells in the area have been much less expensive, andPetrobras has an ultimate, ambitious target closer to $30 million each.


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10 September 2008

CERA Decision Brief



Floating production facilities. Mooring in water depths of 2,200 m, riser interfacesand the potential for floating platforms with well access (SPAR; floating, drilling,production, storage, and offloading platforms).

Several of these challenges may require first-of-a-kind solutions, while others will rely onlessons learned from other developments that have overcome such challenges. However,homegrown solutions to any of these challenges could provide an opportunity for ultimateexport of equipment and services in much the same way that other developing hydrocarbonprovinces have provided the foundation for a thriving export market.

CERA will be examining the technical issues raised by the subsalt play and the ways inwhich technology will be deployed and leveraged. Depending on the policy decisions thatthe Brazilian government takes, the center of gravity of the global ultradeepwater industrycould return with opportunities for Brazil to become a major player.

TIMING AND INVESTMENT: THE SUPPLY CHAIN CHALLENGE

The apparent scale of the resources will, in common with most giant fields, result in aphased approach to development. Indeed, based on its experience in Campos Basin, Petrobrashas already drawn up a staged development strategy for Tupi and other subsalt discoveriesalong the following lines:

Phase 1 will be an extended test using one well tied back to a floating production,storage, and offloading unit with oil exported by shuttle tanker. This will allow theoperator to evaluate the long-term flow potential of future development wells andprovide a model of the characteristics of the reservoir over a larger area than hasbeen evaluated to date.

Phase 2 will be a pilot scheme involving five production wells, which will produceup to 100,000 bd, with two water injector wells and one gas injector well startingup in late 2010. This will test the viability and impact of injecting water or gas in alarger-scale development.

Phase 3 will be the initial full field development using a large-scale floating productionfacility with approximately ten wells and gas export infrastructure producing up to200,000 bd and 200 million cubic feet (MMcf) per day soon after 2013.

Phases 4 and above will involve five to ten floating production units to produce up to1 million barrels per day (mbd) of oil and 1,000 MMcf per day of gas after 2015. This

phase will be a massive undertaking in terms of drilling requirements and constructionof facilities and will require many years to implement.

The announced timetables for implementing each phase of the development are aggressiveand may be driven as much by policy as by logistic or technical considerations. Historically,around the world, however, overly accelerated schedules have been a recipe for cost overrunsand, somewhat ironically, schedule delays. One wild card that might hold up progress isthe possibility of field unitizationthe division of interests in a field that crosses licenseboundaries owned by different consortia. The current lack of data and the higher levels


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CERADecision Brief

of further appraisal required to determine the ownership interests in such potentially vastaccumulations could impose significant delays on the development program if any field isfound to extend beyond the boundaries of current licenses.

It is impossible to be precise about the scale of these new discoveries, but there areseveral indications that Petrobras has a high level of confidence that it has discovered amajor new resource. Firm plans for the phased development of Tupi have been reported assummarized above. Additionally on May 20, 2008, Petrobras, in a press release along withgovernment support, announced it was tendering for 40 deepwater and ultradeepwater drillships and semisubmersibles and 24 support vessels to be delivered through 2017, indicatinga commitment of approximately US$30 billion.

CERA will be preparing an assessment of the overall investment requirements for a rangeof possible outcomes in the subsalt play that will include the supply chain implicationsthecall on personnel, services equipment, capital, and other elements. Viewed in conjunctionwith current and projected capacity in Brazil, this analysis will provide a picture of thechallenges that Brazil faces.

DONT FORGET ABOUT NATURAL GAS

Amid the focus on the expanding oil potential, there has been a significant addition toBrazils gas resource base that may alter the prospects for natural gas imports not only forBrazil but for the whole Southern Cone. Indeed, gas reserves from Tupi alone could amountto 4.5 trillion cubic feet (Tcf), an increase of 22 percent over Brazils current proved andprobable reserves of 20.4 Tcf. If the Jpiter gas condensate discovery is confirmed to bearound the same size as Tupi, assuming 5 boe, Brazils current proved and probable gasreserves could well double. Even without considering Jpiter, the gas output of Tupi alone,which could reach 1,000 MMcf per day after 2015, would be sufficient to replace the wholeof Brazils imports from Bolivia.

However, the path for gas development is probably more technically complex than thatfor oil. The marketing of the gas in the subsalt play will require innovative solutions andprobably high costs, due to the depth of the accumulations and the distance from the coast.Various options are already being evaluated in addition to a traditional subsea pipeline orto reinjection: offshore liquefaction and offshore large-scale power generation. CERA willanalyze the various technical alternatives and challenges for marketing the subsalt gas. Wewill also examine the consequences for regional gas balances resulting from Brazils growinggas resource base.

TAKING IT WITH A GRAIN OF SALT: POSSIBLE OUTLOOKS FOR GLOBAL

SUPPLY

The results of the early exploration program have been positive. But data are sparse andincomplete, and caution must be exercised until more appraisal wells are drilled andproduction test data become available. A comparison with Brazils Mexilho field, also inthe Santos Basin, is a good example of how problematic initial reserve estimates can be on


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both the upside and downside.* Announced in April 2003 at 2.5 trillion cubic feet (Tcf),Mexilhos reserves were revised upward to 14.8 Tcf in September 2003, after just threewells were drilled. In the following years Mexilhos reserves have been gradually reviseddownward to around 6.1 Tcf.

Even before the announcement of the likely scale of Tupi field resources, Brazil wasalready expected to lead productive capacity expansion in Latin America over the next fiveyears.** In the longer term Brazils position will become even stronger, supported by thenew discoveries. At its plateau the Tupi field could produce around 1 mbd, which represents56 percent of current Brazilian oil consumption. By 2020 the subsalt play could contributesignificantly to Brazilian net oil exports, which are expected to reach 1.5 mbd (see Figure4). While fields currently in production will continue to decline there is a large inventoryof new projects under development and under appraisal outside the Santos Basin subsaltplay that will compensate.

With Petrobras holding an interest in every significant component of Brazilian capacity growth,the decisions that it makes will be critical. As noted above, Petrobras may repatriate many

of its experts from international operations to support the increased effort offshore Brazil.The future capacity profile will depend on the overall capital investment program. As partof our research into global oil productive capacity, CERA will be evaluating the outlook for

*See the CERA Alert Santos Basin Gas Find May Triple Brazilian Reserves.**See the CERA January 2008 Latin America Energy Watch The Strategic Risks of Oil in Latin America: GeopoliticsShape Investment Flows.


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Brazil. However, in addition, we will be examining in detail the net effect on oil supply ofthe subsalt discoveries and the complex interactions among investment priorities.

CONCLUSION: A NEED FOR MEASURED ENTHUSIASM?

The subsalt play may have reset the bar for the Brazilian upstream in terms of potentialresources, complexity, and the future scale of production. Uncertainties remain concerningfield sizes and likely long-term reservoir performance since Petrobras is still at the earlystage of exploring and appraising the area. The number of discoveries in the subsalt playprovide strong encouragement, but there is a long way to go. Major investment will berequired before material volumes of sustainable production can be established. Like mostgiant fields being developed today, these fields will be developed in multiple stages requiringincreased levels of skilled personnel, equipment and services, and major capital resources.While Petrobras will likely be able to build on its world-class deepwater operational skills,it already has a world-class inventory of both domestic and international assets that willcompete for these scarce resources. The result may be that the net impact on future oil and

gas production is not as large as currently expectedeven if Brazils share of the globaltotal increases.

In the event that further major discoveries are announced, Brazil will likely need to decidewhether it is better to become a major exporter or to slow the pace of development, atleast for now, given the difficulties with managing oil rents in a constructive way. AlthoughVenezuela and to some extent Mexico continue to be textbook cases for Dutch Disease,Brazils large and diversified economyand the size of its populationshould help it escapethat fate.*

Nevertheless, an overly optimistic expectation of a windfall from subsalt production couldlead to some policy changeswith the aim of taking advantage of the huge revenues to begained at current high oil prices. Despite the considerable potential unfolding in the SantosBasin subsalt play, a complex spectrum of above- and below ground risks is already apparent,and likely changes in Brazils upstream model are already being consideredquite possiblya source of delay, especially in the context of the existing Hydrocarbons Law, which tookfour years to materialize.

CERA will address each of these key issues in a series of future reports: the oil sectorregulatory model, including the benefits and risks of legislature and fiscal changes, the supplychain and challenges, the technology leverage and the opportunity for Brazil to become asignificant exporter of energy-related services, and the impact on global oil supply and theregional gas balance.

Brazils upstream sector is expandingbut how big and how quickly? Much will depend onhow Brazil and Petrobras respond to the challenges. Whatever the answers, the subsalt playoffshore Brazil will be a continuing focus for the oil industry during the coming decade asthis major new province moves from discovery to development. n

*See the CERA Private ReportHydrocarbon-fueled Regional Leadership: Is It Sustainable?

brazil ´s discoveries

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