Ed note: Luiz Antonio Maia Espínola de Lemos works on oil and gas issues at TozziniFreire, Brazil’s largest law firm. Prior to joining the firm, he worked as a lawyer at Petrobras, where he was general counsel for one of the company’s subsidiaries. Lemos has written extensively on oil and gas regulation in Brazil. Parts of this article were published earlier this month on PRWeb.com. Given the importance of the Brazilian oil and gas business to the Western hemisphere, we asked Lemos’ public relations firm to expand on some of his comments. We have edited his comments for clarity and style.
What is the pre-salt region and who is exploring and drilling there?
The pre-salt region is located approximately 170 miles off the coast of Brazil in the Atlantic Ocean. The region likely ranges from Espírito Santo to Santa Catarina State, measuring 497 miles in length and 124 miles in width. The region is named “pre-salt” because the oil is held beneath deep and ultra-deep waters, around 3,000 meters of sand and rock, and an additional layer of salt that, in places, reaches thicknesses of over 2,000 meters, making extraction challenging.
Brazil is developing the technology to drill and recover oil from this region, but as more is discovered about the sheer size of this find it is becoming clear that foreign companies will also play a role in exploration, drilling, the development infrastructure, capital and human resources to fully realize the potential of this region. Indeed, foreign companies have already begun to play an important role by assisting in the drilling. Many of the world’s leading oil companies currently have a presence in the region with others are projected to begin drilling in 2009.
Why have pre-salt site auctions been suspended?
When the pre-salt discoveries were first made, international companies moved quickly to investigate. However, more research and exploration soon revealed the magnitude of the find was much larger than previously thought, and the Brazilian government decided to suspend pre-salt site auctions until a comprehensive strategy to manage and regulate these resources is in place. In other words, as those discoveries proved larger than originally expected, the Brazilian Government realized it was important to develop a comprehensive strategy in order to fully develop these new reserves and, at the same time, guarantee that such windfall wealth would serve as much as possible to the welfare of the Brazilian people. Such suspension first occurred when the government withdrew 41 pre-salt sites from the auctions in the 9th Bid Round in 2007.
When are regulations expected and what is the likely outcome?
The task force is expected to report back to the Brazilian government with new regulations expected to be issued this year still. In the first half of 2009 we will have a clearer picture, but at this point in time two potential scenarios have been discussed. The first plan, suggested by President Luiz Inácio Lula da Silva and energy minister Edison Lobão sees the government creating a state-run company that would manage the development of the oil reserves in the pre-salt region through partnerships with any firm, including Petrobras, in exploring the pre-salt areas that have yet to be auctioned. The second plan focuses on raising mining taxes and oil royalties to provide more income from the find. Either change is likely to need ratification by Brazil’s Congress. The Brazilian government plans to invest additional funds acquired from those oil revenues in education and social development. Another goal of the future legislation is to develop the local industry related to the oil and gas sector, as well as create conditions for Brazil to become self sufficient with respect to human resources expertise and technology.
What will it cost to extract the pre-salt oil and how much has been spent to date?
The cost of producing oil from the pre-salt is unknown, but it some $400 billion is expected to be spent over the next 10 years. Petrobras recently announced an investment plan for the next four years, which foresees that $28.9 billion shall be invested in pre-salt areas until the year of 2013.
Furthermore, according to the Projects Manager of Petrobras, Antonio Carlos Pinto, the company has invested up to $1 billion in drilling 20 wells in the pre-salt region since 2005. Likewise, it was recently released in one of the major Brazilian newspapers that $270 million will be spent in the pre-salt during the year of 2009 for long duration tests in the Tupi field. For 2010, the forecasted investment is of $4 billion.
How long until the drilling is fully online and producing?
Pursuant to recent statements made by Petrobras’ CEO, José Sergio Gabrielli, the pre-salt reserves may take around seven or eight years from its discovery to start production activities. Before the global financial crisis, when the price of oil was between $100 and $150, the forecasts for production start-up were at around 2015. Nevertheless, by virtue of the global crisis and the plunge in oil prices, the investments related to the pre-salt area may have a longer horizon.
What price levels of oil are needed to support operations in the pre-salt?
Currently, there is no consensus amongst experts as to the minimum price levels required to support the operations in the pre-salt area. Opinions have been varying from $35 to $60.
Gabrielli recently said that Petrobras’ business plan for the period from 2009 to 2013 relied on a price of $37. According to the CEO’s announcement, the pre-salt area would still be viable at a minimum price level of $35. But BP, which has presence in the pre-salt area, has said that any operations in Brazilian deep waters, including the pre-salt, will only be commercially viable at a minimum price level of $60 per barrel. Finally, it is important to bear in mind that the decrease of the costs associated with the pre-salt development activities will depend on the scale of the oil reserves, as well as on the increment of the necessary technology to develop such areas.
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