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Tom Nicholls: Brazil makes major oil find

Petrobras’ latest oil find transforms Brazil’s upstream prospects By Tom Nicholls, journalist Brazil’s Petrobras claims to have discovered a new oil province – “comparable to the most important oil provinces in the world”. It says the discovery – called the Tupi accumulation – may boost Brazil’s current 14bn barrel oil and gas reserves by more than 50%. But even though this represents huge upside for Brazil’s oil reserves, Tupi represents just a “small part” of the new frontier, Petrobras claims. The news is a massive boost not just for the partners in the project but for the prospects for other oil companies operating offshore Brazil.

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President Lula, like Petrobras, has a lot of oil on his hands

Just five years ago, doubts about Brazil’s attractiveness as an exploration play were beginning to creep in. When the upstream sector was opened up to private investment in 1997, Brazil was hyped as the world’s new exploration hotspot. The first international licensing round took place in 1999, but, for several years, upbeat exploration announcements were few and far between.The finds that were made were often too small to make development commercially feasible – Brazilian crude is mostly located in costly offshore locations. And because Brazil’s oil is generally thick and viscous and located at considerable water depths, it is technically difficult to pump out of the ground. Making matters worse, once it has been produced, heavy oil is a less valuable commodity on the market than light oil.Just five years ago, companies needed to find recoverable reserves of at least 0.5bn barrels to justify the costs of developing deep and ultra-deep offshore oilfields. With oil prices at around $70 a barrel, that point has come down to 200m-300m barrels. And oil prices of around $100/b, while not sustainable, add more gloss to the economics.True, many international oil companies have still not been able to make as much of a success of their Brazilian acreage as they would like. But Petrobras, after a lean few years around the turn of the century, has gone from strength to strength, dominating the country’s annual licensing rounds and maintaining by far the most impressive exploration record.And a decade after the market opening, the deep-water specialist’s latest find surely dispels any lingering questions over the country’s potential.The downside is that the kind of drilling operations that are needed to tap the resources are very expensive and the operations themselves are among the most technically challenging in the world.Petrobras, the operator of the new discovery, with a 65% stake, says the new frontier ranges through the Espírito Santo, Campos and Santos Basins, in deeper horizons than previously explored, under large layers of salt in rock formations about 800 km by 200 km.Tests show recoverable volumes of between 5bn and 8bn barrels of light – and higher value than most of Brazil’s crude – 28ºAPI oil, but this could increase significantly as further drilling takes place. A “large amount” of associated natural gas is also being produced. The other shareholders are the UK’s BG, with 25%, and Portugal’s Petrogal Galp Energia, with 10%.Part of Petrobras’ success is down to its state-of-the-art upstream technology, which it develops in-house. In addition, it has been prepared to take risks and invest heavily in drilling: it remains the only operator to have drilled, tested and evaluated pre-salt rocks offshore Brazil and says that in the last two years it has spent $1bn drilling 15 wells. The first pre-salt well cost a staggering $240m and took a year to complete.The depths involved are a significant technological achievement: Petrobras has drilled to depths of 5,000-7,000 metres, including more than 2,000 meters of salt and water depths of 2,000-3,000 metres. Encouragingly for Petrobras and other companies considering tackling the pre-salt horizon, costs and drilling times are coming down: Petrobras now says it is now able to drill an equivalent well in 60 days for $60m.Since it was set up over 50 years ago, Petrobras has discovered 25bn barrels of oil, of which 11bn have been lifted. Most of Brazil’s oil and gas is located in the so-called post-salt geological layers – above the salt – 80% of it in the Campos Basin, where heavy oil predominates.