In five years, analysts forecast that Petrobras America’s oil equivalent production will surge from the current 20,000 bpd to as much as 150,000 bpd.
Peter Howard Wertheim and Dayse Abrantes, Special to OGFJ Rio de Janeiro
Petrobras America Inc. (PAI), a Houston-based wholly owned subsidiary of Brazil’s state-controlled oil giant, Petroleo Brasileiro SA (Petrobras), has bold plans to further expand activities, especially in the US Gulf of Mexico (GoM).
PAI’s president, Alberto Guimarã es, told OGFJ that besides diversifying its activities, the company is investing $4.5 billion for the period 2007-2011—$3 billion for E&P and $1.5 billion for downstream.
Experts say that represents about 10 times the company’s five-year US spending plan a decade ago and accounts for about a third of what Petrobras will invest outside Brazil from 2008 to 2012. Although the company declined to disclose the amount expected to be invested during 2008, in 2006, the total was $1.1 billion.
Moving speedily towards becoming an integrated energy company, Petrobras is Brazil’s largest, with a market capitalization of approximately $163 billion. PAI is also on the path towards integration in the US, underpinned by excellent growth perspectives. By 2013, the oil equivalent production is expected to surge from the current 20,000 bpd to 130,000 or even 150,000 bpd, analysts forecast.
In the beginning of 2007 JPMorgan Worldwide Securities Services was appointed successor depositary bank for the common and preferred share American Depositary Receipt (ADR) programs for Petrobras.
Based in New York, Ted Helms, head of Petrobras’ investors relations department, told OGFJ that, as of last September, 32.5% of Petrobras’ capital ownership was listed on NYSE, through Petrobras’ ADRs program: 16.1% in the form of common ADRs, which have voting rights (ticker: PBR) and 16.4% in the form of preferred ADRs (ticker: PBRA).
Up to October, Petrobras’ common ADRs increased 53.49%, while AmexOil increased 20.15%. Other performances in the same period were: ExxonMobil (18.15%), Shell (16.54%), BP (9.40%), and Chevron (19.57%), said Helms.
The executive added that 7.7% of Petrobras’ shares, even though negotiated in Brazil, are in the hands of foreign investors. Besides being traded on the Sã o Paulo Stock Exchange, BOVESPA, the common and preferred Petrobras shares are also traded on LATIBEX (Madrid) and the BCBA (Buenos Aires) exchanges.
Petrobras’ stock made the Fortune 40 list of “Best Foreign Value,” and Petrobras is the best-placed Brazilian company on the 2007 Fortune 500 list, at number 65. At the top of the Fortune 500, is Wal-Mart, followed by three petroleum companies: ExxonMobil, Shell Group, and British Petroleum.
US operations
Concerning oil products trading in the US, President Guimarã es said: “We trade 76,000 bpd mainly in gasoline, residual fuel oil, small but increasing participation in ethanol and our domestic gas and crude Gulf Coast production. From January to October 2007, revenue for all PAI’s operations reached approximately $2.01 billion.”
“Most of our operations are conducted in the US East Coast, where we lease storage with capacity to store 514,000 barrels of gasoline and 286,000 barrels of ethanol to sell at the [US] Gulf Coast and in Puerto Rico, where we have a contract to supply up to 30,000 bpd of fuel oil to the Puerto Rico Power Electric Authority,” said PAI’s CFO Gustavo Tardin Barbosa.
Brazil has the world’s most developed sugar-cane-based ethanol industry and is the world’s largest fuel ethanol exporter. Guimarã es envisages a larger role in the US biofuels market, although the US currently restricts imports of Brazilian ethanol through a $53-cent per gallon tariff.
In September 2006, PAI announced the closing of the acquisition of 50% of the Pasadena Refining System (PRSI), formerly the Crown Refinery in Pasadena, Tex., from Astra Oil Co., a US-based refining and trading company owned by the Belgian group Compagnie Nationale a Portefeuille SA-CNP. The purchase price was approximately $360 million.
“PRSI offers a highly strategic location, close to the Houston Ship Channel and to the main products pipes. There is also land available for expansion. PAI and Astra are currently conducting studies to expand capacity and install units that will enable it to process heavy oils and deliver high-quality products. According to PAI’s plans, the Pasadena refinery will have its current 100,000 bpd processing capacity doubled,” added Barbosa.
US Gulf of Mexico E&P portfolio
With the objective to build up a world-class exploration portfolio of deep and ultra-deep water aiming to secure material production in the medium to long run, as far back as 2002 Petrobras decided to grow its asset base further in the US Gulf of Mexico.
“Our portfolio comprises 338 blocks, of which 200 are operated by Petrobras. So far, the first results are very promising, with six discoveries in the last five years in Cottonwood, Coulumb, Cascade, Chinook, St. Malo, and Megamata fields,” said PAI’s CFO.
On February 2007, the company started producing 20,000 bpd of oil at its first deep-water Gulf field, called Cottonwood.
According to Joã o Figueira, PAI’s upstream senior vice president, the company’s main producing fields are: Cottonwood, representing 51% of total production, and Coulomb North, representing 25% of total production. PAI oil and gas production was split about evenly (50/50) in 2007.
Petrobras America is also the operator of the Cascade and Chinook developments, in which it holds 50% and 71.67%, respectively.
FPSO with detachable turret
“Petrobras has an international reputation for innovative deepwater technology development, and PAI has proposed the use of six technologies that are new to the US Gulf of Mexico. This includes a detachable turret buoy allowing a floating, production, storage, and offloading station (FPSO) to move offsite during hurricanes and severe weather. The FPSO offers transportation of crude via a shuttle tanker. [It features] freestanding hybrid risers, subsea electric submersible pumps, torpedo pile vertical loaded anchors, and polyester mooring systems,” explained Guimarã es.
“PAI has proposed the use of six technologies that are new to the US Gulf of Mexico. This includes a detachable turret buoy allowing a floating, production, storage, and offloading station (FPSO) to move offsite during hurricanes and severe weather.” –PAI President Alberto Guimarães
Given the severe damage inflicted on the Gulf’s infrastructure from hurricanes Katrina and Rita in 2005 and to protect its assets from future storms, Petrobras has opted for the FPSO solution with the detachable turret. Unlike fixed platforms found in the Gulf today, which can be knocked off base in hurricanes, this FPSO can pull up stakes and move out of harm’s way with short notice. PAI feels this will mitigate some of the risks during a hurricane event.
“We can say that with the FPSO, we are bringing to the US Gulf Petrobras’ DNA,” added Barbosa. Cascade and Chinook will have the first conceptual plan for development in the Gulf of Mexico that includes the deployment of this type FPSO facility. The company’s extensive experience in the use of FPSOs dates back to 1979. Currently, 15 such units are under operation offshore Brazil.
Because offshore fields can be brought online sooner and the FPSO solution has a proven record of improving the capabilities of developing oil and gas reserves in deep and ultra deepwater environments, the system could become a model for the rest of the industry in the GoM, say some experts.
Cascade/Chinook and FPSO contracts
BW Offshore Ltd. was selected by Petrobras America Inc. for the conversion, installation, and operation of the FPSO at the Chinook and Cascade fields in Walker Ridge Block 469 and Walker Ridge Block 206, respectively.
The contract is for a total of up to eight years including optional periods of up to three years after the end of the first five fixed years. The contract has a nominal value of $740 million and will generate an annual EBITDA contribution of about $80 million in the fixed period and $70 million in the optional periods.
Last December KBR announced that its wholly-owned subsidiary, Granherne Inc. was awarded a three-year engineering services contract by Petrobras America. Granherne’s marine group work comprises engineering services on the Cascade and Chinook developments in Walker Ridge area of GoM deepwater.
“As of last September, 32.5% of Petrobras’ capital ownership was listed on NYSE through Petrobras’ ADRs program: 16.1% in form of common ADRs, which have voting rights (ticker: PBR) and 16.4% in form of preferred ADRs (ticker: PBRA).” –Ted Helms, head of IR for Petrobras
The company will be providing technical support for design of the hull for the FPSO early production system (EPS), and at a later phase, a full field development (FFD) plan. The FPSO will be located in approximately 2,600 meters of water depth. When deployed, the Cascade/Chinook FPSO will be operating in the world’s deepest waters to date, says KBR.
Engineering and construction company Subsea 7 Inc. announced in January 2008 the signing of a $50 million contract with Petrobras America for installation work in Cascade/Chinook.
“The US GoM offers a number of possibilities. If the shallow waters are in a mature area, there are still a lot of frontier areas for deep and ultra-deep water and deep-shelf exploration. Different from other areas of the world, upfront exploration commitments are very low as you are not obliged to do any exploratory drilling.” –PAI CFO Gustavo Tardin Barbosa
The company will engineer and install 70 km of power cables and control umbilicals and fabricate and install 16 jumpers in the two fields, in water depths ranging from 2,300 meters to 3,000 meters. The work will commence immediately at Subsea 7’s offices in Houston. Fabrication will be carried out in Alabama, and offshore installation is expected to take place in late 2009 and early 2010.
Mature licensing process
PAI already received an authorization by the US Minerals Management Services (MMS) to install the FPSO in the Gulf of Mexico, said Guimarã es.
Asked to compare the granting of environmental licensing process in the US with the one in Brazil, where many oil executives complain the process is too slow, Guimarã es said: “The question is not that simple. The processes of granting environmental licenses in Brazil and the US are at quite different levels of maturity. In the US, the environmental regulation process for oil and gas activities is much more mature for an open market. The MMS does the environmental studies prior to a lease sale process, so once a company wins the bid, they can go forward with their project in an easier fashion.”
Guimarã es noted that the Texas Railroad Commission, which is charged with approving many onshore oil and gas activities in that state, was established in 1891.
“The Brazilian market is experiencing a learning curve, since 1997, when Petrobras lost its monopoly. In Brazil, it is up to the operator to carry out environmental studies once it wins a bid. At this point, the environmental agency begins to participate in the process to decide whether or not to let the project go forward. The national agency in charge of regulating oil and gas activities, ANP, similar to MMS, is still a 10-year old entity,” Guimarã es added.
According to analysts, there is an urgent call in Brazil for better integration among the various regulatory bodies in charge of the whole permitting process, such as the regulatory body ANP and the federal environmental agency IBAMA.
In Barbosa’s evaluation, “The US GoM offers a number of possibilities. If the shallow waters are in a mature area, there are still a lot of frontier areas for deep and ultra deep water and deep-shelf exploration. Different from other areas of the world, upfront exploration commitments are very low as you are not obliged to do any exploratory drilling.”
For him, “the US is an ideal place to build a material portfolio of ‘exploration options’ and to ‘invest as you learn.’ It is also important to mention that the US fiscal regime is designed for a mature area, with basically royalty and corporate tax.”
Asked to compare the fiscal and tax regimes in the US and Brazil, Joã o Figueira, PAI’s upstream senior vice president said: “In the US deepwater, the total government take is 52%, and in Brazil total government take for deepwater is 59%. Royalties in the US reaches 16.67% and in Brazil 10%.”
Partnerships in GoM
Six leases from the last two sales have been awarded to Devon Energy Production Co. LP and Petrobras America Inc. as joint owners. Devon Energy and Petrobras America paid a total of $1,611,000 for the six leases.
According to Caryl Fagot of the MMS Gulf of Mexico Region public affairs department, PAI and Devon Energy jointly own interest in 17 leases/blocks.
There are many bids from the last two sales that are still under review. Therefore the two companies may receive more leases in the future as a result of the last two sales, added Fagot.
“As far as the partnership with Devon, they are together with us in the Cascade development, where Petrobras holds 50% interest and Devon, 50%. In the lease sale OCS 204, we had a joint bidding agreement through which we get joint interest (50-50) in 14 blocks, all of them Devon-operated. In the lease sale OCS 205, we got six blocks together, from which two are Petrobras-operated,” Figueira explained.
Compared to other areas, GoM blocks are small –about 25 square kilometers. By comparison, the average size in offshore Angola is about 4,000 sq. km, and offshore UK, some 240 sq. km.
Except for Cascade Field, which is covered by four blocks located in the Walker Ridge Quadrant (WR 205, WR 206, WR 249 and WR 250), the 20 blocks for which Petrobras and Devon applied together and were highest bidders in Leases 204 and 205 are all in the exploration phase.
The new blocks were selected on the basis of studies and have yet to be technically reviewed involving new seismic data or reprocessing of existing seismic, together with regional geological studies and basin modeling for the purposes to fulfill prospect maturation process so as to allow both companies to jointly decide about drilling.
“In the US deepwater, the total government take is 52%, and in Brazil total government take for deepwater is 59%. Royalties in the US reach 16.67% and in Brazil 10%.” –Jo ã o Figueira, PAI’s upstream senior vice president
“As far as geology is concerned, what I can say is that some blocks are located in regions to be explored aiming at the Lower Tertiary play and others, in the subsalt Miocene,” added Figueira.
According to the MMS, Petrobras America also holds leases with: Apache Corp.; Chevron USA Inc.; Union Oil Co. of California; Energy Resource Technology Inc.; Newfield Exploration Co.; W & T Offshore Inc.; Kerr-McGee Oil & Gas Corp.; Exxon Mobil Corp.; Valiant Energy LLC; BP Exploration & Production Inc.; Anadarko E&P Co. LP; BHP Billiton Petroleum (Deepwater) Inc.; Total E&P USA Inc.; Statoil Gulf of Mexico LLC; Gulfsands Petroleum USA Inc.; Offshore Shelf LLC; MitEnergy Upstream LLC; Hess Corp.; Eni Petroleum US LLC; Northstar GOM LLC.
New seven sisters
A Financial Times study, published in March 2007, named Petrobras one of the world’s seven most influential energy companies outside the Organization for Economic Co-operation and Development. These new “seven sisters” are: Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Petronas of Malaysia, and Petrobras.
These state-owned companies control almost one-third of the world’s oil and gas production and more than one third of its total oil and gas reserves while the old seven sisters, which shrank to four during the industry consolidation of the 1990s, now produce about 10% of the world’s oil and gas and hold just 3% of reserves, reported the British newspaper.
On Dec. 14, 2007, Zack’s Rank Analyst released a report saying, “The oil industry in Brazil remains a great alternative. On Nov. 8, 2007, Petrobras announced the discovery of an oil field called Tupi, in the Santos basin, with a potential to be confirmed between 5 and 8 billion barrels of oil equivalent (boe). Just to stress how important this field is, current Brazilian reserves reach 14.4 billion boe. What’s more, the Tupi field is within an area that is expected to have total reserves over 60 billion boe, all of it light oil, which is not very common in Brazil.”
Brazil already produces as much oil as it consumes. When the Tupi field comes onstream the Petrobras system will increase investments and strengthen Brazil’s political clout as it moves from self- sufficiency to joining an elite group of crude exporters. Top Brazilian government officials say the country is considering an invitation to join OPEC. OGFJ
About the authors
Peter Howard Wertheim and Dayse Abrantes are independent journalists based in Rio de Janeiro, Brazil. Email: [email protected]. They are currently writing a book about Brazil’s oil and gas industry in an international context.
