Petroleo Brasileiro S.A., Company Intelligence Report

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Expanding Upstream Operations: Producing from Pre-salt Reservoirs will Drive Future Investment

Petrobras has been a key contributor in developing oil and gas resources in Brazil for the last five decades. In 2012, the percentage of company’s total production and reserves from Brazil was approximately 91% and 95% respectively. In the last five years, discoveries in Brazil represented 63% of the worldwide deepwater discoveries. Thus, the major focus of the company is towards the development of deepwater and ultra-deepwater regions, especially in the major pre-salt discoveries stretching from Campos to Santos Basin with approximately 36.8 million acres. In 2011, the total increase in the reserves in Brazil was 1.24 billion boe, of which 79% was from the pre-salt areas located in the deepwater discoveries. On September 2010, the company entered into an assignment agreement for the exploration and production of oil and natural gas and other fluid hydrocarbons in specified pre-salt areas, subject to a maximum production of five billion barrels of oil equivalent. These pre-salt areas include six blocks and one contingent block in the Santos Basin. However, the company’s existing contracts in Brazil cover 26.6% of the pre-salt areas, including the areas assigned under the assignment agreement.

Petrobras is aggressively involved in developing Santos Basin, in order to capitalize on the huge growth opportunities in the pre-salt areas located in this region. The first productive field in the Santos Basin pre-salt was Lula (formerly Tupi), which began producing oil in May 2009, following an 18-month Extended Well Test (EWT). In 2011, the company drilled its first exploratory well under the assignment agreement in the Franco area and an Extended Well Test (EWT) was planned for that area in 2012. The Franco oil field is the large ultradeep oil prospect located in the Santos Basin. This field is the second largest pre-salt area found in the basin after Lula field. Among the blocks targeted under the agreement with the Brazilian government, approximately 61% of the total reserves are from the Franco area. The company is targeting the production of oil in the Franco area in 2016.

In 2011, pre-salt represented 7% of the company’s total oil production. The company has made some recent major discoveries, including Lula, Guara, Cernambi, Carioca and Lara in the Santos Basin. These discoveries are expected to add around 2mmbbl/d of oil and gas production by 2020. To support this growth, the company had ordered the construction of 22 new Floating Production Storage and Offloading (FPSO) and 33 drilling rigs and is also making investments in infrastructure. Additionally, Petrobras has also planned to construct and install 19 large production projects, which are expected to add approximately 2.3mmbbl/d of new capacity during 2012–2016. From 2013 through to 2017, it planned to install at least 17 FPSOs in the Santos Basin pre-salt region to develop its production. It made a total capital expenditure investment of $40.4billion in 2012, compared to $43.1 billion in 2011. According to the company’s 2012–2016 business plan, of the total planned E&P capital expenditure of 131.6 billion, which excludes international E&P investments, $49.7 billion will be directed towards pre-salt areas. The company has increased its focus on capital expenditure towards upstream operations from 57% in its 2011–2015 business plan to 60% in its 2012–2016 business plan, primarily to address the development of new pre-salt discoveries. The company’s operations in these major discoveries are spread across four blocks in the Santos Basin, where it holds varying interests.

The company dominated the oil and gas sector in Brazil prior to the deregulation of the oil and gas market in 1997. However, the Brazilian government partially privatized Petrobras, and invited many other foreign oil and gas companies to explore and develop the oil and gas resources present in Brazil. In order to develop Brazil’s pre-salt oil and gas reserves effectively, the government strategically decided to allow the company to remain as the sole presalt operator, planning that Petrobras would own a minimum of 30% WI in any consortium within Brazil. Petrobras has proven to be successful in tapping oil and gas resources from deepwater fields, and claims to have an exploration success ratio of around 87%, compared with the industry average of 25% in pre-salt areas.

These projects are expected to give the company an edge over its competitors and provide significant long-term growth potential.

Report Excerpt

5.1 Growing Investment in Research and Development

Petrobras has been successful in developing and implementing innovative technologies to drill, complete,and produce wells in deep water. It has invested a significant amount of funds for R&D activities. In 2011,it spent almost XX on R&D, representing an increase of about XX over 2010’s amount. This increase wasmainly directed towards developing the technological project called the System of Sub-marine Separationof Water from Oil (Sistema de Separaçao Submarina de Água e Óleo, SSAO), and towards increasing thenumber of projects approved by the National Petrol Agency (Agência Nacional do Petróleo, ANP).