Investment surge in the Brazilian oil and gas and electrical energy marketplace

Buoyed by GDP growth of over 3 percent every year since 2004, Brazil is currently frantically building new infrastructure to develop its vast reserves of natural resources.

Buoyed by GDP growth of over 3 percent every year since 2004, Brazil is currently frantically building new infrastructure to develop its vast reserves of natural resources.

In particular, the so-called pre-salt cluster, in the Atlantic Ocean, which is part of a region that extends about 800km along the coast of Brazil from Espirito Santo state to Santa Catarina state. The cluster’s oil has been found in waters as deep as 3000m and as much as 7000m below the seabed beneath a layer of salt. The area comprises 112,000 square kilometres in deep and ultra-
deep water reservoirs, of which 41,000 square kilometres, have not yet been put up for tender. It is the “most significant oil discovery in the past 20 years”, according to Wood Mackenzie consultants.

The conductor of the orchestra will be state-owned company Petrobras, along with a new company to be created, Petrosal, very much alike Norwegian Petoro. Knowing how to deal with these companies will be key for the success of both old incumbent and new players in the Brazilian oil and gas game.
Petrobras will invest US$174bn through 2013. A total of 23 development
and production projects are forecast to be up and running by this date. By 2020, US$111bn will be invested in the pre-salt reservoirs alone.

Petrobras is about to start the purchasing program for 550 generators, 550 derricks, 350 turbines, 700,000 tons of structural steel for platform hulls, 550 wet Christmas trees, 500 wellheads, 80,000 pumps, 18,000 storage tanks, and 4000km of flexible lines. Petrobras has more than 55,000 items in a preliminary ‘shopping list’, of which drilling packages and FPSO packages, sub-sea equipment and compressors are considered to be the most critical. The company will also renovate its oil tanker fleet with 26 ships already contracted and another 23 to be tendered.

These tenders will all contain gradually increasing minimum local content requirements that can go as high as 95 percent in 2017. This means that interested companies should run and start looking out for local partnerships, areas to establish new facilities, operational basis, enrolment as supplier with Petrobras (CRCC), etc.

In order to achieve such audacious plans, Petrobras will rely on large capitalisation from shareholders, especially the controlling stakeholder, the Brazilian Government. Petrobras will further count on cheap and abundant financing from government development bank BNDES, and other state-owned banks.

In order to reduce prices of equipment, and at the same time allow for the gradual escalation of local content requirement in its projects, the company is breaking up large EPC, service and supply contracts into smaller packages, emphasising greater detail and standardisation of orders, starting with an ambitious program of eight FPSO’s to be locally built, in a dry-dock chartered by Petrobras itself in the southern part of Brazil, in a city called Rio Grande. In order to reduce prices, Petrobras is also planning to revise its standard contracts in order to reduce risk to the supplier.

The target is to produce 3.3 million barrels per day of equivalent oil (boed) by 2013, and 4 million by 2020, along with 5100 boed of natural gas by 2020.
Private companies are coming up with huge investments as well. Devon, Shell, Chevron and StatoilHydro will collectively invest US$25bn through 2013.
In addition to this, a new law opened up concessions for gas pipelines. Among the projects already authorised for tender is the 948km Middle North Gas Pipeline, budgeted at US$1.6bn.

Petrobras, in addition to the daring plans in the E&P sector, is also conducting an ambitious plan of revamping existing refineries and constructing
new ones.

In the gas sector, US$3bn will be spent on developing infrastructure for LNG. The target is to build a liquefaction plant to come into operation in 2013 with a capacity to liquefy 10 million cubic metres per day. Petrobras also intends to build a terminal for docking LNG tankers in order to be able to export LNG. Two LNG terminals exist today (Pecém and Guanabara), and a third one will likely be built in Rio Grande in the short-term, with a capacity for 14 million cubic metres per day. A fourth one is also been studied. Also under study is the expansion of the LNG terminal in the Guanabara Bay, from current 14 million cubic metres per day to 20 million. With all the projects, Petrtobras estimates capacity of 166 million cubic metres per day of natural gas in 2017.

The seasonal demand for gas is characteristic of the Brazilian electrical system, based on hydroelectric plants and safeguarded by the energy generated by predominantly natural gas-fired thermoelectric plants (if we consider the ones under the constructions and the future public tenders for the construction of new thermoelectric plants, which is also a niche worth exploring by foreign investors: Brazil needs an additional 3-4 GW power plant installed capacity per year, considering current expected GDP growth rates for the next five years. Seventy-five percent of this is still hydroelectric power, but thermal power tends to increase and occupy a larger share of the pie.

Petrobras is the sixth larger electrical generator in the country with 5461 MW of installed capacity, and is going to invest US$2.4bn in the sector for expansion through 2013. Installed capacity is forecast to increase from 99,747 MW to 154,797 MW by 2017, which represents an increase of 55 percent in the current generation capacity.

In addition to Petrobras investments, a further US$80bn will be invested
in the electrical sector through 2017 – US$63bn for generation and US$39.1bn for transmission.

Wind power is also a promising sector in the Brazilian marketplace. This year, the first tender exclusively focused on wind power projects will be carried out. So far 1.2 GW worth of projects to be put up for tender have been registered with the relevant regulatory agency, ANEEL. On top of all this, new ports and shipyards are already under construction.

It is likely that every major shipyard in the world will have a significant presence in Brazil (in association with local major contractors) in the next couple of years. In addition, ANP has not since 2007 held tender for new offshore ex- ploration areas. The industry is pressing government to conduct tenders of outside-pre-salt areas urgently, for it cannot be in such a standstill
for so long. The government froze all tenders until the new regulatory framework for pre-salt is introduced. This includes production sharing agreements for new areas and maintaining the concession regime for the areas already tendered, some as long ago as 2000. The model is very much like the Russian model, only that the PSC is mandatory for the new areas, and not discretionary. One can thus expect new tender for promising areas outside the pre-salt areas.

Tenders for the pre-salt areas may take a while to come up, since a gov- ernment-proposed specifi c regulatory framework for the pre-salt cluster has just been passed on to Congress in the form of four different bills. In the pre-salt area, the Brazilian government has already made it clear that the national content requirements in E&P will escalate to around 85 to 95 percent. This means that whoever wishes to have a piece of the pre-salt pie will have to establish signifi cant local presence, in particular equipment suppliers (topsides, pipes, risers, umbilicals, drilling packages, power packages for offshore units, etc.), who will likely need to build production facilities in Brazil.

Newcomers to Brazil’s oil and gas marketplace are usually dismayed by what seems like an overly complex, heavily regulated and bureaucracy-prone legal system. Companies worry about corruption, and about securing their assets against unlawful seizure or nationalisation. These are somewhat far-fetched concerns in today’s Brazil, but understandable ones if we look at the country’s not-so-distant past, and at the Latin American neighbourhood.

The hard facts are: (i) Brazil boasts a booming economy barely shack-
led by the worldwide fi nancial meltdown; (ii) Brazil is an investment-
grade country; (iii) Brazil blossoms among the BRICs; and (iv) Brazil is clearly poised to become the huge next safe hub for the world’s smart money.

Heller Redo Barroso is a Consultant in the Oil and Gas, Power, Shipping, and Offshore Industry. He can be contacted on +55 22 8103 4004 or by email: hrb@hrbv.com.br.