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Promising Deepwater Fields Offshore of Brazil, and a Major Discovery Nearby in Guyana, Business and Industry Trends Analysis

Brazil has proven to have immense oil reserves offshore in deep water.  While the potential for production is excellent, costs of producing from Brazil’s offshore fields are very high.  This cost structure creates long-term challenges.  By 2015, Brazil was producing a very significant 2.53 million barrels of oil per day, compared to neighboring Venezuela’s 2.63 million, according to BP.

In recent years, Brazil’s government-controlled oil company Petrobras announced the discovery of several mega oilfields offshore, including a major gas deposit named Jupiter, off the coast of the state of Rio de Janeiro, and an immense new oil discovery about 155 miles offshore of the state of Sao Paulo in the Santos Basin.  This is close to the major offshore oil field once known as Lula (formerly known as Tupi) which was discovered in 2006 in the Santos Basin.  An even larger find was made in 2010 in ultra-deep water north of Lula.  The new find, called Libra, could hold as much as 12 billion barrels of oil.  Brazil auctioned development rights to Libra in October 2013 to a multinational group of oil companies including state-owned Petroleo Brasileiro SA, Royal Dutch Shell, Total SA, Cnooc Ltd. and China National Petroleum Corp.  The group agreed to pay $7 billion to Brazil’s Treasury and promised to source the bulk of their equipment and services in Brazil.

Combined, these finds turned Brazil into an offshore oil and gas giant almost overnight.  Lula ranks as one of the biggest discoveries in the Western Hemisphere in the past 30 years while Libra is potentially even bigger.  The Santos Basin is a vast area in very deep water.  There, oil reservoirs lie under a thick layer of salt, which creates technical challenges due to heat, pressure and potential movement of the salt structure.  Lula may hold 8 billion barrels of oil, and the Libra discovery may hold as much as 15 billion barrels.  Drilling a single well in the Santos Basin requires an investment of as much as $250 million.  These wells have an average depth of about 22,000 feet, including 7,000 feet of water.  Under the water is the 6,500-foot-thick, corrosive layer of salt.  When a drill bit finally penetrates the salt, it can access a pool of oil estimated to run from 250 to 400 feet thick.  The total Santos Basin covers about 1,000 square miles.  The exploration and production challenges here are similar to those faced on a regular basis in the Gulf of Mexico.

Brazil’s Petrobras is among the world’s largest producers of oil drilled in waters deeper than 1,000 feet.  It could become one of the world’s top oil producers, if it can manage exploration and production costs effectively, deal with political interference (as a firm that is largely controlled by the government), raise the necessary investment funds and create the right kind of management structure.  This list comprises a tall hurdle for the company to rise above.  Unfortunately, Petrobras has been embroiled in massive political scandals, as of 2016, that are likely to constrain the company’s progress for many years to come.

The Brazilian government has been so committed to controlling its domestic oil industry that it requires that Petrobras operate as the only sub-salt dome driller in the offshore area.  Government regulations also require that Petrobras comprise at least 30% of any offshore oil exploration or production consortium and that offshore wells source the bulk of their necessary goods and services from within Brazil.  At the same time, the government had hopes to turn Brazil into a leader in the oilfield services business.  However, as of late 2015, analysts were expecting Brazil to loosen these restrictions after missing its goals for production growth.

Elsewhere in South America, oil and gas production remains promising due to immense reserves of all types:  onshore, offshore and in shale.  Venezuela continues to hold some of the world’s largest oil and gas reserves.  Next door, the small nation of Guyana is attracting investment due to ExxonMobil’s recent discovery offshore.  The Liza-1 well, which completed initial drilling in 2015, is estimated to hold more than 700 million barrels of oil equivalent and could begin production by 2020.

In addition to the challenges posed by deep water activity, which cover everything from shifting pressure zones, extreme temperatures and drills required to pass quickly from water to sand to rock, oil and gas companies face a scarcity of deep water drilling rigs.  (Only a small number of offshore rigs are capable of working in extreme water depths.)  China launched its first home-built deep water rig in 2012, with plans to steadily grow its fleet, while it extends its claims of territory in the South China Sea.



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