Petrobras lays out aggressive Buzios plan

Brazil's state-controlled Petrobras laid out aggressive development plans for the giant Buzios oil field that it will share its new Chinese partners.

Based on a string of production platforms to be installed at the field, Buzios could produce at least 1.65mn b/d in 10 years, significantly enhancing Brazil's non-Opec supply role.

The pre-salt deposit will receive at least 10 additional floating production, storage and offloading (FPSO) units by 2029, some with more than 200,000 b/d of production capacity, Petrobras said today. The company's 1mn b/d Lula pre-salt field, Brazil's biggest oil and natural gas producer, has around nine units with installed capacity of around 1.35mn b/d and is not scheduled to receive more units in the medium term.

In a call intended to calm investors following two lackluster pre-salt auctions this week, Petrobras directors presented a broad vision for Buzios, and hinted that Chinese state-owned partners CNOOC and CNPC could play an expanded role.

Buzios is currently producing around 600,000 b/d of oil equivalent (boe/d) through four 150,000 b/d FPSOs. The first wave of development will be completed with a fifth 150,000 b/d unit scheduled to come on stream in 2022.

"We see the potential to at least double the number of units. We plan to install one unit per year starting in 2024. The main investment will be in 2023 when we have to drill new wells," upstream director Carlos Alberto Pereira de Oliveira told analysts today, adding that each of the new units could cost $2bn-$6bn depending on whether the platforms are leased or acquired.

A second development wave could include FPSOs with 180,000-220,000 b/d of production capacity, part of a trend in Brazil's pre-salt—where high-yield wells, some reaching as much as 50,000 b/d, have allowed companies to seek out bigger platforms.

Early pre-salt development mainly employed 150,000 b/d FPSOs. But the next phase of Petrobras' pre-salt development plans focused on the Transfer of Rights (TOR) region envisages more 180,000 b/d units. The Sepia field, one of the TOR areas not awarded at this week's auction, will receive a landmark 180,000 b/d platform in 2021. The 3.3bn bl Mero field will receive the first 180,000 b/d in 2021, a second in 2023, and two more per year after.

An attractive regulatory regime for at least part of the massive reserves at Buzios makes the field more resilient to low-price scenarios, Petrobras said.

With lifting costs of around $4/bl, the asset is expected to dominate the company's investment plans in the medium term.

More details on the start of the second Buzios development phase should be included in Petrobras' next five-year business plan, which is expected to be published next month.

Petrobras was originally awarded the right to produce around 3.15bn boe from Buzios in 2010 deal with the federal government covering Santos basin TOR pre-salt assets.

After years of intense negotiations over the revision of the 2010 TOR contract to account for commercial adjustments, Brazil offered the excess Buzios reserves in a 6 November licensing round along with three other deposits. Buzios was one of only two that was awarded.

Petrobras took a 90pc operating stake in the excess portion of Buzios, with CNOOC and CNODC splitting the remaining 10pc. Petrobras was the sole bidder for the other TOR award, the Itapu block.

The three Buzios partners paid a record minimum R68bn signing bonus for the area, and the Chinese firms will likely pay billions of dollars more to compensate Petrobras for development costs it has already incurred at the field. Petrobras hopes to finalize that agreement by December 2020, around six months earlier than the deadline established by the government.

The agreement, known as an interim deferred production compensation deal, could also give CNOOC and CNODC the right to increase their participation in the field. Petrobras said it is not considering bringing new companies into the consortium, but plans to deepen its current $27bn divestment plan with more upstream assets.

More oil for China

China is the main destination for the 28°API crude produced at Buzios, and Chinese refiners remain the primary customer for the light, sweet crude produced in Brazil's pre-salt overall.

CNOOC and CNODC, a subsidiary of CNPC, already have stakes in the Petrobras-operated Libra project, now producing around 40,000 b/d from a test well in the Mero field.

CNOOC partnered with Petrobras yesterday in the Aram pre-salt exploration block—the only asset of five awarded at a disappointing production-sharing auction—and has been active in the various upstream auctions in Brazil since 2013.

Chinese firms appear to the only ones not dissuaded by Brazil's complex regulatory system, which has been blamed for keeping Western oil companies on the sidelines.

"These excessive regulations is why Brazil has grown very slowly over three decades," Petrobras chief executive Roberto Castello Branco said on this morning's call. "I believe current management of economic policy in Brazil is doing its best to get rid of these complexities that hinder economic development. I think the government is thinking about why we were not able to attract more companies, and thinking about changing the regulatory environment."

The elimination of both Petrobras' right of first refusal for upstream assets and the geographic designation known as the pre-salt polygon, which is governed by production-sharing terms, are the primary targets of a push by industry and the government to increase upstream competition.

Changes being discussed have broad support among IOCs that have deep footprints in deepwater Brazil. Leading that group, Shell, which has played an important role in the regulatory changes that started in 2016 with the elimination of a rule that obligated Petrobras to hold a minimum 30pc stake in pre-salt assets.

"I think the major pre-salt auctions have already happened," Shell Brasil president Andre Araujo said today at an event in Rio de Janeiro. Araujo said the company supports a simplification of rules, including a lone concession model, and believes discoveries are what justifies signing bonuses. Like its Western peers, Shell was pre-qualified but did not participate in this week's auctions.