Photo: Reuters, Bruno Domingos
In preparation to host the World Cup in 2014 and the Summer Olympic Games in 2016, Brazil has made enormous financial guarantees as it will be at the forefront of the global spotlight. Brazil, home to South America’s largest economy and population, has committed to spending at least $13 billion for the World Cup and $15 billion for the Olympics – many are predicting both hefty sums can increase even higher. As the money has been flowing thus far, not all Brazilians are supportive of spending exorbitantly on these events. The most visible expression has come in the form of protests that were calling for better public services, amongst other issues. The message did not go unheard.
Brazilian President Dilma Rousseff has since proposed several domestic reforms. A dramatic action was formalized when both houses of Brazil’s Congress passed a bill that designates all royalties from newly discovered oil fields to fund education and healthcare. According to the bill, 75 percent of the new drilling royalties the Brazilian government is due to receive are to be invested in education and 25 percent on health.
After the bill was passed, Rousseff said, “For me and my government, education is the principal pillar to transform Brazil into a great nation, assuring that our people are freed from poverty.”
Rousseff even went so far as to call the bill a “historic victory.”
The legislation will amount to big bucks. Brazil’s oil royalties, which are expected to rise when the nation taps into it new fields off its Atlantic coast, could bring multiples of $100 billion.
A new find
In 2007, Petróleo Brasileiro S.A. or Petrobras, which is state owned and had 100 percent control of the industry until 1997, discovered a “major” oil find dubbed “pre-salt” layer. The National Petroleum Agency (ANP), the principal government agency charged with monitoring the oil sector, estimates that the reserves from the various fields within the discovery could hold more than 50 billion barrels of high-quality recoverable crude. Even prior to the pre-salt, Brazil reported to have proved reserves of 14 billion barrels of crude, which is the equivalent of global oil consumption for 3 years.
But getting the oil and associated money from the new discovery will be anything but easy from both a technical and policy perspective. In fact it will be an amazing feat of human ingenuity.
According to Petrobras, the oil deposit starts 340 km (211 miles) offshore and extends 200 kilometers (224 miles) farther into the Atlantic while spanning 800 kilometers (500 miles) along the south east coast from Espirito Santo state to Santa Catarina state. If that was not enough, the oil deposits lay up to 8 kilometers (5 miles) below sea level: up to 3 km (about 2 miles) beneath the ocean surface and another 5 kilometers (3.1 miles) under the seabed, including a layer of salt to be navigated. The cost associated with drilling and production in this scenario adds a large burden of upfront investment before commercial scale production.
Brazil currently produces around two million barrels a day and aims to boost output to nearly five million by 2020, largely thanks to the pre-salt reserves. Petrobras has the expertise and ability to tap these reserves, but they sheer volume will most likely leave the company stretched too thin.
International partners
Petrobras CEO Maria das Graças Foster has said that Petrobras has the capacity to explore and produce 100% of the oil from Libra, which alone holds an estimated 12 billion barrels of oil, but does not have the financial capacity to cover the investments needed to develop the area.
Brazil decided to open the new discovery to international partners for an inflow of capital and it has set a framework to structure deals. The process unfolds by companies that bid their services through production sharing agreements (oil remains property of the state and the company keeps a percentage of the profits). Petrobras must be the operator and have a minimum 30 percent take in all projects in the pre-salt blocks. It was thought the companies that offer the biggest share of oil output will win the contracts.
The Libra oil field initial registration for auction did not draw the interest originally predicted. ANP announced 11 companies had agreed to pay the 2.05 million real ($930,000) registration fee that will allow participation in the auction process, however Magda Chambriard, head ANP, previously stated she had expected more than 40 companies to bid for Libra. Majors such as Exxon, BP and Chevron stayed away, yet China’s CNOOC, CNPC and Repsol Sinopec; Japan’s Mitsui; Colombia’s Ecopetrol; India’s ONGC Videsh; Portugal’s Petrogal; Malaysia’s Petronas; Anglo-Dutch Shell; France’s Total; and Brazil’s own state oil giant Petrobras all registered.
The auction was held on Monday and won by the only – a consortium including Shell (20 percent), Total (20 percent) and CNPC and CNOOC (10 percent each). Petrobras will drill the field and keeps ownership of 40 percent. Mines and Energy Minister Edison Lobao said he is “not one bit frustrated” by the contest having been won by the lowest possible bid. It is believed foreign oil companies stayed away because they believed the rules for the new concessions offered little upside for profit and too big a role for the State and Petrobras.
Under the terms of their bid, Petrobras and its partners offered to pay 15 billion reais ($6.88 billion) up front for the rights. They also agreed to spend at least 610.9 million reais on further exploration in the area.
The auction was met with a wave of protests with many Brazilians claiming the State auctioned away its wealth as oil workers went on strike.
Is policy holding back another industry?
Brazil is blessed with vast resources and energy potential. The country, in fact, is now the 5th biggest market for wind turbines, according to Bloomberg New Energy Finance. Several foreign companies are investing in Brazil’s wind sector, including Italy’s Enel Green Power, GE, Alstom and Gamesa. Enel stated wind has the potential to generate 130-140 GW, and the industry is beginning to make its presence felt. Wind power increased 73% in 2012 to 2,500 MW and is now at 2.8 GW reaching 8 million people from 119 wind farms. Average wind power prices in Brazil have declined from 148 reais ($64 U.S.) per megawatt-hour (mWh) at the end of 2009 to $40-43 mWh this year driven by competition and technological advances.
The price has kept solar expansion at bay as wind power is currently about a quarter as expensive as solar in Brazil – even though most expect that industry to grow as its costs drop.
However, policies have been cited as a reason for not even greater growth. There have been changes in regulations, local content roles and uncertainty of grid availability and consistency. Furthermore, project developers are required to buy or make their parts domestically for favorable financing; limiting the market is estimated to up to an extra 20 percent. Wind is still relatively nascent and policy has room to adapt.
Calendar keeps turning
It will be interesting to observe how further related events and policies unfold and/or change, especially as the World’s attention will become more focused on the nation as the World Cup creeps closer, and President Rousseff surely will be working to ensure the event goes off without a hitch.
