I have just returned from the Rio Oil & Gas Conference, and as any visitor to Brazil will testify, it is hard not to get a little carried away with this fascinating country.
But it was not the sun that caught my imagination (it rained for a week), not the samba, sea or soccer, but the sheer scale of this country’s natural resources and energy potential.
The topic on the tip of everybody’s tongue is the huge new sub-salt discoveries made in the Santos Basin.
Petrobras used the conference to announce that it has proved another 3-4billion barrels of light oil in its Iara field to add to the 8-12billion barrels it is looking to produce from Tupi.
This may be just the tip of the iceberg in a vast sub-salt play that could hold up to 80billion barrels oil equivalent, and where every well drilled to date has hit hydrocarbons.
The Brazilian oil industry understandably feels like it has hit the jackpot, but these resources present massive challenges as well. Located beneath a thick salt cap in water depths of over 2,000m, the development of these huge fields will push the boundaries of modern drilling technology and could cost up to $500billion to develop.
Petrobras and the Brazilian government are pushing for the majority of FPSOs (production ships) and drilling rigs to be constructed within Brazil and there are strict local content requirements for offshore operators. This is creating supply constraints that are pushing up costs and risk delaying full-scale production.
The sub-salt basin is not the only area generating excitement in Brazil these days. Less than 5% of this huge country’s total area of sedimentary basins is under licence, which makes it one of the most under-explored regions of the world. With the local economy growing steadily at about 5% per annum despite the recent global economic turmoil, Brazil’s energy consumption is also expanding rapidly, providing opportunities for importation of LNG and power generation, including renewables.
Brazil is the world’s largest exporter of ethanol and expects investments of about $32billion in this sector through to 2012. Petrobras is also investing significant sums in biodiesel, which it can produce from soy bean, castor, sunflowers, various other oleaginous crops and even residual animal fats.
In light of the ongoing fuel versus food debate, Petrobras and the Brazilian government are at pains to stress that the ethanol Brazil produces from sugar cane is much more environmentally friendly than that produced from corn in the US; that the areas on which these crops are grown are thousands of miles from the Amazon rainforest, and that the cultivation of these crops provides a livelihood to thousands of small family farms.
There are great opportunities for international investors to bring the capital, manpower and expertise necessary to help develop these resources and markets, as demonstrated by the strong turnout for the outward trade mission to the Rio Oil & Gas Conference organised by Scottish Development International and the Energy Industries Council. However, the Brazilian investment climate also presents its own unique challenges.
Brazil is notorious for its bureaucracy, which is exacerbated by the existence of separate legislation and regulation at federal, state and municipal levels of government.
It is also necessary to contend with restrictive labour laws, exchange control regulations and withholding taxes payable on procurement of services from outside Brazil. With the right advice, however, all these issues are manageable and pale into insignificance alongside the potential rewards.
Brazilian commercial law is largely based on that used in Italy in the 1930s, whereas its oil industry tends to take its lead from Houston. However, there is considerable interest in international knowledge sharing and understanding best industry practices.
Brazilian oil industry executives expressed an interest in attending the annual seminar on UK oil&gas law at St Andrews organised by CEPMLP, in association with CMS Cameron McKenna, and are keen to keep up to date with new industry initiatives such as the new LOGIC JOA and industry standard Decommissioning Cost Provision Deed.
The first of the BRIC countries (Brazil, Russia, India, and China) left me amazed at the enormity of the development challenges and opportunities.
Brazil has an almost unbelievable scale of operations to service, with requirements for more technology, people and supplies of every kind. The potential for collaboration between the North Sea and the South Atlantic is greater even than the distance between them.
Penelope Warne is head of energy at CMS Cameron McKenna, which has 55 offices in 24 countries, including Sao Paulo, Brazil