The role of E&P independents in Brazil’s upstreamNovember 19, 2018
Rodolfo Landim, president of Ouro Preto Óleo e Gás, talks to TOGY about the assets available for different types of companies in Brazil, the significance of the permanent offer system, the evolution of local content guidelines and status of gas infrastructure. E&P player Ouro Preto operates in Brazil through three main subsidiaries: OP Energy, OP Pescada and OP Energia Onshore.
• On market shifts: “There is an ongoing process of portfolio analysis. Farm-outs or asset sales will become interesting areas of opportunity for other firms looking to participate in the market. Due to a lighter structure and great technological expertise, independent operators can add value in the continuity of operation in more mature fields.”
• On where to invest: “If you are a small investor, one possibility today would be to invest in Petrobras, buying stocks. When you buy stocks from Petrobras, you are buying stocks in a diversified company that performs many different activities and has multiple strategies. If you wanted to become an investor in a purely pre-salt player, where could you invest your money? Ouro Preto, for example, offers an opportunity to invest in a player highly focused on pre-salt areas.”
• On gas growth: “The gas sector needs focus and development. If we want to develop the industry, it needs to be simplified. This is important because not only in Brazil, but also around the world, there is an understanding that gas demand will grow more than petroleum demand.”
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What role can independent producers play in Brazil?
At the moment in Brazil, there is a process of renewal at Petrobras and other companies. There is an ongoing process of portfolio analysis. Farm-outs or asset sales will become interesting areas of opportunity for other firms looking to participate in the market. Due to having a lighter structure and great technological expertise, independent operators can add value in the continuity of operation in more mature fields.
Another area of interest concerns pre-salt auctions. Pre-salt projects require a lot of resources; the pre-salt game is played by big, multinational companies. We are talking about wells that generate more than 30,000 bopd, which was not done before.
If you are a small investor, one possibility today would be to invest in Petrobras, buying stocks. When you buy stocks from Petrobras, you are buying stocks in a diversified company that performs many different activities and has multiple strategies. If you wanted to become an investor in a purely pre-salt player, where could you invest your money? Ouro Preto, for example, offers an opportunity to invest in a player highly focused on pre-salt areas.
Is the government doing enough to promote opportunities for smaller players?
Up until 1997, Petrobras had a monopoly on production and exploration in the country. Petrobras decided how much it would allocate to more mature basins and frontier basins. The trend was always to allocate more resources to basins where it had the best results. When the sector opened, companies entering Brazil naturally followed the steps of Petrobras.
In a certain way, activities in the onshore basins were reduced because of Petrobras and the other companies following the NOC’s steps, but this does not mean there are no opportunities to be explored in those areas. The Brazilian sedimentary basins are huge, but this is work that requires data gathering to attract companies. The more information gathered and investment made in these basins, the more value will be able to be aggregated to attract companies. I think the government needs to look at this with keen interest.
Are investments encouraged by the permanent offer system established in 2018?
The permanent offer system helps in that you are not required to wait for an auction to have access to an area. If an area has already undergone a bidding process and there was no interest, the fact that the area comes under the permanent offer system is positive, because circumstances in the petroleum sector change.
All of a sudden, a block opened to the market can become more attractive and land bidders. This speeds up the process, especially when there is price recovery and increased interest in exploratory activity. In that case, companies can act quickly.
How have local content requirements evolved in Brazil?
When the increase in local content was established, the price of the barrel was around USD 100, there were not many reserve opportunities in the world and some countries had controlled production that you could not access. From this context, local content strategy was developed under a huge plan by Petrobras, a plan of rapid growth with a huge demand for goods and services in Brazil. Many companies prepared for the boom that would come through Petrobras, and then the perfect storm took place.
Around 2005-2007, Brazil was the world’s sweetheart; everyone wanted to invest money here. The global crisis came in 2008-2009 and affected the possibility of growth. On top of that, there was the reduction of barrel prices in 2014 from USD 110 to USD 40, and problems specific to Petrobras related to Operation Car Wash paralysed the company’s development project.
Other companies became indebted and, contrary to expectations, revenues dropped. Companies following the plans of the government and Petrobras entered difficult times, which have lasted up to today for some. It is common to hear about restructuring and mergers and acquisitions.
In this context, the reduction of local content levels is important and necessary. In the end, the reduction of local content requirements was a very realist action taken by the ANP and the government because some companies would not have been able to follow the old rules, due to the lack of suppliers in the Brazilian market resulting from the aforementioned crises.
How well developed is Brazil’s gas infrastructure?
It is worrying that Petrobras has clearly signaled to the market that it will not make investments in this sector. If you have a market to be supplied, you need to make sure gas infrastructure exists. The NOC was the dominant player in the sector for a long time. That business was very fragmented within the company, so Petrobras ended up not investing. The company restructured its gas operations in 2000-2001 to transform it more into a business.
Pipeline construction in the country was an activity authorised by the ANP, and with the subsequent change, it was understood that Petrobras was too dominant in the sector, so a new rule was established concerning the creation of a concession. With this model, many players could take part in the same construction project, but several barriers have hampered the construction of pipelines.
The first thing that should be done is the simplification of the process as much as possible. There is no need to create complex regulations for a sector with a small capacity in its infrastructure. When the United States created regulations, a huge pipeline network already existed throughout the country.
The gas sector needs focus and development. If we want to develop the industry, it needs to be simplified. This is important because not only in Brazil, but also around the world, there is an understanding that gas demand will grow more than petroleum demand.
I believe we need to think about gas carefully, because a lot of gas will be produced from pre-salt areas. There is a lot of associated gas there, which is a great opportunity. A discussion is necessary, even in terms of changing the Brazilian electricity matrix by adding gas-operated thermal plants for base power. To utilise this gigantic volume of gas when it becomes available, it is important to have an energy policy.
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