Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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Brazil’s Pre-Salt Oil Six Years Later

by Shannon K. O'Neil
October 10, 2013

An aerial view of the final stage of the construction of new P-56 semi-submersible production platform for the oil company Petrobas at the Brasfels shipyard in Angra dos Reis, about 115 miles (185 km) west of Rio de Janeiro February 24, 2011 (Sergio Moraes/Courtesy Reuters). An aerial view of the final stage of the construction of new P-56 semi-submersible production platform for the oil company Petrobas at the Brasfels shipyard in Angra dos Reis, about 115 miles (185 km) west of Rio de Janeiro February 24, 2011 (Sergio Moraes/Courtesy Reuters).

In 2007, Petrobras engineers struck black gold, discovering vast oil reserves in the deep-water off the Brazilian coast and permanently altering not only Brazil’s energy landscape but the country’s economic and political fortunes. Immediate surveys predicted that some 80 billion barrels were trapped in these pre-salt reserves (named after the rock layer they are located in), a number so high that then-President Lula declared the find as proof that “God is Brazilian.”

Forecasters heralded Brazil’s coming energy dominance, predicting output to more than double to 5 million barrels of oil a day by 2013, transforming the country into the world’s fourth largest oil producer (behind only the United States, Saudi Arabia, and Russia). Six years later, here is a look at where the fields stand today.

Output has increased just 20 percent to 2.6 million barrels a day (some 350,000 barrels from the pre-salt fields), making Brazil the world’s eleventh largest oil producer. The vast difference between initial expectations and today’s reality comes in part from timing, as pre-salt production had a slow start, only really taking off in 2011. But other barriers have also limited exploration and production.

One of the structural challenges has been Brazil’s infrastructure. With 30 percent of roads considered to be “bad or very bad,” transport costs are an estimated 66 percent higher than they would be with better quality roads. Ports too are overwhelmed, with trucks routinely sitting in line at some of São Paulo’s ports for an astonishing twenty-four hours. Four new ports are scheduled to open in Rio de Janeiro by 2015 to help alleviate the backlog. Still, these bottlenecks and congestion have constrained output and raised costs so far.

Disappointing, too, have been some of the fields themselves. The dramatic saga of Eike Batista and his oil exploration company OGX Petróleo e Gás is a prime example. In 2007, OGX leased large offshore oil fields, and boasted of 4.8 billion barrels in potential reserves and an imminent 1 million barrels a day in production. But as the company’s exploration continued, field after field came up dry, with the most productive well starting at 15,000 barrels a day (disappointing by most oil company standards)—precipitating the decline of both OGX’s market capitalization and Batista’s personal wealth, which fell some $34 billion.

Another drag had been finding enough of the right people. Petrobras has rapidly expanded its staff over the past decade (from fewer than 40,000 workers in 2000 to 80,000 today), but the company estimates that it will need some 200,000 on staff by 2015 in order to meet its targets. And with Brazil’s unemployment rates at record lows, skilled workers able and willing to enter the company’s training programs are scarce.

Also slowing the process has been the legislative process, which has taken some time to define the rules of the game. Over the last six years Brazil’s Congress has struggled with questions of how best to explore the fields (Petrobras was named the sole operator), distribute the royalties (oil producing and non-producing states are waiting to see if the Supreme Court upholds legislation mandating that they receive roughly the same share), and include foreign companies (Petrobras maintains at least 30 percent control and ownership over all future finds). Brazil also enacted a quite ambitious local content law, requiring between 37 to 85 percent of the oil supply chain to be made in Brazil during the exploration phase (and 55 to 80 percent during the development phase).

Taken together, these structural and policy issues have tempered interest from many of the major oil companies skilled in deep water extraction. The most recent instance came in late September, when just eleven companies signed up to bid for the Libra field auction, the crown-jewel of the pre-salt fields (the government had expected forty). This all suggests that though still offering enormous potential, unlocking Brazil’s energy benefits is turning out to be a much more complicated and longer term endeavor.

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