Industry Trend Analysis - Ultra-Deepwater Will Dominate Output - OCT 2017

BMI View: Ultra-deepwater deposits will drive upstream growth in Brazil over the next decade. Given large operators' heightened focus on offshore acreage, we expect ultra-deepwater crude will comprise the bulk of domestic output before 2019 .

Brazil's oil sector is in the midst of a radical shift. Having previously been led by deepwater production gains, the industry is increasingly shifting its attention towards ultra-deepwater deposits. Over the past three years, resources at depths of 6,000-7,000m below the surface have risen to prominence given their vast size and high quality, producing over 1.2mn b/d in Q117. Estimates suggest the presalt polygon in Brazil could hold upwards of 50bn bbls of oil in place, a volume nearly four times greater than the country's current reserves of just under 13.0bn bbls.

Presalt Taking The Lead
Brazil - Petroleum Production By Location, 000 b/d
Source: ANP

We have long-highlighted the importance of ultra-deepwater deposits in Brazil's upstream sector ( see 'Presalt E&P Focus Following USD17bn Impairment', April 24 2015). This is due to the dominance of state-owned Petrobras, which operates over 94.0% of the domestic market, and its increased emphasis on the region to generate sustained growth. Though investments slowed in the wake of the oil price decline and a far-reaching corruption scandal, presalt remains at the core of the company's long-term upstream strategy.

Over the next three years, we expect Petrobras will sharpen its focus on the polygon to an even greater extent due to the viability of these assets combined with the company's expertise in ultra-deepwater development. Petrobras has successfully reduced lifting costs in the presalt to an estimated USD8/bbl from upwards of USD15/bbl in 2014. This, combined with increased application of integrated technologies has redefined the bounds of deepwater development, creating a unique segment in the Brazilian market.

In 2017 alone, four offshore projects are expected to begin producing, three of which will tap pre-salt deposits. The most recent start-up, the P-66 platform at Lula Sul, began on May 17 and reportedly reached upwards of 30,000b/d by early June. The project was the seventh unit to be placed in the Lula field and will produce up to 150,000b/d.

Deeper Deposits Driving The Upstream
Petrobras - 5-Year Deepwater E&P Plan
Source: Petrobras

This project, along with the other ten expected to come online through 2019, underpin our more bullish production outlook in Brazil. We expect total liquids output will grow by an average rate of 5.6% y-o-y over the next three years, reaching 3.1mn b/d. Given Petrobras' continued focus on ultra-deepwater E&P, we believe this segment will dominate the country's production before 2019. The company is directing over 80% of its spending on upstream over the next five years, 66.0% of which will be focused on the pre-salt.

Beyond 2020, we maintain that output growth will continue to be derived from the deepwater segment. This will be facilitated by the development of the country's licensing regime which has now been prescribed via a three-year schedule. In addition, new leadership in both the government and at Petrobras ushered in a wave of industry-friendly regulatory change over the past year, thereby stimulating investor confidence in the process ( see ' Licensing Round Ramp-Up Offers Fresh Start For Brazil ' , April 26 2017).

Presalt Up For Grabs
Map of Brazilian Offshore Basins
Note: Libra is the only existing Production Sharing Contract in the presalt. Source: Petrobras, BMI

We therefore believe the two production sharing rounds in the presalt in September 2017 will attract significant interest. This is due to the size of the resources on offer along with increased efficiencies throughout the region which have lowered commercial costs. A licensing round has not been held in the presalt since October 2013, which has inhibited investment from the private sector. However, we believe this round will mark the start of a new deepwater project pipeline in Brazil which will buoy the country's output well beyond the next decade.