Brazil's Oil: Less Mega Than You Think

Word last week that offshore oil players may not be impressed with Brazil's massive pre-salt prospects. At least, not as impressed as Brazilian officials think.

Several industry players under the banner of the Americas Society/Council of the Americas Energy Action Group released a report analyzing investment in Brazil's billion-barrel pre-salt prospects. The group concluded that potential bidders for these fields may be deterred by poor fiscal terms.

One of the biggest stumbling blocks is state participation. The current rules call for Brazilian state oil firm Petrobras to operate all pre-salt fields. The firm must also hold a minimum 30% stake in each project.

The report raises an interesting question: does Petrobras have the skill and manpower to operate a large number of projects here? The government has estimated that the massive Libra field alone (8 to 12 billion barrels) will cost $174 billion to develop. That alone is a lot to chew alone. Let alone with several other developments going in tandem.

With the warning issued, the government could now alter the fiscal terms of its production sharing contracts to make investment more attractive. Or it could ignore the these forebodings and wait to see if E&Ps will balk when it comes to bid time.

The risk is that a failed bid round could take a lot of the steam out of the pre-salt play. Even in the best-case scenario it will be several years before the massive fields here start producing. Any delays in licensing could set the timeline back to a decade or more.

Brazil will likely stick to its fiscal guns. Opinion right now is that deepwater exploration is one of the only plays going that's big enough to matter for major E&Ps. The Brazilians know they're one of the only games in town on this front.

But they're the not completely alone. The deepwater U.S. Gulf of Mexico is still active. And drilling is picking up in offshore West Africa.

This is the time you, as a hydrocarbon agency, have to ask: are we really as attractive as we think?

Here's to realism,

By. Dave Forest