I think that God in creating Man somewhat overestimated his ability.
     —Oscar Wilde

Brazil's announcement of the Tupi discovery created a lot of buzz in the oil industry and the press. Business Week anointed Brazil as the New Oil Superpower (November 19, 2007). "In a recent radio broadcast, Brazil's President Luiz Inácio Lula da Silva said he's convinced a "higher power" has taken a shining to Brazil." God could not be invoked, however, in a little noticed item published six days earlier: Petrobras Reduces 2008 Brazil Oil Output Forecast To 2 Million B/D from SmartMoney. Let's take a closer look at Brazil's oil production and what role the Tupi field will likely play in the future.

Almost all of Brazil's oil production comes from the deepwater fields of the Santos, Campos and Espirto Santo basins off its southeast coast. Unlike large onshore fields, which may produce at peak capacity for a long time, deepwater fields usually follow the production profile shown in the graph (left). (See A Non-OPEC Progress Report, this column, September 12, 2007 for a discussion.) Peak production is achieved for a relatively short time—some of number of months—before exponential declines set in. These declines are steep in the deepwater, running 10-15% per year.

Brazil uses floating production, storage and offloading (FPSO) systems. These giant ships are hooked up to producing wells and are designed to take-in, process and store a certain amount of oil and gas for offloading to tankers or pipelines. The quoted processing and storage capacity of the FPSO is also stated as the peak production capacity of the oil field in question.

With this background, it is possible to understand what the SmartMoney article is telling investors.

For 2007, Petrobras now expects its domestic oil production to average 1.8 million barrels a day. Late last year, [Chief Financial Officer Almir] Barbassa had said the company's production likely will average 1.979 million barrels a day this year.

But during the third quarter, Petrobras' domestic production averaged 1.779 million barrels of oil a day, only 1% more than in the year-earlier quarter although the company took several new oil rigs [FPSOs] on stream over the course of the year.

"Our new systems added 203,000 barrels a day, but the natural decline of our production was 170,000 barrels a day," Barbassa said.

He added that Petrobras hasn't been able to ramp up output at its P-34, Cidade do Rio de Janeiro and Capixaba platforms [FPSOs] as fast as expected. The 100,000 barrels a day Capixaba rig [FPSO] has been especially disappointing, adding only 32,000 barrels a day on average from the Golfinho field in Espirito Santo state this year so far, Barbassa said. The company now plans to also link the Capixaba platform to nearby fields. [emphasis added]

Brazil has missed its 2007 production target because 1) there is a 10% decline rate in its existing production base; 2) delays are typical in ramping up FPSOs; and 3) actual production does not always meet capacity expectations. These are not one-off problems—deepwater field declines are relentless, technical delays often happen in implementing extremely complex FPSO systems, and offshore oil fields do underperform sometimes.

Brazil is scheduled to put an astonishing 1.2 million barrels per day of new oil on-stream in the 2008-2011 period if one tallies up the expected peak production rates for new fields. (The source is Upstream production capacities to advance in many countries, an extensive list compiled by Guntis Morris for the Oil & Gas Journal July 23, 2007, Volume 105, #28.) Petrobras accounts for 1.1 million barrels per day, with the other 100,000 barrels coming from the Peregrino field operated by Norsk Hydro.

The graph (above, left) shows Brazil's actual production through 2007 along with projected output for 2008. Petrobras' output targets for 2011 and 2015 according to their 2006 Annual Report (p. 21) are highlighted in the figure. Here's some food for thought as we attempt to set realistic expectations about Brazi's future oil production—

1. Petrobras expects to net 374,000 barrels per day by 2011, only 34% of the peak production rates of new fields that they will put on-stream in the 2008-2010 period. Brazil's national oil company would not be expected to be pessimistic in their forward looking statements, so this no doubt represents their most realistic best case scenario for investors. The much smaller net addition to production flows is due to declines, delays and performance expectations as explained above.
2. Looking at the graph, production grows at healthy rate from 2000 through 2003, and then unsteadily from 2004 to 2008. The oil production growth rate must shoot up thereafter to meet Petrobras' 2015 target of 2.812 million barrels per day. Production grew 5.17% a year from 2000 through 2006. There was no growth in 2007 and according to their CFO Almir Barbassa (SmartMoney above ), 2008 will be disappointing as well. Therefore, the average yearly growth rate after 2008 must now be 5.27% to meet the 2011 target, and 4.14% per year to meet the 2015 goal.
3. All scheduled projects after 2010 are projected to bring 480,000 barrels per day on-stream (at peak rates) according to the Oil & Gas Journal. 2011 is only a bit more than 3 years away. New projects take at least that much time to come on-stream, let alone reach peak production levels, so it is evident that Brazil's rate of production growth must slow down in 2011 and thereafter as things stand now. Indeed, there is a possibility that Brazil's production might plateau or decline thereafter unless there are other new projects waiting in the wings.

Where does the Tupi discovery fit into this picture? Most early news stories were fixated on the quoted reserve numbers. Petrobras put the estimate at between 5 and 8 billion recoverable barrels of oil equivalent, which includes natural gas. This made the field the largest find since the discovery of Kazakhstan's Kashagan field in the North Caspian Basin in the year 2000. (No, Kashagan, aka Cash-All-Gone, is not on-stream yet in case you were wondering.) Business Week was very optimistic about the new find—

Initially, Tupi will produce about 100,000 barrels a day but may ramp up to as much as 1 million before 2020—more than the biggest U.S. field in Alaska's Prudhoe Bay, says Hugo Repsold, Petrobras' exploration and production strategy manager. "It's monstrous," says Matthew Shaw, a Latin America energy analyst at consultant Wood Mackenzie in London.

Later news reports like McClatchy's Massive deep-water oil find in Brazil challenges technology (Yahoo News, December 1, 2007) cited the technological challenges in producing a field that lies "under 7,000 feet of ocean water and more than 16,000 feet of rock, sand and salt, including a 1.2-mile-thick layer of rock-hard salt." Wood Mackenzie analyst Matthew Shaw "said it is unlikely Tupi production will start before 2013. But by 2022 the field could be producing a million barrels a day." Petrobras CEO Sergio Gabrielli that Tupi production will "very likely" top 200,000 barrels of oil equivalent [BOE] in 10 to 15 years, but threw caution to the wind when he said that "pilot production at the field may start in 2010-2011 at around 100,000 BOE a day." Petrobras CFO Barbassa upped the ante concerning the date—

The field, which is in the promising pre-salt area off Brazil's coast, could reach its peak output as early as five to seven years from now, CFO Almir Barbassa said. He spoke at the annual conference of the Latibex exchange of Latin American companies traded in Madrid.

Barbassa said it's too early to tell exactly what Tupi's peak output will be and when it will be reached. Currently, the company is able to make only rough estimates and cannot give exact production targets for the field, he said.

The bottom line is that nobody knows when Brazil will see the first commercial oil at Tupi, but this event is unlikely to occur before 2013 according to Wood Mackenzie. It would then take an additional 7 to 9 years to get the field to its peak production level. The field's peak output will depend on a number of factors, not least of which is the amount of investment Petrobras and its partners (BG Group and Portugal's Gal Energia) are willing to throw at the problem. A key question is whether investment at Tupi will divert funds from other easier deepwater projects.

Petrobras' Hugo Repsold speculates that Tupi will surpass production at Prudhoe Bay (graph above left). That could be true eventually if he is talking about Alaska's current North Slope production levels. Tupi's recoverable reserves are not yet well delineated, but the first numbers are substantially less than those initially estimated for Prudhoe Bay. Despite the cold temperatures in the Alaskan Arctic, Tupi will be developed in a much harsher high-pressure, high-temperature ultra-deepwater environment. Deepwater fields like Tupi have the production profile shown in the first graph above, whereas the giant onshore Prudhoe Bay field had sustained peak production rates of about 1.50-1.60 million barrels per day for about a decade. Few deepwater fields (e.g. Brent or Forties in the shallower North Sea) have ever matched this kind of steady output (at whatever levels) for more than a year or two.

Let's talk about hyperbole and reality. It is not the intention here to dump on Brazil. Petrobras has a well-deserved reputation as a world leader in offshore oil production. Brazil has obviously been a success story since the year 2000. After the Tupi discovery, Brazil's ambassador to Saudi Arabia told reporters at the recent Organization of Petroleum Exporting Countries [OPEC] summit that the South American producer was considering joining OPEC, saying "a membership decision will come after we know what our export capacity will be and we think this will be good." This is a remarkable ambition for a country which does not export any oil now and whose prospects for large production increases in the coming years are clouded with uncertainty. The ambassador did add that "Brazil will have a clearer idea about Tupi's export viability within 6-12 months." It's always a good idea to keep one's feet on the ground.

"This discovery... proves that God is Brazilian," Brazilian President Luiz Inacio Lula da Silva said during a speech at his presidential palace in the capital Brasilia. The Economist had the same thought in All this and oil too published on November 15th. Mum's the word as far as God goes, but here on Earth it is apparent that Petrobras may struggle to meet their 2011 production target, let alone their goal for 2015. Tupi is unlikely to add more than a few hundred thousand barrels a day in the 2013-2015 period, but this is well short of the production Brazil is already putting on-stream in 2008, 2009, and 2010. Whether Tupi will be Brazil's new Eldorado in the second decade of the 21st century is entirely up in the air at this point.

Contact the author at [the original article].