May 20 (Bloomberg) -- Petroleo Brasileiro SA is finding it hard to pump oil at one of Brazil’s largest prospects, three people with knowledge of the project said, signaling its venture with BG Group Plc and Galp Energia SGPS SA may have higher costs or slower development than at other offshore fields.
Petrobras, the world’s biggest producer in deep waters, has encountered low permeability at sections of the Iara field, said the people, who spoke on condition of anonymity because results haven’t been made public. That means more costly techniques, such as hydraulic fracturing, or fracking, may be needed to get oil flowing at Iara, where single deep-water wells have already cost more than $100 million apiece, one of the people said.
BG of the U.K. and Portugal’s Galp are relying on Petrobras as concession operator to accelerate output at their wells in the Iara discovery. Petrobras instead may prioritize areas of the field that flow better rather than employ fracking miles below the South Atlantic seabed, said Cleveland Jones, a geology professor at Rio de Janeiro State University.
“The option is to go for the easy stuff and the difficult stuff later, the path of least resistance,” Jones, who has researched fields with the same geology, said by phone from Rio. “Why drill a much more expensive well when you don’t need to?”
Iara, about 230 kilometers (143 miles) out to sea from Rio, is one of Brazil’s five largest discoveries. It’s in the same exploration block as Lula, the world’s biggest discovery in more than a decade. That’s where Petrobras beat production expectations and individual wells pump as much as 36,000 barrels a day. Both fields are known as “pre-salt” -- in a reference to their geological formation over time.
In 2008, Petrobras estimated as much as 4 billion barrels of recoverable reserves at Iara, or enough to meet Brazilian demand for more than five years. The recent tests suggest the quality of the pre-salt reservoirs aren’t uniform. Brazil plans an auction for more exploration licenses in November.
The state-run producer may eventually use “special techniques for stimulation and well geometry” at areas of Iara to optimize productivity, Petrobras said May 13 in an e-mailed reply to questions. The Rio de Janeiro-based company said it will finish a fourth well and start a fifth before the end of the year at the field where it maintains positive expectations.
Petrobras declined to comment on any possible changes to the reserve estimates and said in the e-mail that its business plan calls for two production systems at the area by the end of 2018. That compares with seven at the Lula field.
BG, the U.K.’s No. 3 gas producer, has said it expects existing assets in Brazil to deliver more than a third of its production in 2020. Lisbon-based Galp has said it’s counting on Brazilian crude to help curb dependence on refining and fuel sales in Portugal and Spain.
Pre-salt fields will double Petrobras’s output by 2020 after it started production in 2009, according to the company’s business plan.
The partners are examining plans to expand Iara, which has “similar oil in place to Lula, but with slightly poorer reservoir properties,” BG CEO Chris Finlayson said May 14 in London. A press officer for BG’s Brazil unit, who isn’t an authorized spokesperson, referred questions on Iara to operator Petrobras. Pedro Marques Pereira, a spokesman at Lisbon-based Galp, also referred questions to Petrobras in an e-mail.
BG has a 25 percent stake in the BM-S-11 block that includes Iara, and Galp has 10 percent. Growing output at Brazil’s pre-salt helped both BG and Galp beat earnings estimates in the first quarter. BG shares rose 0.1 percent to 1,232 pence in London, Galp rose 0.6 percent to 12.54 euros and Petrobras gained 1.3 percent to 20.20 reais in Sao Paulo.
The Brazilian producer is already developing pre-salt fields it discovered after Iara at a faster pace. Franco, which Petrobras bought from the government in 2010 as part of a $70 billion share sale, is set to start production in 2016 from two separate production systems. The field, where Petrobras will sell all of the oil itself, will have five systems in place by the end of 2019, according to the business plan.
Petrobras drilled its first pre-salt well at BM-S-10 in 2005, where it discovered the Paraty field. Drilling a single well in the area has cost in excess of $200 million. It costs about 50 percent more to drill horizontal wells and frack offshore reservoirs, said Jason Kenney, an analyst at Banco Santander SA in Edinburgh.
“You’re now in a different ballgame of drilling, it’s about as complex as a well can get,” Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago, said by telephone, without giving a cost estimate. “They’ll assess where it fits with the larger strategy. They’ll always go for the most economical barrels first.”
Petrobras has lowered drilling costs in the pre-salt by reducing times to 70 days in 2012 from 134 in 2006, according to the company’s business plan. The region as a whole has beaten the company’s targets. In 2010 Petrobras planned to be pumping 241,000 barrels a day from the pre-salt by 2014. In March Brazil’s pre-salt oil and gas output reached 349,600 barrels a day, according to the National Petroleum Agency, or ANP.
Petrobras has returned areas of the pre-salt to the government after initial exploration failed to show commercial potential. The biggest producer in waters deeper than 1,000 feet returned 28 percent of BM-S-10 exploration block, including the Macunaima prospect it discovered in 2011, to the oil regulator last year, according to ANP’s website.
Exxon Mobil Corp., Hess Corp. and Petrobras returned the BM-S-22 block to the regulator a year ago after failing to find commercial deposits.
“Not all the news has been good,” Fernando Siqueira, a former Petrobras manager and current vice-president of the association of Petrobras engineers, said by phone from Rio. “Exxon drilled three wells and found nothing.”
Petrobras plans to pump its first barrels from Iara in 2017 after installing a production vessel at the site, according to its business plan. The output will come from the Iara Horst well, 8 kilometers from the initial find.
Iara Horst has “better reservoir characteristics” than the first well it drilled in the area, Petrobras said in a March 2011 statement. It was the second pre-salt field, after Lula, where Petrobras gave specific reserve estimates.
Petrobras’s overall success rate in the pre-salt is at 82 percent, higher than the 64 percent rate for its entire Brazil operations, according to information on its website. Globally, about 35 percent of wells find oil and natural gas.
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