Drilling the pre-salt – is Brazil still a “land of opportunity” for BP and Shell?

4 Feb 2014 james
2013 protests at the oil auctions in Rio de Janeiro

We are just days away from the fourth anniversary of BP’s announcement in 2010 that it was boldly going into the Brazilian offshore oil province, known in the industry as the ‘pre-salt’. Tony Hayward, BP CEO at the time proclaimed: “This strategic opportunity fits well with BP’s operating strengths and key interests around the world, offering us significant additional long-term growth potential”. The company spent $3.6bn and brought interests in eight license blocks in the offshore fields from the US company Devon Energy. These were prospects that promised deep and difficult projects – 110 kilometers out in the Atlantic Ocean, in some the seabed lay 2,000 meters below the surface and the possible oil was far beyond that, beneath a thick layer of salt rocks which plays havoc with seismic testing. These industrial ventures would require vast amounts of capital and technology like the space race.

BP’s share price in March 2010 was trading at a near historic high. It looked as if Tony Hayward had shaken off the shadow of the troubled last years of CEO John Brown that followed on from the explosion at the Texas City refinery in March 2005. The Board of the company was confident about taking risks, such as speculating on the Brazil pre-salt – ‘long term plays’ that could generate profitable return.

Barely 40 days later, at an oil field far closer to the shore, a bare 66 km off the Louisiana coast, and in water a third less deep as the Brazil blocks, disaster struck – the Deepwater Horizon exploded, killing 11, destroying ecosystems, decimating communities, and bringing BP to the edge of bankruptcy. Quite suddenly ‘BP’s operating strengths’ didn’t look so impressive and there were concerns at BP having become the largest foreign investor in the Brazil offshore ‘pre-salt’ industry.

Since the early 2000s there had been talk of Brazil as the great new place of hope for the international private oil companies (IOCs). These IOCs were getting increasingly squeezed out of access to reserves by the rise of national oil companies and the reassertion of state control over a number of key oil provinces, such as in Russia and Venezuela. Brazil looked as though it would be a different prospect – complex oil fields that required huge amounts of capital and technological experimentation to exploit, and a government that seemed happy to give generous terms to IOC’s. In turn the government of Brazil presented to the people the vision that oil would be the pathway that would lead to the nation’s development, the national treasure house that would enable Brazil to become a powerful member of the rising group of BRIC countries.

Shell was one of the earliest international companies to gamble on the pre-salt.  On its flagship project, the Parque das Conchas block in the Campos Basin far off the coast of the state of Rio de Janiero, the first discovery well was drilled in 2000. A final investment decision was taken six years later in October 2006, and subsequently a floating production vessel, Espirito Santo, was constructed, built in Singapore, to operate in 1,780 meters of water. In July 2009 the first phase of production began, with oil being pumped from deep beneath the seabed up into the Espirito Santo, before being shipped on to refineries. On 2nd October last year a second phase of Parque das Conchas began pumping a further 35,000 barrel of oil per day.

Greenpeace Brazil at Chevron's headquarters
Greenpeace Brazil at Chevron’s headquarters

But the climate of opinion in Brazil has changed. The oil offshore has begun to be seen less unequivocally as a ‘pathway to development’. In November 2011 Chevron created a disastrous 3,600 barrel oil spill whilst drilling on the Frade bloc, north east of Rio de Janiero. The leak led to the largest ever environmental lawsuit in Brazilian history being taken out against Chevron and Transocean and showed that prosecutors would be tough on international companies in the wake of Deepwater Horizon. Meanwhile wider social movements in the country have recognised that the ‘Production Sharing Agreements’ made with the likes of Shell and BP in the 2000’s, were on terms far too beneficial to the transnationals that left the country at the mercy of foreign companies.

A mere three weeks after the start of the 2nd phase at Parque das Conchjas came the much awaited ‘First Pre-Salt Licensing Round’. Shell was bidding to purchase the right to drill in the Libra field. The event was billed by the government as a proud moment at which to celebrate ‘foreign direct investment’. It was met by huge protests. The beachside hotel where the event was held had to be defended by riot police who fired rubber bullets and tear gas. Six people were injured in prolonged clashes between demonstrators and police. Speaking in opposition to the licensing round was Cedro Silva, president of one of Brazil’s largest union: “The decision of the government and ANP/Petrobras is a fire sale of our national riches to foreign capital.” Meanwhile Ildo Sauer, retired Director of Gas & Energy of Petrobras said: “Brazil is giving up its sovereignity: pre-salt has already been discovered, it doesn’t need to be auctioned off.”

Brazil's Mines and Energy Minister Edison Lobao meets representatives of the consortium winner of the auction for the  Libra offshore oilfield during a ceremony in Rio de JaneiroPeter Voser, then-CEO of Shell tried to put a brave face on the events, saying: “The Libra oil discovery in Brazil is one of the largest deep water oil accumulations in the world. We look forward to applying Shell’s global deep water experience and technology, to support the profitable development of this exciting opportunity.” Events such as the signing of a Production Sharing Agreement for a oil prospect that is a hundred kilometers offshore rarely ignites popular interest, let alone full-scale civil opposition so intense that the state feels the need to mobilise its paramilitary police. The strength of public anger on 22nd October 2013, surrounding the Licensing Round, shocked many in the international oil industry.

A further shock in the Brazilian pre-salt came only eight weeks later. On18th December 2013, BP announced that it was relinquishing the Pitanga block in the Camamu-Almada Basin. This was one of the prospects that it had obtained from Devon Energy less than three years before. BP eventually began drilling in the block in Mid September 2013, but a fruitless search meant that it decided the take the unusual step of writing off the prospect at a loss of over $1bn.

Finally on 29th January 2014 Shell announced that it would sell 23% its’ holding in the Parque des Conchas project to Qatar Petroleum International. This news came on the same day that Shell announced that it was calling a halt to its US Arctic drilling programme. Both the projects in the frozen Chuckhi Sea and the warm Atlantic off Brazil fall under the responsibility of Marvin Odum, Chief Executive of Shell Upstream Americas.

Shell selling on a stake in their pre-salt flagship project does not in itself signal a great shift, however coming in the context of the flurry of news over the past three months, it suggests that something is in the air. It may signal a wider retreat. Certainly shareholders in Shell and BP should be concerned. The technical challenge of pre-salt was always known, so too was the scale of capital expenditure required, but BP’s relinquishing of Pitanga and the intensity of the civil society opposition to the Production Sharing Agreement for the Libra field, means that the risk profile of Brazil may be changing rapidly. Will this also enable Brazilian social movements to prevent destructive drilling and assert economic and environmental justice?

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