The frenzy of seismic activity in Brazil has lessened somewhat. Now the world waits with anticipation for the first wells to be drilled.

The waiting is almost over. Soon wells will be drilled and tested in Brazil, wells drilled not by Petrobras alone but with the help of foreign oil companies that are, for the first time, being given a shot at this huge country's hydrocarbon riches. And the results of those wells will provide for the first time some indication of whether the vast amounts of money being spent in Brazil might actually generate some return on investment.
The past few months in Brazil could be used as a textbook study on privatization at the speed of light. After spending a couple of years making noises about opening its oil and gas provinces to the rest of the world, Brazil lit the green light so suddenly that oil companies and seismic contractors had precious little time to react. The country enacted its New Oil Law in 1997, creating the Agência Nacional do Petróleo (ANP) to regulate the industry. Promises of concessions and licensing rounds prompted swift reaction from the seismic community. In January 1999, one seismic vessel was surveying offshore Brazil; a few months later there were 24.
Many oil companies that entered joint venture agreements with Petrobras through these concessions discovered they had only until August 2001 to begin commercial production on their exploration blocks, meaning initial drilling programs needed to begin by summer 2000. This rush mentality has resulted in a backlog of seismic, environmental and drilling permits as the country's newly created agencies have been overwhelmed by paperwork.
But this frantic pace promises to slow down within the next couple of years. Brazil hosted its first licensing round in 1999, awarding exploration rights to 12 of the 27 blocks up for tender, for a total of US $180 million. Round 2 took place in June. Terms on these license round blocks are kinder, allowing for more time to evaluate the blocks before beginning commercial production.
So a positive forecast might predict plenty of work to go around in Brazil for several years. The country is, after all, home to a remarkable assortment of sedimentary basins, most of which are underexplored. In a country larger than the continental United States, only about 100,000 wells have been drilled, compared to 5 million or so in the United States. With the government's eagerness to promote more oil and gas exploration, it's likely that opportunities will be numerous.
Trouble in paradise?
So why isn't everyone rushing to Brazil? Perhaps it's because several potential problems could sully the industry's eager anticipation. A key concern is the fact that the regulations are still something of a moving target. Even though it might not be any more difficult to operate in Brazil than it is to operate in Nigeria or Angola, the system in those countries is more established.
"I think administratively it's a pain in the neck in either place," said Robin Walker, marketing manager for North and South America for Schlumberger's Reservoir Evaluation-Seismic group. "But because of the PSC-type (production-sharing contract) agreements that people have in West Africa, the rules of the game are well understood."
Brazil is still suffering growing pains in this area. "The ANP is actively establishing more and more regulations in line with international standards to govern this more complex industry," said Phil Hanson, vice president of E&P for Shell Brasil SA. "As a regulation comes in, a new process needs to be developed to administrate it. All of this can tend, for understandable reasons, to slow down the pace as regulations emerge."
A major factor for contractors and oil companies alike is the Ibama, the country's agency in charge of issuing environmental permits. "The environmental situation needs to be addressed," said Rollin Delzer, vice president, business development offshore Western Hemisphere for CGG. "There are companies like Santa Fe who have drill rigs on site that are on standby because they have no permit." Most contractors agree the agency isn't purposely dragging its heels; rather it is understaffed and overwhelmed with the amount of paperwork to process.
More ominous is the potential for things to shift in a direction that would risk companies' considerable investment in the area. While allowing that there is no indication Brazil will follow the lead of some other countries, Walker said oil companies don't like to be in the position of proving up a large field and then having the host government take excessive control due to an unexpected rule change. "These things have happened before, and oil companies have enormously long memories," he said.
These and other factors have kept some oil companies that have deepwater experience in other parts of the world from participating, and this is a concern to seismic contractors who rely on multiple clients to make their nonexclusive ventures a success.
"There are 50 companies that used to play the deep water in the Gulf of Mexico," said Kim Abdallah, vice president of international new ventures for TGS-Nopec. "Why aren't the same 50 companies playing Brazil? They know that there are huge reserves there. It's the first chance to go into a country with world-class basins on a ground-level basis, yet so many companies have chosen not to do it."
Guarded optimism
Oil companies that are active in Brazil are generally positive about their experiences and optimistic about the future. Unocal, which has participating interests in three exploration blocks, has made Brazil one of its primary targets. "Brazil today represents an important component in Unocal's global deepwater exploration strategy targeting basins with outstanding potential," said Sergio Brandao, managing director of Unocal Brazil. "The commitment to exploration in Brazil will grow over time as a function of success achieved."
The company has plans to drill at least one well on its BC-9 block in the deepwater Campos Basin, which it operates in partnership with Petrobras, Japex and Repsol-YPF. It also will participate in the drilling of two wells in the first half of 2001 on a block in the deepwater Espirito Santo Basin, which it shares with Petrobras and operator ExxonMobil.
Unocal has encountered no difficulties with permitting and doesn't anticipate any real problems down the road. "As a governmental agency, ANP has done a fine job so far in setting regulations and ensuring their compliance," Brandao said. "Their track record is very good, and there is no reason to speculate it will be any different in the future.
"Political stability and commitment to market reforms are also key ingredients that make Brazil an attractive long-term business proposition for Unocal."
Shell also has interests in three blocks in Brazil that it obtained through exploration partnerships with Petrobras prior to Round 1. It plans to start drilling on its
BC-10 block in the Campos Basin this month.
Additionally, Shell is partnering with operator BP Amoco on a block in the Amazonas Basin that was awarded during Round 1.
Shell's experience in Brazil dates back 86 years, but more recently it was involved in risk-sharing contracts with Petrobras in the late 1970s under Pecten, the international wing of Shell Oil. The wide exploration effort resulted in the discovery of the Merluza field, still producing gas today under Petrobras' operation.
Hanson expects drilling in Brazil to be active during the next few years. "When you've brought a piece of equipment in, when you've gone through the complex procedures of importation, when you've gone through some of the difficulties of having the rig inspected and getting permits for it, there will be a tendency to be sure that there's a continuous work sequence for that unit for a reasonable period," he said. "People will be phasing their activity so that they can be drilling in a continuous sequence."
'Spec' on the horizon
As the first round of drilling gets under way, seismic contractors are somewhat nervously watching developments and wondering what their next step might be. Many have moved boats out of Brazil to Canada and other markets with a short summer season; others are moving their boats from southern to northern waters near Brazil to avoid the harsh weather conditions that affect the southern basins during the Brazilian winter.
Hanson thinks Brazil will remain a viable market for spec. But some seismic contractors are betting the proprietary market there will eventually grow. "I see a lot of opportunity for us on smaller proprietary surveys as companies evaluate and interpret their data," said Greg Leriger, project manager for Schlumberger. "I think our business plan from here on is a mixture."
Veritas DGC hasn't shot any 3D spec in Brazil yet, although it does have a 2D spec survey under way in the Sergipe-Alagoas and Paraiba-Pemambuco basins as well as some proprietary 3D. It has plans for additional 2D spec surveys in other basins later this year, but Andy Phipps, vice president, Latin America, said bureaucratic problems in Brazil, a vessel overcapacity and the size of the blocks have caused the company to hold off on 3D spec plans.
Other contractors like the 3D spec model and plan to continue pursuing it. Mark Wilkinson, vice president of multiclient services for PGS Exploration (US) Inc., said increasing competition from other world-class basins around the world, including Canada, West Africa and the North Sea, is beginning to put some pricing pressure on Brazil, which until recently has had very poor pricing. "We know we have competitors who are pricing predatorially," he said. "But PGS remains committed. We have half of the Ramform fleet in Brazil shooting multiclient, and it's most likely we'll have three vessels in place for the remainder of this year."
Still, though the number of vessels in Brazil has decreased due to boats being moved to other parts of the world, most contractors believe too many crews are chasing too little work. Larry Wagner, general manager, worldwide marine, for Western Geophysical, agreed Brazil could use a major discovery or two to jumpstart the proprietary seismic market there. But he added Brazil can't be viewed as its own microcosm, at least not from a marine viewpoint. "In marine, the assets move relatively easily, so until we get the utilization rate as an industry into an area that makes sense, it's hard to say how long this downturn is going to go on," he said. "Brazil is interesting; there's no doubt about it. It has potential. The real question is how soon we start seeing some of those successes."