Critical times for the future of Brazil’s upstream industry...Brazil’s offshore resources are cost competitive against other areas Unconventionals have a competitive edge at low

Critical times for the future of Brazil’s upstream industry May 13, 2016 Horacio Cuenca Upstream Research Director, Latin America

Trusted commercial intelligence www.woodmac.com

2

In the last decade, Brazil has been the most prolific offshore deepwater basin 168 discoveries representing 38 billion barrels of oil out of the 77 discovered globally

Source: Wood Mackenzie Exploration Service

5

0

25

20

15

10

2011 2010 2009 2008 2007 2006

Billion bbl

2015 2014 2013 2012

Rest of the World Brazil

100

80

60

40

20

0

12

25

11

Moz

ambi

que

Bra

zil

7

Mex

ico

8

Ango

la

8

US

GoM

Res

t of t

he W

orld

46

Nig

eria

Billon boe

Conventional oil discoveries Conventional YTF – Deep Water Basins


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However, the world has changed and operators are responding drastically to the prevailing oil price

Source: Wood Mackenzie. Forecast of trend for development costs based on Wood Mackenzie database

Budget cuts, job reductions, project deferrals, efficiencies and supply chain wins

0

100

200

300

400

500

600

700

800

Cap

ex In

vest

men

t (U

S$ B

illio

n)

Onstream Under DevelopmentProbable Development yet-to-drill North AmericaExploration spend

US$220 bn drop in annual development capex L48: uncons

flexibility: recovers 2017 with firming oil price?

Conventional FIDs: • 6 in 2015 • similar in 2016?

Exploration spend halves to US$45 bn 2016-18 – consequences?

Will Exploration spend pick up towards 2020?

Global upstream spend (US$ bn)

Upstream investment to fall by 40% from

peak Some operators have given up deepwater exploration, e.g. Marathon, ConocoPhillips

$400bn

$660bn

Apresentador

Notas de apresentação

Our operators survey says: Drilling rates: most downward pressure evident - Onshore US (-30%), global d/w (-22%), shallow offshore (-17%) Eng, Proc, Instal, Constr: lower margin, less scope to fall - 5%-15% deflation Deflation will vary considerably by - Resource theme (tight oil market loose vs GoM HPHT tight; oil sands costs more ‘internalised’ so less scope) Region: some tight markets e.g. Middle East, Azerbaijan (e.g. Shah Deniz); fat to come out Oz, North Sea How much is structural how much cyclical? Depends on oil price and depends how long prices stay low Supply pare back will mean a shortage in a recovering market Consolidation will shift power to suppliers Potential sustainable cuts? 5% MAYBE 10% Not enough to change new project break evens below $80-90/bbl So – narrow window to lock in contracts? WM data from Q4 2014 for 2016 spend vs the current ‘live’ database - dropped (l48 coverage only) 63 billion (halved). And from 2016 – 2020, we’ve dropped from a scarcely credible $662 billion to $517 billion (down $146 billion or 26%). 2016 development expenditure has halved relative to our 2014 estimate of US$133 billion? will be the first time since the late '80s that global upstream spending will decline for two consecutive years. Between 2015 and 2017 – lost more than US$200 billion in onshore US and will have produced a billion barrels less than would have been produced (mainly oil). US$80 for oil + gas. 1 billion barrels of just oil – 15 1mmbbl/d, 16 1.5 mmbbl/d 17 2mmbbl/d. SRMC – US$10-20/bbl opex Hess cut 40% Continental 50%, Noble 50%


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Deepwater developments have been hit hardest, with 16 Bboe in investments postponed

Deferred reserves (Bboe) by theme

10

15

20

25

Africa Europe AsiaPacific

Americas

Q3 2014 Q4 2015C

apex

per

boe

-6%

-6%

-21%

-14%

Changes in Capex/boe (Q3 2014 v Q4 2015)

Costs are clearly down in all regions but Deepwater has remained “sticky”

0

2

4

6

8

10

12

14

16

18

Deepwater Oil Sands

Jun-15 Dec-15

Com

mer

cial

rese

rves

(Bbo

e)

+18%

-27%

+50%

+135%

Apresentador


The production impact of these deferments is material in a global context. In the June update we estimated that delayed projects accounted for around 1 million b/d of liquids by 2021, rising to just under 2 million b/d by 2025. With more deepwater oil projects being pushed back, the impact six months later is significantly greater – by 2021 deferred volumes are at 1.5 million b/d, rising sharply to 2.9 million b/d by 2025. FIDs on many of these projects have been pushed back to 2017 or beyond, with first production currently targeted between 2020 and 2023. But against a backdrop of overwhelming corporate pressure to free-up capital and reduce future spend - to the detriment of production growth - there is considerable scope for this wall of output to get pushed back further if prices do not recover and/or costs do not fall enough. Drop in US uncons? Cost deflation: up to 30% in 2015/16 Varies across sectors (L48 vs GoM HPHT) Varies across region (North Sea vs M East) Structural versus cyclical?


5

0

20

40

60

80

100

120

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Bre

akev

en B

rent

Pric

e N

PV,1

5 (U

S$/b

bl)

Capex as a % of total investment in discretionary projects

Conventional Deepwater ex Brazil LNGDeepwater Brazil Tight Oil at NPV10 Unconventional Gas at NPV10

Resource cost curve: Breakeven Brent Price versus % investment in discretionary projects

Brazil’s offshore resources are cost competitive against other areas

Unconventionals have a competitive edge at low prices; LNG/deepwater challenged

Source: Wood Mackenzie Q3 2015 dataset. % of investment in discretionary projects in each resource theme for the 2015-2030 period. NA onshore breakeven calculated using our base-case gas prices (US$3.75/mmbtu long-term real); excludes dry gas plays. Capital Spend is the net investment in probable developments and yet-to-drill wells onshore North America (nominal terms). It does not include investment in fields which are already onstream and newfield developments that fall under tax ring fences which are already onstream, with the exception of future expansions at Tengiz, Kashagan, Karachaganak, Lula, Shah Deniz, South Iototan, Haute Mer Zone D, ACG and Claire.

Apresentador


What resource themes should companies be thinking about if they want to shape a portfolio that works at both low and high prices? Opting for the lowest cost of supply will be a key success factor. A big area of focus for our upstream research teams recently has been to develop cost curves to better understand resource theme competitive positioning. This is unique to Wood Mackenzie, leveraging our asst level data. Here we show cost curves for pre-FID developments in our database. There are three key takeaways: Conventional, deep water excluding Brazil and LNG are economically challenged at low oil prices; more than 80% of projects need >$60/bbl LT to make a return of 15% There are big regional differences within each resource theme. Brazil has some of the most competitive breakeven prices globally, underpinned by the pre-salt play. The deep water curve steepens without this investment hotspot Unconventionals (tight oil and unconv gas) have a much flatter cost curve. About 50% of the investment in our database works at US$60/bbl or below under a 10% discount rate. The main takeway is that unconventionals has a competitive edge over other resource themes at low prices.

Trusted commercial intelligence © Wood Mackenzie

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….but the country has been challenged in attracting non-Petrobras investment, even in periods of high-oil price Although open since 1998, Brazil’s upstream continues to be one of the most highly concentrated

Number of Active Companies

% o

f Cou

ntry

Res

erve

s

Con

trol

led

by T

op P

laye

r

20% reserves owned by 62 others

Industry Concentration (% of country’s reserves owned by largest player) and Number of Players

2P Reserves (Bboe)

60 40 2

Source: Wood Mackenzie Upstream Data Tool. Excludes Russia & CIS, Rest of Europe and North America

7663

US

GoM

26

UK

13

Ango

la

Now

ay

Nig

eria

Bra

zil

Active Deep Water Operators

15

8821158

Nig

eria

UK

Nor

way

140

Bra

zil

US

GoM

Ango

la

40

Exploration Wells Drilled Past 5 years

80% reserves owned by

one company


7

From a fiscal perspective, REPETRO sustains the competitiveness of the concession regime Without REPETRO Brazil will stop been attractive in terms of investor returns

Deep Water Fiscal Regime Competitiveness

Note: NPV(10%) per bbl to the investor of developing a 660 mmbbl deep water oil field under each fiscal regime. No exploration risk included.

-10 -5 0 5 10 15 20

UKUS

MozambiqueCanadaNorwayNigeriaAngola

Brazil Concession With RepetroBrazil Concession Without Repetro

Brazil PSC With RepetroBrazil PSC Without Repetro

Net Present Value (USD per barrel)

Barrel at USD 75 Barrel at USD 55


8

Between 2010-2030, 29.5 billion barrels are economic at US$75/bbl with REPETRO, reducing to 17.8 billion barrels without

Break-Even Oil Price Estimate (10%) at FID date for Fields Onstream 2010-2030

REPETRO has a significant impact on economics at oil prices between US$50 – US$80/bbl Sa

pinh

oa

Lula

-Irac

ema

Ron

cado

r

Buzi

os

Pere

grin

o

Car

cara

Berb

igao

Suru

ru

Libr

a

BM-C

-33

Iara

Ent

orno

Ju

pite

r_TR

0 10,000 20,000 30,000 0

20

40

60

80

100

US$

/bbl

Recoverable Reserves, mmboe

Breakeven with REPETRO, $/bbl

Incremental Breakeven No REPETRO, $/bbl

17.8 29.5


9

Governments are adjusting their terms to remain competitive after the oil price decline Several were already under study due to challenging high technical costs Others change automatically…


10

Some countries have remained attractive and seen successful licensing round results In spite of the depressed market, some countries continue to attract investment

Ireland 2016 Record bids, attracted 4 IOCs

Measures adopted : no drilling

commitment, fiscal stability offered

Canada 2015 C$1.2B in work commitments,

9 companies participated

Measures adopted: longer analysis time prior to bidding, new

royalty regime

Mexico 2015 Increased participation in each round, high

interest levels from Asian companies

Measures adopted: changes in deductibility of costs, reasonable minimum bids, larger blocks,

revised royalty rates


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Local Content requirements will impact competitiveness and must be understood within the limits of the domestic supply chain

CAPEX Forecast by Component US$MM Local Content Requirements US$MM

Domestic Supply Chain Capacity

Ups

trea

m

Dev

elop

men

t Pro

ject

s


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The information upon which this report is based comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.

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Critical times for the future of Brazil’s upstream industry...Brazil’s offshore resources are cost competitive against other areas Unconventionals have a competitive edge at low