Question 1. Despite the discovery of massive reserves in the Pre-salt, oil production has been flat for the last four years. Why?

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2 Questions 1. Despite the discovery of massive reserves in the Pre-salt, oil production has been flat for the last four years. Why? Has the Pre-salt turned out to be a disappointment or are there other reasons why production is not increasing? 2. The participation of foreign oil companies in Brazil is rising. The Chinese companies are increasing their presence. Shell and Total bid for the Libra block in the pre-salt while American firms didn t even register. What explains these developments and what should we expect going forward in terms of international investment in Brazil s oil sector? 3. According to the 2013 EIA report, Brazil has the tenth largest shale gas resources in the world and held an unconventional bid round last year. What is the outlook for unconventionals in Brazil? What private players would be interested in developing these reserves? 4. We have seen an significant growth in LNG imports lately. What are the causes and impacts, and will Brazil continue to import LNG or become self-sufficient in gas? 5. There have been warnings that after the worst drought in 40 years, Brazil may see blackouts over the next year. Where are these problems stemming from and does the government have a plan to resolve them? 6. Fuel price caps have contributed to Petrobras weak profits and soaring debts. Do you expect the government to reverse or ease this policy? 7. Many analysts say current President Dilma Rousseff is likely to win re-election. Assuming that scenario bears out, would you expect any changes to energy policy? Will she become more pragmatic and address the problems, or double down and deepen current policies? 2

3 Question 1. Despite the discovery of massive reserves in the Pre-salt, oil production has been flat for the last four years. Why? Has the Pre-salt turned out to be a disappointment or are there other reasons why production is not increasing?

4 BRAZIL S OIL PRODUCTION IS STAGNATING SINCE 2010 WHY? Excess of optimism by Petrobras on future production targets Insufficient investment in fields currently in production (faster decline) Introduction and enforcement of new operational safety regulations Delays in the commissioning of new FPSO units

5 RECENT EVOLUTION OF OIL SECTOR IN BRAZIL: HIGH EXPECTATIONS AND FRUSTRATIONS Business Plan thousand barrils per day would represent more US$25 billions in revenue if exported Business Plan Source: Petrobras 5

6 RAPID PRODUCTION GROWTH FROM THE PRESALT COMPENSATES FOR DECLINE OF OTHER FIELDS Source: Petrobras 6

7 THE PRESALT PROVINCE Source: Petrobras 7

8 Question 2. The participation of foreign oil companies in Brazil is rising. The Chinese companies are increasing their presence. Shell and Total bid for the Libra block in the pre-salt while American firms didn t even register. What explains these developments and what should we expect going forward in terms of international investment in Brazil s oil sector?

9 PRIVATE BRAZILIAN AND FOREIGN COMPANIES ARE ALREADY PRODUCING A SIGNIFICANT AMOUNT OF OIL AND GAS IN BRAZIL Oil and Gas Production in Brazil by Company April 2014 Source: ANP 9

10 New players have entered the Brazilian Upstream since the Upstream Opening in 1999 Percentage of Exploratory Blocks awarded by Company/Consortium Source: Prysma elaboration with ANP data PRYSMA E&T CONSULTORES 10

11 Especially in the Presalt, new players will have an important share of the oil and gas production Blocks the Presalt s Santos Cluster with Exploration Concessions Source: Own elaboration with data from Petrobras & ANP PRYSMA E&T CONSULTORES 11

12 Question 3. According to the 2013 EIA report, Brazil has the tenth largest shale gas resources in the world and held an unconventional bid round last year. What is the outlook for unconventionals in Brazil? What private players would be interested in developing these reserves?

13 Large unconventional gas potential but still unproven Source: EIA, 2013 PRYSMA E&T CONSULTORES 13

14 Brazil s sedimentary basins are still relatively unexplored especially onshore Concessions 98% of area Production sharing 2% (Presalt blocks not yet under E&P Concenssion) Transfer of rights (or onerous assignment) PRYSMA E&T CONSULTORES to Petrobras 7 blocks in the Presalt 14 Source: ANP 38 sedimentary basins, of which 29 with potential for petroleum exploration representing over 7.5 million km² of sedimentary area 2/3 onshore / 1/3 offshore Only ~6% of this area is currently under E&P concessions ~450,000 km² under E&P concessions ~500 exploratory blocks Of these, only ~21,000 km² are in the development and production phase >400 fields 3 different regimes

15 After a gap of 5 years, there were 3 E&P Bid Rounds in 2013 Bid Round 11 May 2013 focusing on oil & gas new frontiers and marginal accumulation basins Bid Round 12 Oct focusing on onshore areas with natural gas potential, both conventional and unconventional, in both new frontier and mature basin 1 st Production Sharing Bid Round for the Presalt Nov to auction the very large prospect of Libra PRYSMA E&T CONSULTORES 15

16 Bid Round 12 for Onshore Acreage Mixed Results 240 exploratory blocks (areas in blue) offered in 13 sectors of 7 sedimentary basins, of which 5 New Frontier Basins and 2 Mature Basins. 21 companies were authorized to participate and 12 made successful offers 8 Brazilian and 4 foreign. Only 72 blocks were awarded in 5 Basins (no offers for Parecis and São Francisco) corresponding to an area of 47,428 km² Of these Petrobras acquired 49 blocks: 43 as operator and 6 as non operator Source: Own elaboration with ANP data PRYSMA E&T CONSULTORES 16

17 But onshore exploration and production is already ongoing in acreage awarded in previous Bid Rounds Solimões Basin Second largest gas producing basin in Brazil, but most gas is reinjected for lack of markets Difficult environment in the Amazon forest Parnaiba Basin 8 exploratory blocks awarded in Bid Round 7 Production reached 200 Mcf/d in 2014 Gas-to-wire Sergipe-Alagoas Mature basin with 55 active production fields 47 exploration blocks awarded in Bid Rounds Recôncavo Basin Mature basin with 86 active production fields 34 exploration blocks awarded in Bid Rounds 9, São Francisco Basin 30 exploration blocks awarded in Bid Rounds 7 and 10 6 operators: Petra Energia, Imetame, Orteng, Shell, Cisco and Cemes Petroleo Substantial discoveries of unconventional gas (tight) Source: Own elaboration with ANP data PRYSMA E&T CONSULTORES 17

18 These onshore areas are located in remote areas with little infrastructure and far from existing gas markets Lack of natural gas transportation infrastructure is the main barrier to the development of onshore gas in Brazil but gas-by-wire could be an options for remote gas resources PRYSMA E&T CONSULTORES 18

19 Question 4. We have seen an significant growth in LNG imports lately. What are the causes and impacts, and will Brazil continue to import LNG or become selfsufficient in gas?

20 Brazil has 3 LNG regasification plants Pecém (CE) Mcf/d Total LNG Import Capacity = 1.5 Bcf/d Salvador (BA) Mcf/d Natural Gas Supply in Brazil Baia de Guanabara (RJ) 2009 / 2012 / Mcf/d Source: Own elaboration PRYSMA E&T CONSULTORES 20

21 LNG is imported in Brazil mainly for supply flexibility reasons Power Sector Gas Demand LNG Imports Source: Own elaboration PRYSMA E&T CONSULTORES 21

22 Natural Gas Demand in Brazil High variability of the power sector natural gas demand requires supply flexibility which is not provided by domestic supply (associated with oil production) Source: Own elaboration with data from ANP, Abegas, MME, ONS PRYSMA E&T CONSULTORES 22

23 LNG Import Prices in Brazil Source: AliceWeb PRYSMA E&T CONSULTORES 23

24 The natural gas import bill has reached US$7 billion in 2013 Annual Expenses in Natural Gas Imports (both Bolivia and LNG) Source: ANP PRYSMA E&T CONSULTORES 24

25 Several other LNG regasification projects are under discussion Projeto Barcarena (PA) Pecém (CE) Salvador (BA) Projeto Barra do Riacho (ES) Projeto Porto do Açu (RJ) Baia de Guanabara (RJ) Projeto Paranaguá ou São Francisco do Sul (SC) Source: Own elaboration Projeto Rio Grande (RS) PRYSMA E&T CONSULTORES 25

26 LNG imports could be a midterm solution given the uncertainties of the other sources of natural gas supply Presalt natural gas production Pipeline imports from Bolivia Onshore gas production Reinjection rate? GOR? Current and projected pipelines to coast will transport up to 1.8 Bcf/d need to be expanded Lack of investments R/P ratio dropping fast (6 years at the end of 2011) Supply commitments with Argentina Can Bolivia supply both its export markets and its internal market? Resource dimension? Exploration technology repeatability Production costs Lack of pipeline infrastructure PRYSMA E&T CONSULTORES 26

27 From LNG importer to net LNG exporter in the long run? The IEA vision Source: IEA, WEO 2013 PRYSMA E&T CONSULTORES 27

28 Question 5. There have been warnings that after the worst drought in 40 years, Brazil may see blackouts over the next year. Where are these problems stemming from and does the government have a plan to resolve them?

29 %Long Term Average Worst drought in 40 years, or are there more structural problems? Monthly Inflows (% of Long-term Average Inflow) Source: PSR based on ONS data 29

30 Even with full dispatch of thermal plants since Oct 2012, reservoirs are emptying Evolution of hydro reservoirs stored energy (% max) All thermal plants dispatched base loaded Source: PSR based on ONS data 30

31 SIN s Stored Energy (%max) Heading to a rationing, as in 2001? Average hydro reservoirs stored energy (% of max) Source: PSR based on ONS data 31

32 Until last year, the Government was not planning for much increase in gas-fired thermal power capacity Official Projections for Power Generation Capacity Growth Source: EPE (2013) Of 62 GW of new capacity, just 5 GW is thermal New capacity will be mostly large hydro projects in the Amazon region and wind farms PRYSMA E&T CONSULTORES 32

33 Question 6. Fuel price caps have contributed to Petrobras weak profits and soaring debts. Do you expect the government to reverse or ease this policy?

34 AVERAGE BRAZIL OIL PRODUCTS PRICE vs. AVERAGE USGC OIL PRODUCTS PRICE Source: Petrobras 34

35 A NEW PATTERN OF OIL PRODUCTS PRICING IN BRAZIL? Source: Petrobras 35

36 PETROBRAS REVENUE LOSSES Estimated Accumulated Revenue Losses by Petrobras (for selling gasoline, diesel and LPG below international benchmark prices) Source: Own Elaboration 36

37 PRICE CONTROLS HAD STRONG FINANCIAL IMPACTS ON PETROBRAS 1 excludes corporate and elimination 2 adjusted according to average exchange rate Source: Petrobras 37

38 FINANCIAL CHALLENGES FOR PETROBRAS Rapid increase in net debt from US$ 31 billions in 2010 to US$ 95 billions in 2013 The debt level is jeopardizing the Petrobras investment grade rating Petrobras Investment in US$ billions Debt Index for Petrobras (Net debt / EBITDA) Largest CAPEX in the industry in 2012 Source: Petrobras 38

39 Question 7. Many analysts say current President Dilma Rousseff is likely to win re-election. Assuming that scenario bears out, would you expect any changes to energy policy? Will she become more pragmatic and address the problems, or double down and deepen current policies?

40 OUTLOOK FOR PETROBRAS AND BRAZIL S OIL PRODUCTION Field development plans indicate a 4.3 million bpd oil production in 2021 Annual upstream investments rise from $5bn in 2002 to $30bn in 2012 Projected Oil Production (Mbbl/D) based on contracts approved by ANP Transfer-of-Right Contract Concession Contracts (offshore non Presalt) Concession Contracts (Pre-salt) Concession Contracts onshore Source: ANP 40

41 OUTLOOK FOR PETROBRAS: THE ABILITY TO DELIVER WILL BE CRITICAL Source: Petrobras 41

42 THANK YOU! Sylvie D Apote PRYSMA E&T CONSULTORES sdapote@prysma-et.com Edmar Almeida FEDERAL UNIVERSITY OF RIO DE JANEIRO edmar@ie.ufrj.br