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Interview

Denis Palluat de Besset, Managing Director, Total, Brazil

28.01.2014 / Energyboardroom

Denis Palluat de Besset, Managing Director of Total Brazil, talks about the political and social significance of the oil and gas industry in Brazil, how to assure the Brazilian population that their natural resources are not being sold off to international powers merely because the industry is open to foreign-owned companies, and stresses the need for win-win solutions for everyone to market productivity at a high.

Total plans to invest USD 300 million in Brazil in 2014; yet, you yourself stated that this is a limited amount of outlay, in part caused by the late arrival of a rig to the Xerelete field, arriving only next year. Where will this money be focused?

Next year will be interesting for Total in Brazil, as steps will be taken to put the Xerelete field toward production. Whilst the field itself was found about a decade ago, and was initially only considered to be a post-salt discovery in water 2,400 meters deep with heavy oil, more recently it has been ascertained there is a pre-salt prospect lying underneath. Total will be seeking to discover the full potential of this field, and drill deeper to access the resources underneath.

The pre-salt element of this field may add substantial reserves, which would make Xerelete commercially highly attractive and at represent a great prize for the company.

Last year, Total took over the title of ‘operator’ of the Xerelete field in the Campos Basin from Petrobras and planned to move operations forward in 2013, though there have been delays on this project. How did Total put an end to these hold ups and to what extent will Total overhaul the working practices at the rig?

Unpredictable circumstances or events causing delays should almost be expected in this business; all one can do is anticipate where they might arise, and ensure work moves back on track as quickly as possible. With the operatorship having moved from Petrobras to Total (the partnership also including BP), allowing Petrobras to deploy capabilities elsewhere, Xerelete represents a useful means for Total to expand its presence here in Brazil. However, drilling a single well here in Brazil is difficult because of the cost associated with subletting a drilling rig—most are contracted for longer, three-year plus projects by an operator to drill a larger number of wells. Total was fortunate to obtain an agreement with Petrobras to use one of their rigs and with this agreement the vessel will start operations with Total following its current work with Petrobras.

Originally this well had been planned for September 2013; but its delay until January 2014 is no issue of significance. The reasons for this delay are not financial, or statutory reasons; it is a natural, unavoidable delay in this process, but operations will be progressing in the near future.

Underneath the Xerelete structure, you mentioned a pre-salt structure has been identified. Has there been any further effort to explore this resource, and what will be the technical challenges of accessing it?

Total originally discovered Xerelete, which seemed a limited volume and a relatively unexciting find until Petrobras, drilling deeper discovered the pre-salt reservoirs in the Campos and Santos Basin. Our geologists, further analyzing this result identified a prospect beneath that which had already been found. This looked like a positive prospect with a great chance of finding oil; so we made a number of additional studies, consulted with our partners and finally decided that it was worth the money to fully investigate this resource by drilling.

It is a positive result to discover significant potential reserves like this and Total very much considers this to be a marker signifying our substantially increased presence in Brazil.

Whilst your presence has certainly increased, Total’s existence in Brazil, with no oil output yet, really does not reflect the importance of the company on the World Energy map. How do you explain this situation and what are the key strategic axes taken to solidify the company’s position in the country?

Three or four years ago with the discovery of pre-salt resources in Brazil, Total was effectively non-existent in this country. However, the possibilities created by the pre-salt fields meant that Total decided to refocus on this country, building up its presence. This strategic decision has been implemented over the last few years. Firstly, Total bought 20 percent of the rights to block BM-S-54 “Gato de Mato” from Shell; secondly, Total took over the operatorship of Xerelete from Petrobras which was another strategic decision aimed at expanding our presence, and involved the arrival of 30-40 professionals to Brazil to prepare for subsequent operations. Thirdly, we started to invest in greater exploration, and we realized this tangibly through our investments in the 11th round, acquiring ten new concessions. Finally, the icing on the cake was entering into the consortium acting on the opportunity posed by the Libra field.

Five years ago it was true to say there was a gap between the importance of Brazil and Total’s representation here; but now however; Total’s efforts to secure a significant chunk of this market at the moment have closed this margin entirely. We have invested a great deal and Total will continue to grow.

In 2012, Total had a single block to its name in Brazil. Now it has 13, including ten exploration licenses gained in the 11th bidding round. What prospects do these new blocks have? Should we see the company continuing to invest on exploration licenses in the coming years?

The investment in these areas of search has been very positive. They are not concentrated in one basin, but are in areas from Foz de Amazonas, Barreirinhas and Ceará to Espirito Santo. This reduces risk by spreading our investment across areas with prospects for discoveries. Total has spread across all of Brazil risks associated with exploration and geological unpredictability. For example Foz de Amazonas, Barreirinhas and Ceará are all areas with equatorial margin prospects, whereas Espirito Santo is a classic pre-salt and post salt exploration area.

We have negotiated an agreement with Petrobras to enter into a prospect in the south on the Uruguayan border. Whilst this is still subject to approval by the authorities, following this approval, Total will have options from the very North of Brazil to the very South, and will have spread its risks by doing so.

Total joined the Libra consortium late over concerns that: “the president and all directors [of PPSA] must be people who know this type of work … they cannot be people who will handle [the Libra project] in a political way “. What finally overcame Total’s concerns and gave you confidence that the Libra project would not be politically compromised?

Right now, I am confident that those companies who are absent from Libra will be the ones who most regret the outcome of the Libra auction. Total is very happy to be in the Libra consortium and indeed all parties involved seem to be satisfied with arrangements. Libra became a possibility for Total because the Production Sharing Contract final version, published in August this year, showed significant improvements on earlier versions—sufficiently so to make this contract attractive.

Changes in the governance of the project too, helped assuage any concerns we had. When we saw the persons elected to become directors of PPSA, we realized that the government was not playing a political game, but was eager to promote the early and effective development of the Libra resource. This was the first signal the government clearly gave as to its intent in this regard. The political risks that had been the subject of much discussion seemed far smaller following this development.

With Petrobras, Shell and Total working together, a deepwater champion has been created. The level of experience and ability within this consortium is astounding and furthermore, the power the Chinese bring to the consortium too, means that Libra will generate significant kudos for all involved parties.

Whilst Libra was being awarded in auction, protestors in the street voiced concerns about Brazil’s resources being sold. How do IOCs become involved and provide solutions for the benefit of the Brazilian oil and gas market without Brazilians feeling they have cause to fear selling of the family silver?

IOCs undoubtedly contribute to the Brazilian economy, firstly through royalties and taxes that will go directly to the government. Over thirty years, a trillion BRL will go to the Brazilian federal, state and local governments providing much needed funds for health, education and other public services. Secondly, there is a direct contribution, as most of Libra’s production units will be built here in Brazil, using Brazilian engineers, consultants, contractors and shipyards.

So, the contribution from the IOCs to Brazil is a significant one. The Brazilian political system has nothing to fear from our presence here.

One of the solutions the Brazilian government has undertaken to ensure that local economies benefit as widely as possible is Local Content Requirements. How has local content affected Total’s business and what would be a balanced solution that would offer satisfaction to both parties?

With time, there will be increasing capacity within the Brazilian production chain. The demand is there; Brazilian capacity to satisfy this demand will grow accordingly. I am confident that current investment in shipyards, building capacities and services will grow.

However, one of Total’s concerns, not with regard to Libra, but as an IOC operating in Brasil is about local content requirements. These commitments cannot be allowed to kill the project. At the moment, LCR is a punitive system. Those companies not achieving the level of LCR they committed to at the point of bidding face fines up to 60 percent of the value of what they will not have achieved in terms of Local Content commitment. This has the potential to be enormous; it can kill a project and means that companies may not engage with projects, afraid of the risks doing so would entail.

An incentive system is wiser, encouraging investment in the areas of the sectors, which are providing for the needs of companies such as Total. This would make the system more beneficial for the contractors, the whole supply chain and the government, rather than simply hazardous to investment.

Solutions that bring win-win situations to all parties should be highlighted whenever possible.

 

To read more interviews and articles on Brazil, and to download the latest free report on the country, click here.

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