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Interview

Renato Bertani, CEO, Barra Energia, Brazil

16.06.2014 / Energyboardroom

Renato Bertani, President of the World Petroleum Congress, sits down with EnergyBoardroom to discuss Barra Energia, of which he is also CEO, covering topics including risk spreading in Brazilian pre-salt and the pace of technological innovation in Brazil.

What is the new proposition that Barra Energia brings to the existing oil and gas paradigm in Brazil?

Barra Energia is funded by two American private equity funds, Riverstone and First Reserve, in addition to a number of other investors with smaller commitments. Riverstone and First Reserve committed 500 million USD each. All capital committed to us adds up to 1.2 billion USD.

We started in 2010, and so far we invested about 500 million USD. I think it is fair to say that we have been successful in building a portfolio in the pre-salt region of Brazil. These are perhaps the most exciting new oil promises in the world. It is an incredibly rich province that is still in its infancy.

That is the context. Barra Energia is a small company compared to the players that are involved in this area. We have been successful first of all because we have the required financial backing. We put together a very solid, experienced team of geologists, reservoir engineers, geophysicists that knows how to be selective in acquiring opportunities.

Selective is a key word here. We assessed over 20 opportunities before deciding to acquire two blocks: BS-4, and BMS-8. We acquired ten percent of BMS-8 from Shell, and ten percent from Shell and 20 percent from Chevron on BS-4.

After over one year of looking for opportunities and assessing many potential deals, we finally decided that these were the areas with the best potential and asked for the merits that would fit well within our strategy. And I think that the results so far confirmed that we had the right approach.

Keep in mind that we have been able to build this portfolio during a period without bid rounds. Our only options were to buy from other companies. We could not participate in bid rounds in order to build this portfolio. We plan to continue with the same strategy in which focusing is central. We do not want to spread all over, we have limits, and we are very well funded and do not have any liquidity problems whatsoever.

Out of 1.2 billion USD we spent roughly 500 million USD, so we still have lots of capability to carry on our investment plan. But it is not because there is availability that we are going to relax. We will continue extremely disciplined in terms of any future deals that we will incorporate in our portfolio.

This activity is intrinsically risky. Understanding the risk is crucial. In pre-salt, some say that there is no risk, or at least the risk is very low. Yes, certainly, it is an extraordinarily new oil province, but there are lots of uncertainties that companies operating in the province have to deal with – success is not certain when investing in pre-salt.

Indeed pre-salt challenges are manifold: very unusual reservoir, expensive wells, and logistical hurdles. How does a rookie company mitigate risk in this environment through your portfolio management?

The first thing is spreading the risk; do not put all your eggs in the same basket. Beyond that, it is essentially good technology and good understanding of the issues. You need a capable team that will be able to understand the issues. We need to start by understanding that the risk is there. We need to be prepared to eventually have results that are not as expected, because intrinsically there is risk.

But you mitigate that risk by understanding the issues that are related to your activity and the level of risk that you have to live with, and are able to spread and build a portfolio with sufficient diversification. Focus in a certain place, and within that area seek diversification and build together multiple opportunities, so that in the end, in the balance, you increase the chances of success.

In our portfolio, even though we are only talking about two blocks, deliberately what we needed and what we obtained was access to several opportunities in these two blocks. Today, Barra Energia has a field under development, a number of discoveries under appraisal – one of which is a huge discovery called Carcarra – and a number of other exploration opportunities where we may have other discoveries.

So right there we have a balanced portfolio, a combination of projects in different stages. Some are lower risk, some are higher risk, but it is the balance of the portfolio that creates the opportunity to be successful.

The ANP is organizing Brazil‘s 1st presalt licensing round. Can we expect bids from Barra Energia?

We are constantly studying opportunities, be that through bid rounds, farm-ins, or acquisitions. Our team is constantly assessing other data available in these areas, particularly in the pre-salt areas of Campos, Santos, and Espirito Santo, the three basins that are Barra Energia’s focus.

Not necessarily willwe acquire or bid on something, just because it is offered. It needs to make strategic and economic sense. We are studying Libra, and are studying for future bid rounds. Libra is coming in October, and then I think it is unlikely that we will have another bid round for the pre-salt next year. It is desirable, but it is an election year, which creates a level of complexity.

Could you speak to the set-up of this first pre-salt licensing round, primarily the Production Sharing Contracts and Petrobras’ operator obligation?

First of all, the new contract model that the government decided to adopt for the pre-salt has some innovative features. One of them is a sliding scale for sharing of profit oil based on oil prices and average well productivity. A number of these features have to be tested in real life as we move forward.

To give you the broad picture, the industry is prepared to work with Production Sharing Agreements, and I expect strong interest of companies around the world in the Libra bid round. The simple reason is that it is a huge discovery, even though there is a significant range of uncertainty.

We should not forget that it is a huge geologic structure, but only one well has been drilled so far. This well has great reservoir and very significant oil column, but it is still only one well in the whole area. And this well sits in one side of the structure, not in the center.

So the information from this well has to be extrapolated to the rest of the whole area where we expect that there may be oil. That indicates that there is a range of uncertainty in the size of the accumulation. Nevertheless, it is something very significant, and that is why I think we will see strong interest from oil companies around the world.

One of the features of the Production Sharing Agreements is that Petrobras by law will be the operator with a minimum of 30 percent participation. My honest view is that this is probably not in the best interest of Petrobras itself. It would be better if Petrobras has the option to become operator rather than the obligation.

Petrobras is an extraordinary company that is very capable – I do not have any doubts that they can do it. They have already demonstrated this: they produced over 300.000 bpd from pre-salt in June 2013.

The question is whether or not Petrobras eventually will have to participate in pre-salt acreage that is not priority. I am not talking about Libra, which, given the size of the discovery, has to be in the priorities. But in the future, for Petrobras and for the industry as a whole it would be better in my view if that obligation would not be there.

Regardless of that, we will see a lot of investment coming into the pre-salt. That is another comment I would like to make: after waiting for almost five years for a first bid round for pre-salt acreage, we should not have to wait again for several years after Libra. For the industry, for the country, for Petrobras and all other stakeholders it is crucial that we continue to have bid rounds on a regular basis, be it every year or every year and a half.

Talking about Petrobras as an extraordinary company that has developed the expertise to exploit these challenging fields – do you feel that the pace of technological development of Brazil’s oil & gas industry is high enough?

Certainly the achievements so far are extraordinary. Start with the very fact that it took wells that cost 150 to 200 million USD to discover the pre-salt. Someone, and that credit goes to Petrobras and their partners, decided to drill below the pre-salt layer and test for the possibility of the existence of a reservoir, which you do not find if you drill below the salty shallow waters offshore Brazil.

There was the vision that we should change the paradigms, and through good geosciences, Petrobras and their partners concluded that there could be high-quality reservoirs in deep waters not seen in shallow waters. That change in paradigm was what caused the company to discover the pre-salt.

Then, drilling through 2000 meters of salt, in some places with very high temperatures and pressures or with very high levels of CO2 and H2S associated with oil, poses serious challenges, also logistically. We are talking about wells that are 200-300 kilometers from the coast. All these challenges are being overcome. There is no question about the availability of the technology to continue drilling and producing the pre-salt.

Should we stop here? Definitely not. Continuing to invest in R&D on top of what is done already is a must. Certainly we could create a lot more value by optimizing drilling operations, so that we could drill faster, cheaper and safer, or by improving recovery factors so that we could extract, with the same number of wells, more oil from the reservoir.

There is always room for improvements. That is why having involvement of as many operators as we can is valuable. I am not questioning at all whether Petrobras is capable of doing it and developing the technology. They have proven that they can. I believe that more players and more operators will allow even more ideas to be tested, some of which will work out eventually.

That is my thesis: it is in the best interest of the country and of the industry that we have more operators involved.

You are also the first president of the World Petroleum Council to be elected from southern hemisphere. What is the significance of your appointment and what are the priorities on top of your agenda?

I have been participating in a number of events, not only in the congresses. The Petroleum Council organizes its main event, the World Petroleum Congress, every three years. But our goal is not only to organize a congress. Our goal is to discuss the key issues of our industry, promote the debate, and ensure the long-term sustainability of the industry.

The key issue here is sustainability. In order to convey our message and provoke this discussion, we have discussed and came up with certain sustainability principles that we think should be adopted by all stakeholders in order to ensure the long-term sustainability of our industry.

We split these principles in two groups. There are four principles that we think should be adopted by the regulators, and four principles that should be followed by the oil companies.

Let us start with the regulators. The first point is steady and fair and stable regulatory terms. We need to be sure that the terms offered to the industry, once established, are kept stable and allow for a fair compensation of the capital that comes in.

Secondly, access to acreage. That is a very broad concept, but it goes back to the need to have bid rounds. This is a very relevant topic for Brazil today, but it is applicable everywhere. I know of a number of countries where the industry does not have acreage to carry on an investment.

Thirdly, clear regulation on all HSE aspects, and transparent and rigorous enforcement. The rules need to be clear and transparent, and enforcement has to be transparent, following consistency in application, without distinction.

Fourthly, there must be a balanced approach to promoting the development of local industry, of goods and services. But this is very different from pure protectionism. Protectionism takes away the incentive for local companies to become globally competitive, and creating a local industry that is globally competitive is the only way in which everybody can benefit.

If you simply offer pure protectionism, then the local industry develops, but the costs tend to be higher and the quality not necessarily as good. Then companies are not competitive internationally. That is a very important feature: promoting local industry, which at the same time could be competitive on a global level.

These are crucial principles that we would like to see from any regulator. Stability of the rules is actually very good in many developing countries. In West Africa, almost all countries that adopted Production Sharing Agreements stick to the rules once they are established. And the other way around, I have seen repetitive changes of the rules in developed countries.

Now what are the principles that oil companies should adopt? Oil companies should work in a way that ensures remuneration of the capital, and the risk to which this capital is exposed. This might seem a very capitalist stance, but in essence, being profitable in a responsible manner is also the best way to be socially responsible. If a company is profitable, it can reinvest capital, and that is how we can create more jobs, more development, and more activity, which benefits everyone in the end.

Remunerating the capital and balancing risk is the first part. There is another side to that, which is that the oil companies need to ensure that they create compatible or proportional wealth to the community in which they operate. There has to be a proper balance between the profitability they generate and the amount of value they create for society. That happens in the form of taxes, royalties, creating jobs, interacting with local communities and respecting them.

The third principle is obvious: minimum impact and strive for a target of zero accidents.

The final, and perhaps the most important, point is ethics and transparency. These must be part of the business model. It is not just something that is done because it is required; it has to be part of the decision making.

A lot of capital is available in the world today. But capital is also becoming more and more rigorous in where it is going. The owners of the capital need to make sure that the management of the companies that are on the receiving end of their money adhere to the highest ethical standards. It is becoming a business factor: the industry wants to be ethical not only because it is the right thing to do, but also because it makes business sense.

These are the four main principles we are applying on both sides.

I served in the WPC for two terms as vice-president, and now as president. I cannot have a fourth term under our constitution. This is my last one, and I am fully focused on pushing these principles forward.

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

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