Subsea 7 ready for next phase at troubled Brazil project -BG

The first of four giant riser systems that engineering group Subsea 7 is building for Brazilian offshore oil fields was ready to sail on Friday, energy firm BG said, a relief for Subsea 7 after big, costly delays to the project.

Subsea 7 warned last month it was suffering a series of issues at the $1 billion ultradeep Guará-Lula project, resulting in a cost blowout and a six-month delay in the offshore phase of the contract for the riser systems - subsea piping to carry oil.

"The first of the four buoyancy-supported risers was due to sail this morning," said Chris Finlayson, chief executive of BG, one of the partners in the Guara and Lula fields operated by Petrobras.

"It will then take around three weeks to tether that in place, at which point the steel catenary risers can start to be installed," Finlayson said.

Subsea 7 declined to comment.

It had predicted last month that the first of four riser systems would sail in mid-July, conditions permitting. The engineering company is assembling the systems in Brazil, where they are then loaded for transport offshore.

Vard falls into the red

Offshore shipbuilder Vard has reported a loss of NOK44m ($7.2m) in the second quarter 2013, down from a profit of NOK278m in the same period last year.


The first half earnings stood at NOK136m, a 75% drop on 2012's NOK548m. Cashflow has also tumbled in the first half from NOK1bn in 2012 to a negative NOK277m in 2013. Cash and cash equivalents have fallen to NOK2bn on 30 June this year, down from NOK3.3bn on the same date in 2012.

Second quarter revenues at Vard have fallen 11.7% year on year to NOK2.9bn, EBITDA was also down 73% to NOK121m for the quarter from NOK460m in Q2 2012.

While the second quarter saw the delivery of eight vessels, contracts were secured for just three, with no orders signed for the group's Brazilian and Vietnamese yards. The group's orderbook stands at 41 vessels as at 30 June 2013, with a total value of NOK13bn.

Vard's Brazilian yard, Vard Niterói, continues to suffer from high personnel turnover, delays, budget overruns and a dependency on outsourced hull construction. The company expects that the overload situation at the yard will be reduced from the fourth quarter of this year as a result of mitigating actions currently underway.

Vard Promar, the group's other Brazilian yard, has commenced operations on schedule, cutting its first steel in June 2013. Construction of the yard is expected to be completed in the third quarter of this year.

The problems in Brazil are isolated from the rest of the group, with Romania enjoying a high workload and Norway delivering several projects. Utilisation at Vietnam is suffering however, as the yard recently delivered the penultimate vessel in its orderbook.

Looking foward the company is upbeat about new contract potential for the second half of the year, expecting fewer orders for higher value vessels. A focus will be put on securing new orders for the Vietnam yard, as well as managing the high workload in Romania
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Suez Wins Water-Supply Contract for Oil Vessels Off Brazil Coast

Suez Environnement (SEV), the second-largest water company in Europe, won a supply contract for vessels involved in offshore oil production in Brazil.

Degremont, Suez’s water-management subsidiary, was awarded an engineering and procurement contract for four water-supply units for Keppel FELS Brasil and its affiliates Lindel Private Ltd. and Estaleiro BrasFELS Ltda.

The water-supply units, two of them seawater desalination, will equip two floating production, storage and offloading or FPSOs vessels ordered by Tupi BV, a subsidiary of state-owned Petrobras Brasileiro SA, for offshore oil production in Brazil. The other two are sulphate removal units that treat seawater to make it suitable for water injection, helping avoid clogging rock reservoirs and contributing to enhanced oil recovery, Suez said today in a statement. No contract terms were disclosed.

Following the discovery of ultra-deep reservoirs 300 kilometers off shore, Brazil will become the sixth-largest oil producer by 2020, said Remi Lantier, chief executive officer of Degremont. With the contract, “Degremont proves its capability to accompany Petrobras in its needs for innovative water solutions for upstream oil and gas production.”

Brazil –tender documents released for 1st pre-salt licensing round

On 9 July, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) of Brazil published the initial tender protocol and draft production sharing contract for its first licensing round for the vast pre-salt reserves in the country’s Santos basin, which will be auctioned on 21 October in Rio de Janeiro. This auction follows the success of the 11th licensing round of oil and gas rights in May and continues Brazil’s ambitious licensing programme, with an auction planned for unconventional oil and gas rights, including shale, in November, and another round for marginal fields planned for February 2014.

However, only the pre-salt round will award rights under production sharing agreements rather than concession contracts. The pre-salt area hit the headlines with the Lula (formerly Tupi) discovery in 2006. This 8 to 12 billion barrel field opened up a new petroleum province that is estimated to contain between 70 and 100 billion barrels in ultra deep water offshore Brazil.

This discovery provoked a national debate about how these reserves should be exploited, which resulted in the enactment in 2010 of a production sharing regime for pre-salt and strategic areas, as defined by the government, as an alternative to the concession regime which will continue to be used elsewhere. It also sparked a prolonged tussle between different states and municipalities regarding the distribution of production revenues. This regulatory uncertainty prevented any licensing from taking place between 2008 and 2013, but seems to have been resolved by new legislation allowing non-producing states a greater share in oil revenues. This has paved the way for the resumption of licensing and this first auction of pre-saltrights, which will cover an area known as “Libra” with estimated reserves of 12 bn barrels.

Access to such huge reserves will not come cheaply, with the Brazilian government demanding a signature bonus of 15 billion reais (£4.5 billion) from the winning consortium. By way of comparison, the total of the signature bonuses for the 142 blocks awarded in the 11th licensing round was 2.8 billion reais (£833 million). Even bidding is expensive, with each bidding company required to pay a participation fee of R$2,067,400 (£615,000), which will give them access to the relevant data packages.

Bidding

The tender protocol for the first licensing round sets out pre-qualification requirements, bid procedures and the main commercial terms of the production sharing contracts on offer, with pre-qualification documents to be submitted by 9 September 2013. Interested companies are required to pre-qualify and must provide evidence that they hold the requisite technical and financial capabilities. Pre-qualified companies may bid individually or in consortia of up to five members, with at least one member satisfying the highest levels of technical and financial criteria (“Level A”). The ANP has attempted to simplify the process for companies which have recently been through the licensing process, so that companies who qualified as Operator A or B for the 11th licensing round may request that the ANP refer to the documents previously submitted.

Petrobras, the state-controlled oil company, may decide to enter the auction individually or as part of a specific consortium established before the bidding takes place. In any case, it is a requirement of the pre-salt legislation that Petrobras becomes operator, and acquires a minimum 30% interest in any winning consortium. It will also be required to pay its relevant proportion of the signature bonus.

Production Sharing

Under a production sharing regime, private companies bear exploration and development risks and only recover their costs if they make and develop commercial discoveries. When production commences, those companies are reimbursed for expenditures from a percentage of the revenue generated by oil sales (cost oil). For this round, the cost oil percentage is subject to a maximum of 50% of the total production value for the first two years and 30% for all years thereafter.

The remainder of the production (profit oil) is then divided between the private companies and the state. Under the Brazilian production sharing agreement the split of profit oil will vary according to (1) the price per barrel and (2) the average daily production per well, subject to a minimum government share of 41.65%. Wells suffering from technical and operational issues that cause them to fall below the average will not be included in the calculation. For the purpose of bidding, companies will indicate the percentage of profit oil they are offering on the basis of an oil price of US$100.01 to US$120 per barrel and an average daily production of between 10,001 bpd and 12,000 bpd. The winning bidder will be the one which offers the greatest percentage of profit oil to the government. In the event of a tie, the joint highest bidders will be invited to submit a further bid. If they are still tied, the winner will be selected at random.

The production sharing agreement will have a term of 35 years, with an exploration phase of four years and a development and production stage of up to 31 years. Bidders are required to source at least 37% of goods and services in Libra’s exploration from local sources (known as “local content”), with that figure rising to 55% during the production phase. Local content commitments have been a feature of every licensing round since the seventh round in 2006 and have been one of the criteria for determining the winning bids. For the pre-salt auction the local content percentages are fixed and not a bidding criteria, although the required percentages are broadly in line with those levels bid for offshore acreage in the last licensing round. This is important to bidders because prices for most oil and gas supplies manufactured in Brazil remain considerably higher than the equivalent produced internationally.

The announcement of this round has been anticipated for some time and a number of details have been released over recent weeks. The auction of the pre-salt rights is expected to prove prohibitively expensive for smaller companies but should attract the sector’s major players, including a number of Asian national oil companies, which are likely to be comfortable with a non-operator role alongside Petrobras, and many of which qualified for the 11th round with Operator A status but chose not to bid in that round. In any case, the acreage on offer is considered highly attractive and the bid round is expected to be competitive. New pre-salt bidding should also trigger an acceleration in oil and gas investment in this important region, and, in the medium term, help Brazil to sustain strong production growth.

SBM announces FPSOs contracts

SBM announces FPSOs contracts with a consortium comprised of Petrobras (65%), BG Brasil - BG Group (25%), and Petrogal - Galp (10%). of Lula field.


SBM Offshore announced today (15 July) that contracts have been executed with BM-S-11 subsidiary Tupi BV on 12 July 2013 for the twenty-year charter and operation of the two (2) FPSOs Cidade de Maricà andCidade de Saquarema.

Both FPSOs are destined for the Lula field in the pre-salt province offshore Brazil. BM-S-11 block is under concession to a consortium comprised of Petrobras (65%), BG Brasil - BG Group (25%), and Petrogal - Galp (10%).

The FPSOs will be owned and operated by a Joint Venture owned by affiliated companies of SBM Offshore, Mitsubishi Corporation, Nippon Yusen Kabushiki Kaisha, and Queiroz Galvão Óleo e Gás S.A. in which SBM Offshore shareholding will be 56%.

SBM Offshore is in charge of the construction. The two FPSOs will be direct copies of the blueprint for FPSOCidade de Ilhabela, which is scheduled to launch next year. In addition, Cidade de Maricà and Cidade de Saquarema will also benefit from the technological expertise and experience that the Company acquired during the successful completion of FPSO Cidade de Paraty - the first of four state-of-the-art, pre-salt FPSOs to start production offshore Brazil.

Planned delivery for FPSOs Cidade de Maricà and Cidade de Saquarema is expected respectively by end 2015 and early 2016.

The total Contract Value for which the Joint Venture company owned by SBM Offshore and its partners will acquire the two FPSOs is approximately US$ 3.5 Billion.

Technip to provide flexible pipes for Iracema Sul field in Brazil

France-based engineering and construction firm Technip has secured a contract from Petrobras to deliver flexible pipes for the development of Iracema Sul field, which is situated in the Santos Basin pre-salt area, Brazil, at a water depth of up to 2,500m.

The value of the contract is estimated to be around EUR500m.

Under the contract, Technip will supply almost 250km of flexible pipes for oil production, gas lift, water and gas injection, as well as related equipment for the pre-salt area to be installed on the floating production storage and offloading unit Cidade de Mangaratiba.

The highly technological flexible pipes have been designed to meet Petrobras' requested service life. Gas injection pipes are designed for high internal pressure, using the Teta profile developed by Technip's R&D team.

Technip's operating center in Brazil will execute the engineering and project management.

The flexible pipes will be fabricated at the company's existing manufacturing plant in Vitória, while some specifications also being produced at the new manufacturing plant at Açu, Brazil.

Technip is expected to carry out first delivery in the first half of 2014.

Brazil to require shale probes as part of onshore gas licensing round

Brazil will require oil and gas companies to test the shale gas potential at a number of onshore exploration blocks that it is offering as part of its 12th licensing round, the country's energy regulator said Tuesday.

Brazil's 12th Bidding Round at the end of October will offer onshore sedimentary basins of Parana, Parecis, Parnaiba, Reconcavo, Acre and Sao Francisco, which Brazil's National Agency of Petroleum, Natural Gas and Biofuels (ANP) believes hold significant reserves of both conventional and unconventional gas.

While the focus of exploration will likely be for conventional gas deposits, the government is keen to start evaluating the shale gas potential of the blocks, ANP head Magda Chambriard said.


Winning bidders in the round will be required to drill into shale source rocks in some of the basins as part of work commitments on the acreage Chambriard said. The well results must then be submitted to ANP for review.

"If the analysis is good then they can go ahead and develop the shale, if it's not, we will [at least] have good information of the shale potential," Chambriard told reporters in London.

Brazil, which produces more than 80% of its power from hydroelectric dams, is looking to generate more from gas-fired plants to avoid outages during droughts and to produce more gas domestically to cut its dependency on imports of LNG.

The final list of blocks for the 12th round has yet to be announced, but more 250 blocks will be offered, covering an area of 168,348 sq km, according to local reports.

Brazil has surveyed several prospective shale basins, with four included in the 12th round -- Parnaiba, Parecis, Reconcavo and Sao Francisco -- expected to hold a combined 288 Tcf of potential shale gas, Chambriard told an investor briefing in London.

The US Energy Information Administration has also estimated that Brazil's Parana basin holds a further 226 Tcf of technically recoverable reserves.

Chambriard said the estimates represent only preliminary figures based on an analogue model of rocks found in the US's prolific Barnet Shale play.

Aker win Brazil contracts

Offshore staff

FORNEBU, Norway – Repsol Sinopec Brazil has contracted Managed Pressure Operations (MPO) to provide managed pressure drilling (MPD) systems and riser gas handling services.

The three-year contract, with options for a further two years, involves use of the equipment for an ultra-deepwater operation in the Campos basin offshore Brazil.

Charles Orbell, head of MPO, which is part of Aker Solutions' drilling technologies business, said the program would “demonstrate the unique capabilities of our riser gas handling safety system and introduce the first deepwater application of our riser drilling device into an offshore MPD system below the tensioner on a rig".

The riser gas handling system helps control wellbore fluids during offshore oil and gas drilling. It detects an influx of gas into a drilling riser and diverts the gas to prevent a blowout.

The riser drilling device seals the area around the drill pipe during drilling operations. Integrating a riser drilling device with a riser gas handling system enables MPD drilling operations

Subsea 7 awarded contracts for three new-build PLSVs

 Subsea 7

Subsea 7 announced the award of three contracts from Petrobras with a combined value (at the time of contract signature) of approximately US$1.6 billion for the construction and operation of three new-build flexible pipe-lay support vessels (PLSVs).

The work scope of each of these 5 year contracts is similar to that of the PLSVs which Subsea 7 currently operates offshore Brazil, comprising project management, engineering and installation of flowlines, umbilicals and equipment supplied by Petrobras.

The three new PLSVs are of similar design to the Seven Waves, and will be constructed in Holland at the IHC Merwede shipyard. The vessels are scheduled to be delivered in Q3 2016, Q4 2016 and Q2 2017 respectively. They are designed for operation in water depths of up to 3,000 metres, and will be equipped with a pipe-lay system for installing flexible flowlines and umbilicals, including a Lay System tower with 550 tonnes top tension capability, twin underdeck baskets capable of storing up to 4,000 tonnes of flexible flowlines and two state of the art ROVs. The total cost of the three vessels, including inventories, commissioning and mobilization to Brazil, is approximately US$950 million.

Subsea 7 CEO, Jean Cahuzac said: “We are pleased with this award which further strengthens our presence in this key deep-water territory. Based on our experience with the construction of the Seven Waves, which is progressing well, we are confident that these three vessels will be delivered on time and in line with our cost estimates. We are comfortable with the commercial model, the risk profile, and the expected financial return of these contracts.”

Subsea 7 announced the award of three contracts from Petrobras with a combined value (at the time of contract signature) of approximately US$1.6 billion for the construction and operation of three new-build flexible pipe-lay support vessels (PLSVs). The work scope of each of these 5 year contracts is similar to that of the PLSVs which Subsea 7 currently operates offshore Brazil, comprising project management, engineering and installation of flowlines, umbilicals and equipment supplied by Petrobras.

The three new PLSVs are of similar design to the Seven Waves, and will be constructed in Holland at the IHC Merwede shipyard. The vessels are scheduled to be delivered in Q3 2016, Q4 2016 and Q2 2017 respectively. They are designed for operation in water depths of up to 3,000 metres, and will be equipped with a pipe-lay system for installing flexible flowlines and umbilicals, including a Lay System tower with 550 tonnes top tension capability, twin underdeck baskets capable of storing up to 4,000 tonnes of flexible flowlines and two state of the art ROVs. The total cost of the three vessels, including inventories, commissioning and mobilization to Brazil, is approximately US$950 million.

Subsea 7 CEO, Jean Cahuzac said: “We are pleased with this award which further strengthens our presence in this key deep-water territory. Based on our experience with the construction of the Seven Waves, which is progressing well, we are confident that these three vessels will be delivered on time and in line with our cost estimates. We are comfortable with the commercial model, the risk profile, and the expected financial return of these contracts.”

Petrobras' Brazil stranglehold saps oil services sector

LONDON, June 27 (Reuters) - The scale of Brazil's offshore oil reserves should be bringing a bonanza to service and equipment companies. Instead, dominant national company Petrobras' negotiating tactics and government demands are combining to squeeze industry margins.

Oil service companies - suppliers of everything from rigs to teams of engineers - cite issues in Brazil for contributing to a spate of earnings disappointments. The trend continued on Thursday as Subsea 7 warned it will miss its 2013 profit forecast due to cost overruns on its Brazil project.

"Certainly Brazil for many players this year has been softer than they had expected," Glynn Williams, partner at oil services private equity fund Epi-V, told Reuters.

There are unique difficulties of doing business in Brazil, Subsea 7 Chief Executive Jean Cahuzac said in explaining cost increases of between $250 million and $300 million at its Guará-Lula project, offshore Brazil.

"It is partly due to the project, but to a great extent it is due to the Brazilian environment," he said. "It's more difficult to work in Brazil, it's a more complex situation because of local content, the administration ... the tax."

Yet the scale of Brazil's offshore oil and gas ambitions make it a hard place for international contractors to ignore.

The country's giant 2006 oil discovery, where Petrobras is principle operator, hailed a rush into Latin America's largest economy by oil service companies, whose expertise and equipment allows oil companies to explore and develop fields.

Some 27 percent of all deep- and ultra-deep offshore wells drilled in the last two years were in Brazil, according to data from research company IHS.

So for European contractors such as Subsea 7, Saipem , Aker Solutions and Technip, offshore Brazil has become a crucial operating centre, accounting for 15 percent of Subsea 7's first-quarter revenue, for example.

But in recent months, companies which grew fat on years of strong oil prices in which drillers fell over each other to secure their scarce services, have found themselves facing tight-margin contracts in which they carry a large chunk of operational risk.

LOCAL CONTENT

Strict local content rules and a rapid increase in labour costs have also taken their toll.

Saipem, Aker and Subsea 7 have issued profit warnings this year, with Brazilian activities partly to blame.

At the end of last year, Petrobras vowed to cut costs by 32 billion reais ($15.4 bln) between 2013 and 2016, responding to a decline in output, a government fuel-price freeze, soaring prices for offshore projects and rising debt.

The net effect was to put at risk its $237 billion five-year investment plan, the world's largest corporate spending program.

Yet Petrobras remains dominant in Brazilian drilling as it is responsible for 90 percent of the country's offshore output. That gives it a strong hand when it comes to negotiations.

Petrobras demands an additional discount from suppliers who have already offered the most competitive price through a tender process, an industry source told Reuters.

"When pricing material some percentage has to be added on for the discount they will always ask of the bid winner, even though it's a bid where the lowest price wins," said the source who spoke to Reuters on condition of anonymity.

The source said Petrobras had also been cutting back on new projects. "Now that they are out of money ... Petrobras has cancelled and postponed new opportunities, even the small ones".

In a statement, Petrobras outlined how suppliers compete for contracts, but did not comment on whether it asks for discounts on top of a price proposed in the tendering process.

Neither did Petrobras say whether its stance towards contractors had shifted since it launched its cost-saving drive.

"In our management of suppliers, we encourage the technological development of the companies in a manner that meets the demands of Brazilian industry," the company said.

Recent pressures on oil service companies are a contrast with previous times, when data shows investors believe they have captured much of the value from the strong oil price.

The Thomson Reuters global oil services index performed twice as well as the Dow Jones index of the world's top 30 oil companies over the past three years, rising some 53 percent compared with 27 percent.

But this year the services sector has been shaken by a number of disappointments.

LOWER PROFITS

Saipem's two profit warnings in the past six months have wiped out 12 billion euros ($15.5 billion) of shareholder value since the stock peaked in September 2012.

Norway-based Aker also warned of lower profits due to cost overruns and project delays and has seen its stock slump by a third this year.

Investors and analysts highlight issues in working and negotiating with Petrobras, whose debts of $97 billion make it one of the world's most indebted publicly listed companies.

"It's much easier in Brazil to get into a confrontational relationship with Petrobras if you're not careful, because they do not have the ability to react so fast to changes of scope," said Charles Whall, energy portfolio manager at Investec Asset Management, referring to the way demands of a project may change as it is carried out.

One issue is the sharing of risk, with Petrobras eager to shift responsibility for operational issues on to the contractor, industry insiders say - a key issue given the depth and geological complexity of Brazil's "subsalt" oil deposits, where work can be unpredictable and contractors have been more exposed to risks than in other areas of the world.

Subsea 7 said sharing the risk of deepwater subsalt projects with Petrobras was different to other similar projects around the world and said it will not add orders until a new business model can be negotiated with Petrobras.

"This (working in the subsalt) is all on the forefront of technology in terms of water depths ... and there has been some learning curve, the cost of which has not been equitably distributed between contractor and operator," Whall said.

A lack of other growth markets has created fierce competition in recent years for European oil services companies.

While U.S. firms Schlumberger and Halliburton Co have been tied to the growth of shale in the United States, European contractors have been left battling for work in places like West Africa and Brazil where most new opportunities have been found.

"If you haven't got the right contracts in West Africa, if you haven't been in the first wave of Brazilian contracts, then you've really suffered relative to the rest," Whall said.

The other problem has been strict local content regulation, exacerbated by the rising cost of labour, particularly among engineers and other skilled oil services jobs.

Aker CEO Per Harald Kongelf partly blamed local content rules for disappointing first-quarter earnings.

But as one of the remaining high-growth markets, contractors will find it difficult to pull out, according to Bob Fryklund, energy analyst at IHS.

"Brazil is still top of the heap right now," he said.