Petrobras cancels rigs 11-28-12

Petrobras has cancelled a process to contract five new ultra deep-water drilling rigs, due to the pre-salt’s strong resource quality, which means fewer wells are required. The company cited higher well productivity in the pre-salt Santos basin as a reason for the cancellation. Higher well productivity will require fewer wells overall. The rigs, which were to be capable of operating in water depths up to 3,000m, were being contracted through the Ocean Rig Group.

Fast pre-salt flow rates (peaking around 26kbpd on average) and low offshore decline rates (just -8.8% / year) were two drivers of high well productivity that we observed in our recent overview of 14,000 wells and 300 fields drilled in Brazil over the past decade. Overall, Brazil’s wells are more productive than other offshore basins we have analysed. In particular, the Santos basin pre-salt appears the “best of the best”, with the most productive wells of all: notably Lula’s Cidade de Angra dos Reis FPSO reached its design capacity around 90-100kbpd with just four (of six planned) wells connected & producing (Exhibit 1, Exhibit 2).

Drilling times are also declining, with the best composite wells’ drilling times likely to be 75% shorter than the first pre-salt wells. The discovery well at Lula took 141 days to drill, the average presalt well this year took 75 days, the best well took just 43 days and the best composite future wells could be drilled in just 34 days (Exhibit 3). At this rate, you could conceivably drill the c4-5 producers and 2-3 injectors required to bring on a new FPSO easily in a year with a single rig.

Will Petrobras have enough rigs after the cancellation? – We think so. Petrobras currently has 17 deep water rigs in operation in the pre-salt Santos basin area. At peak, we model that 30 wells per year must be drilled at the key five BG fields, which could imply as little as four rigs per year are required (assuming no improvement from 2012 drilling rates and a week-long turnaround to move rigs between well-sites). Even with other wells to drill in the Santos, this looks comfortable, given 17 rigs currently present and 28 further rigs under contract to be delivered over the remainder of the decade.

Pre-salt economics continue to look strong, between $5-9/boe, potentially stronger if fewer wells are required. We model an average NPV per barrel of $6.7/boe across BG’s pre-salt fields. Our numbers include c300 wells across these five super-giants, over their lifetimes. With each well costing $100M including drilling, subsea, risers and their connection to the FPSOs, the potential savings are there, albeit smaller in the context of the $160Bn of gross value locked in these five fields today.

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