What impact could Brazil's offshore oil reserves have on the United States and on global energy markets? During today's OnPoint, Bob Gruendel, global chairman of the energy sector at the law firm DLA Piper, discusses the politics, technology, and investments behind Brazil's pre-salt oil discoveries.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Bob Gruendel, Global Chair of the Energy Sector at DLA Piper. Bob, thanks for coming on the show.
Bob Gruendel: My pleasure.
Monica Trauzzi: Bob, Brazil is making some very big strides on the energy front, positioning itself really to be a world leader on oil exports. Talk a bit about what's happened in Brazil politically over the last few years that's sort of shifted the game for them on offshore exploration.
Bob Gruendel: Well, there's no doubt that right now Brazil has to be the most exciting game in town when it comes to oil and gas. They have had a combination of some very fortunate finds, what people call the pre-salt discoveries. This is oil that's been trapped beneath a prehistoric layer of salt off the shore, coastline of Brazil, about 200 miles out. So, it poses some technological tech challenges in order to access it, but the technology is there today and the Brazilians are moving ahead with that. On the political front, they've looked at the oil reserves as a real bonanza for the country, from the standpoint of development and social progress. So they've passed some legislation, which they're still tinkering with now, to get the amounts of money -- oil revenues right as to what goes where. But the legislation will require the state-controlled oil company, Petrobras, which is one of the largest oil and gas companies in the world, to have a minimum of 30 percent control of oil development and to be the operator of every block of offshore development in the country. So they've sort of positioned themselves in sort of a midway position between kind of a populist position and a real mercantile position where they're trying to also attract foreign investment.
Monica Trauzzi: So, like you said, the oil is essentially sitting under this prehistoric salt. How aspirational is the plan then? I mean is the technology there? How much do we actually know about these formations and how to get to this oil?
Bob Gruendel: Well, the formations themselves are clearly there and the proven reserves that Brazil now has, and by proven reserves those are quantities of oil that geologists are quite confident are there, is about 12 to 13 billion barrels, which is very substantial, would put Brazil as the second-largest reserve holder in South America after Venezuela. But there is thought that these reserves might be far more extensive than that and there is some talk about it being maybe 120 billion barrels, which would be just extraordinary. So, Brazil is a real player. They have, so far in their history, been a net importer of oil and gas, but this is going to change the game for them. The expectation is that within the next 5 to 10 years they will become a major exporter, maybe even top five exporter in the world. As far as the aspirational aspect of accessing the oil, the technology is there. The very first well they drilled cost well over $100 million in the pre-salt. But Petrobras, the company I mentioned before, is a leader in deepwater technology and they've been refining these processes very quickly and now they've got the cost of oil down to substantially under $100 million and falling. So the technology is there, it's just a matter of rounding up enough investment to get it done.
Monica Trauzzi: So, how soon could we see this oil on the market?
Bob Gruendel: Well, we're already seeing some, not great quantities of it, but the first well is producing commercially, a well actually named after the former President Lula, and it's producing over 100,000 barrels a day now. I expect that probably within 5 to 10 years it's going to be very, very substantial.
Monica Trauzzi: What are the key differences, from where you sit, between the exploration that's happening in Brazil and the discussions we see happening here in the United States relating to oil exploration?
Bob Gruendel: Well, the key difference is that the Brazilians are bullish on drilling. They have found these reserves, they are very actively attempting to quantify them, to pour money into the development of the drilling campaigns. The expectation is over the next 10 years there will be over $600 million -- $600 billion poured into this development. Petrobras alone is going to commit over 200 billion over the next five years. So it's just an attitude difference. Of course, they have reserves that far outstrip anything we're aware that we have, although much of the U.S. coastline hasn't even been geologically mapped yet, so we don't really know how much we've got, but certainly in the Gulf of Mexico there are deepwater operations underway. Some of that's been retarded because of the Deepwater Horizon problem that BP encountered, but as permitting comes back online, I think you'll see the deployment of the same technologies that the Brazilians are going to be using in the U.S. Gulf, just not at the same level, because our commitment to drilling offshore just isn't there yet.
Monica Trauzzi: How does Brazil view the U.S. and China as potential customers for this oil?
Bob Gruendel: Well, I think they look at both economies clearly as the two largest in the world and probably the main destinations for whatever exports that they start to generate. They probably would like to maintain a balance between the two. The U.S. historically has been Brazil's largest trading partner. Last year China surpassed the United States for the top position with Brazil. But I don't think the Brazilians want to get too comfortably into either country's camp. I think that they will look to keep their exports well diversified and take advantage of pricing differentials around the world as they arise.
Monica Trauzzi: With the global economy in flux, how concerned are the Brazilians that some foreign investments might dry up?
Bob Gruendel: Well, right now I don't think they're too concerned because I think they're focused much more on their domestic situation. There is a rising sentiment inside Brazil that these oil revenues need to be used for domestic purposes and for the advancement of social causes inside the country, which is, you know, well conceived. Brazil needs to bring its population substantially to a higher standard of living across the board, but -- and they have the intention of doing that. So, right now they're very focused on the development of the wells and the outcome of the revenue that they realize from it. And, I will tell you this, that despite the bad economy across the world, from where I sit, practicing energy law across the world, Brazil is the hottest game in town. And if you are an investor or a developer of oil projects, you can't help but want to be in Brazil. So, they're not seeing any lack of interest, at least not yet.
Monica Trauzzi: Safety standards have been a critical part of the discussion here in the U.S. You mentioned the Deepwater Horizon incident, which has played into that. How do Brazil's safety standards compared to the U.S.'s?
Bob Gruendel: They're excellent, in a word. Petrobras is probably the world leader in deepwater drilling. They've been developing technologies and experience in this area for years. They are actually, as we speak, working on the first floating production storage -- oil floating unit in the U.S. Gulf, which is going to be drilled 160 miles off the U.S. coast in 3000 meters of water. So they know what they're doing and they're used to U.S. standards of safety, because they're obviously operating in the U.S. Gulf and the Brazilians are themselves acutely aware of the risks and hazards and their safety standards and I've seen their contracts and I've seen their execution and it's world class.
Monica Trauzzi: There's a lot of opposition to offshore drilling here in the U.S. What's the public reaction like in Brazil?
Bob Gruendel: As I said, bullish. You know, let's get to it is the attitude there.
Monica Trauzzi: All right, we'll end it right there. Thank you for coming on the show. Nice to see you.
Bob Gruendel: Thank you so much.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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