Jose Formigli Executive Manager E&P Pr-sal Petrobras What have been the challenges presented by the pre-salt

t region and what opportunities does it represent? The pre-salt is a reservoir formation that was created over 120 million years ago when Africa and South America began to separate. At that time there was an internal sea between the two land masses, not exactly what you would call an ocean. This created a low energy environment where sediments could deposit from the present microorganisms. As a result, at present time, 5 6 km below the sea level you can find very porous, interconnected rock formations with a good level of permeability. When you add these formations with the natural coincidence of organic material at lower layers as well as right pressure and temperature including a 2000 m layer of salt, it creates a trapped region of oil & gas. In order to take advantage of this natural condition, we had to take several steps, the first being to identify the potential through geological modeling of the area. Second, we had to have the seismic interpretation skills to identify the correct structures below the salt. Thirdly, creating the technology to drill at depths of over 2 km of Water Depth, through 2 km of salt, to then reach the reservoir at roughly 5Km of total depth was crucial. Lastly, its necessary to take care of the economic demands to develop the reservoirs. Of course, when you have a large amount of oil which we have identified to be between 10.6 and 16 billion bbl of oil equivalent that is potentially recoverable then you benefit from scale. That being said, every cent we are able to optimize the development of these fields is extremely welcome. This optimization of infrastructure applies not only to the extraction technology but also logistical support, commercial strategy and transfer possibilities. Since the first identification of the potential of the region though the Parati well in 2006 we have had a 100% success rate with 15 wells up to now, which is uncommon especially considering its a brand new exploration frontier. Im not saying there isnt any risk in the pre-salt but it has been very well managed based on the exploration knowledge that has been accumulated by Petrobras over time. Not only does the pre-salt provide a large opportunity in terms of production volume and technological development but it also happens to be the first time in Brazil, we have engaged in large production development with partners. Most of our deepwater fields already in production were discovered by Petrobras alone. All of todays blocks were acquired after the Petrobras monopoly end in Brazil so we have partners in nearly every one. Since we have decided to run fast track production development at the same pace as exploration it demands a lot of studies as well as the alignment of partners in order to achieve our targets. The first target was achieved last year when we began producing an Extended Well Test (EWT) from the Tupi field in the Santos Basin, pre-salt cluster in May 2009. Our second target, which will be achieved in the coming months, will be another EWT, this one in the Guara Field. Following this we look forward to

having the first large scale commercial production by November from the Tupi Pilot System which has a 100,000 barrel/day capacity on the platform. This one will also have a gas pipeline to a pre-existing platform then routed to shore along the So Paulo coast, transferring roughly 3 million cubic meters per day of gas. In the next four years we expect 15 more EWTs in the remaining large discoveries each one producing to an FPSO. The major reason for this is to gather information on reservoir performance, flow assurance and others uncertainties aspects so that we can fine tune the geologic model to optimize extraction. Our engineers will then be able to create better performance projections for these reservoirs which are important because while they may be similar in many aspects each, but has significant specific differences. Therefore we cannot apply the same model to each. Through 2013 we will be installing two extra pilot systems larger than the one scheduled for Tupi; one in the Guar field producing 120,000 barrels and 5 million m of gas per day as well as another of similar size in the northeast accumulation of Tupi. In parallel with these ones, we are designing and bidding on 8 new units, that we call replicant FPSO for their specification similarities, that will be put into production through 2016 with an average individual production capacity of 150,000 barrels and 6 million m of gas per day. All these systems including the pilots have gas, water and CO reinjection. The reason for this is that we will only be able to conclude which recovery method to apply to the microbialite reservoirs after having spent some time with the pilot systems. We may use only one method in the end, or a combination of the previous mentioned ones. Concerning CO reinjection, we have two targets in mind: environmental friendship and cost-savings. The amount of CO presented in the gas flow may be of significant level so we made the decision not to apply the most frequent procedure in industry which is to separate the CO2 from hydrocarbons and bleed it off into the atmosphere. Considering the large scale and the fact that we may have some kind of regulatory constraint on this in the future, Petrobras decided it would be better to assume, since the very beginning of the production development, to reinject the CO in the producing reservoir formation. On top of this green effect we may have also a potential benefit from the incremental recovery factor of the reservoir and, while this is still being tested in the lab, the results are quite encouraging. Of course, we will only be able to guarantee this after trying it on the pilot systems and evaluating the effective impact. In terms of total production, including the three pilots and eight replicant systems the target for 2017 is a minimum of 1 million barrels per day coming from Petrobras operated production systems in the Santos Basin Pre-salt cluster accumulations. For 2020, our target for the whole pre-salt accumulations offshore Brazil is around 1.8 million barrels per day. The pre-salt discoveries have been the first time where Petrobras has had to operate with international operators to develop such a dimension of new fields. At the same time, CENPES is also working to develop new technologies to meet the demands of the region. What challenges have come from taking something out of the lab and applying it in the field?

Petrobras has been working with international service companies for the last 40 years, and our sequence of production developments in the Campos Basin deepwaters were done through technology developed in house and in partnership with the international community. In this respect, we are highly integrated in regard to international procurement, both for service and equipment supply. Today we are running very well with our IOC partners and theyve contributed significantly to the pace that we want to implement the project. I think were all aligned on the same targets. Looking at the challenges, there are many but none of them can be identified as barriers. We know we are able to produce which is evident in our platform that has been producing since May last year. The reservoir performance has been exactly as predicted and the operations have been running smoothly. Undoubtedly, we have many opportunities to optimize the production when we look at the whole area development. Reservoir characterization is a good example as the type of rock we are dealing with, known as microbialite, is not very usual worldwide, even onshore. Were working very hard alongside universities and research centers, both inside and outside Brazil, to develop the expertise for exploiting this kind of rock. Interestingly, there are two other communities that used to study the same rock. One is composed by scientists looking for the origins of life in the calcium carbonate structure because it represents one of the first organized life forms on Earth. When NASA studies look for areas where they may find life beyond the Earth, theyre often looking for non-advanced forms such as these ones that have been able to survive for 3.5 billion years on our planet, no matter all the environmental changes our planet has passed through. The other sector that studies these organisms is the pharmacology industry as it also tries to understand the longevity of these rocks in the hopes of transferring these studies to human health. For the oil and gas industry the implication of this is that we have to search for specialists who have never been involved in this sector before. When you consider this factor, reservoir characterization can be rather challenging and may demand a variety of specialists to be attracted or internally developed in our industry. Another challenge is the drilling and well completion aspect where roughly 50% of our capital expenditure to develop the Santos Basin Pre-salt Cluster will be applied. Therefore, whatever we can do to optimize the geometry of the wells in order to increase well productivity is a benefit, normally leading to lower number of wells to be constructed. Moreover, considering that rig time is very expensive, effort is being done to reduce it in conclusion: lower total number of wells and drilling/completing those necessary ones as quick as possible, naturally under the required HSE conditions. These factors mean that we have to consider the type of wells we are planning, whether they are vertical, deviated or horizontal ones and the implications that they will have on the production level and final recovery factor. Some oil professionals have the opinion that horizontal well is a panacea for the industry that guarantees that a reservoir will produce more with less wells. Petrobras has a very large experience with this well geometry in the Campos Basin deepwaters where the geological formation is made of turbidite sandstone, completely different from the formations found in the Presalt Santos

Basin. When you consider the heterogeneity of these formations in the pre-salt region, the permeability will definitely differ should you use a vertical or a horizontal approach. As a result, its difficult to make an immediate inference between the effectiveness of what we have applied in Campos Basin turbidites and what should be used in the Pre-salt horizon. Drilling the well also presents challenges as you have to pass through a 2000 meter layer of salt which will expand if you dont apply the correct drilling fluids to deal with the wellbore stability. If not properly treated, the salt may swallow over the drill string resulting even the loss of the well. It is worthwhile mentioning rig time may reach US$600,000 per day! When you add on this number the cost of the logistical support for the rig, we can easily achieve US$1 million per day on each well under construction. So every hour you can save youre looking at saving thousands of dollars. The daily rig cost is not the only concern. Many of the rigs that can be applied in this region are not readily available in the market. Ironically the recent economic downturn of 2008/2009 forced the deepwater rig s demand to reduce slightly the corresponding rates. An additional point to consider is the CO content in the produced gas which, by itself, is not a big problem but it has to be extracted from the hydrocarbon flow since it doesnt provide any value to the client. In a situation where there is a combination of CO and water, there is potential for a very high corrosive environment which means you need to prepare and protect the path through which the oil & gas will travel through. This includes installing the well casing, production string, subsea tree, flexible or rigid pipelines and the processing plant for this corrosive condition. For overcoming these situations we have special alloys but we also need to optimize their application because if we use the best grade, in every location, the solution will become a burdensome and possibly with prohibitive associated cost. The destination of this separated CO2 in a environmental friendly solution is critical and we may elaborate this topic later on. We have also to take into account the demands of subsea engineering for Santos Basin Pre-salt Cluster but fortunately our history in the Campos Basin has given us a solid background in this field. Throughout the last 3 decades we have developed the technology to produce in water depths even deeper than 2200 m, which is the average water depth for the pre-salt region. Subsea trees and flexible lines are all mostly available for the presalt scenario: what we have to do now is qualify them for the presence of CO + H2O. With respect to the platforms, we again have a lot of experience due to the Campos Basin but Santos Basin development does provide some new challenges related to ocean conditions for the mooring conditions design. The processing plant on the platform also presents some challenging issues: firstly, the pressure required for CO reinjection into the formation, a method for the destination of this contaminant instead of ventilating to atmosphere, will be in the range from 7000 to 8000 psi. Handling CO at this pressure means it is no longer a gas but a liquid and consequently the facilities have to be prepared to pump, instead of compress, it back into the reservoir. Secondly, you need to actually fit all components that comprise a process plant on the deck space of a Very Large Crude Carrier (VLCC) or a new build barge type hull; in either case there is limited space to

install all eventually needed topsides equipment. If you want to include oil and gas processing, gas compression, CO separation and pumping, water injection and still leave some room for people to rest, its definitely not an easy task. Therefore we are very careful in this phase and look to modularize each piece of the puzzle to put it together like LEGOs to ensure that we fit everything on the available deck space and its cargo load capacity. Currently, we are developing eight called replicant FPSOs with this modularized fashion. At the moment, every service provider is looking to take a piece of the cake. In order to create these efficiencies that Petrobras is looking for in the pre-salt region you need the help of the service industry. How do you choose the best providers for the business? We have room for the good ones. There will be so many platforms, wells and components that we will very likely not identify only one partner for each service. As a matter of fact, this is a long-term philosophy of Petrobras: for instance, in the Campos Basin development we typically worked with three or four suppliers for each key equipment. Most of the major service providers are already here in Brazil and were establishing specific cooperation agreements for the demands we currently recognize. When Petrobras decided to drill the first exploratory wells in the pre-salt and we were unaware that we would have the so high success we have enjoyed, we had previously identified some companies to work with. This was because they had the most advanced technology to be applied on the planned wildcats. Later we identified the large amount of oil and gas present in the area and perceived that we would have dozens of wells to drill. While we knew that we could have supplier A and B to help us in these regions, we also looked at suppliers C and D trying to figure out how we could give some incentive for them to reach the same level as A and B in order to broaden our support base. Of course this strategy only makes sense if we identify that these new equipment or service providers are capable to achieve the necessary level of quality, schedule delivery and price competitiveness. In some situations, we define which technologies should be best tailor made to the pre-salt scenario rather than directly supplied from the suppliers shelves. In this case, we develop technological cooperation agreements with these companies, many of them already currently establishing research centers here in Rio de Janeiro and other cities in Brazil. We encourage the good competition among these companies that can bring to us sustainable solutions meaning high local content, economic competitiveness and continued investment. Long-term vision is important because we arent just developing 11 production platforms for the Presalt cluster in Santos Basin; we will stay in the pre-salt for many decades so it would be foolish to think the technology we have now will be the best solution in the future. A good example of this is nanotechnology where we currently have a specialist working on how to incorporate this discipline into the drilling phase and the reservoir monitoring of our developments. Just as the health industry looks to monitor certain parameters in the human bloodstream we can do the same within the wells and reservoir by introducing nanoparticles through an injection well and waiting for it to travel through the reservoir till they breakthrough the producing well months or years later. From the recorded data we can figure out the path properties the particles travelled through which makes it an interesting tool that

we currently dont have but may be available in a not so distant future. Of course, this implies that our mindset will have to change as the technology evolves in the same way that our mindset has changed from the development of the Campos Basin to now. This is not a matter of being better or worse, but rather one of being different because ts a completely different technological and financial environment. You cannot compare the Brazil of the 1970s and 1980s to the Brazil of today or that one that will hopefully be in the future. I know that the guy who will sit on my chair in the future will say, Okay, that was fantastic but now we have this. Keeping this in mind, you execute in the short term but maintain a broader view of the horizon leaving the indispensable freedom degree should be present for absorbing these ambiance changes. In the 1980s, when Petrobras was faced with the technical challenges of deepwater exploration and production development as well as the financial challenge of a developing country, we looked to the North Sea and to the Gulf of Mexico for guidance. However, at that point the water depths were not so high in those regions as here in Campos Basin, so we had to establish technological relationships with universities and suppliers to develop our own technology. This cooperation philosophy is in our blood as a company: we dont discuss why we do it - we just do it. Today, were not just doing research work with international partners; were incorporating Brazilian universities as well, because we think this is a good opportunity for Brazilian Academy. For example, our researches in the rock formation of the pre-salt allow Brazils geosciences community capabilities to grow in an unusual segment of the market. On a personal note, what is it that excites you the most to be working in one of the biggest discoveries in the Western Hemisphere in the last 30 years? What keeps you motivated? I consider myself to be a very fortunate guy. Ive had the opportunity to work as an execution professional on the Campos Basin development and now I am integrating the team which is planning and designing the evaluation and production development phases of one of the most outstanding exploration frontiers in a worldwide basis this is awesome! When I was working offshore in the 1980s we knew we were doing something special and we also could identify how difficult it might be for the decision makers at the time to tell us what the best move to make. Today, we have the advantage of being able to forecast the size of the reserves and paint a larger picture which makes a tremendous difference in the planning. Logistically speaking, the pre-salt region is highly demanding being located more than 300 km offshore or roughly the double of the distance in Campos Basin. This means that the impacts on the everyday consumable needs as well as on the infrastructure and communication demands are high. Today, we know that we may establish fiber optic rings connecting the region so that, from the arrival of the very first platforms, you can already transmit data to shore and vice-versa. This is drastically different from 30 years ago when everything was transmitted by radio, even fax being considered a breakthrough. Some people like to point out the challenges that lie ahead of us, but I like always to highlight that we do not have technical or logistical barriers, but opportunities to economically optimize our projects.. .

Whenever I think Im facing something difficult I think back on what people in my position should have confronted decades ago and I come to the conclusion that I have quite an easy life Petrobras and its partners have a tremendous opportunity ahead of us. The project grabs a lot of peoples attention, no matter it comes from raising problems or pursuing and applying solutions: everybody wants to contribute. What we have to do is to balance these issues by not underestimating them but, at the same time, not over analyzing them to the point that it stops us in our tracks. We have to move it on and that fits quite well with Petrobras slogan: Challenge is our energy!