Franco Pre-Salt – New Monster Play in Brazil

The Franco pre-salt field, which is located southwest of the massive Libra field that will be auctioned in October 21st, originally had been forecast to contain 3 billion barrels boe of recoverable light oil. In light of new studies, the Franco pre-salt field is now believed to contain recoverable oil volumes equal to or superior to the Libra pre-salt field, something hovering around 10 billion barrels boe.

This is excellent news for Petrobras, which is in the process of making major exploratory, production and infrastructure investments and desperately needs new capital. The reason it being excellent news has nothing to do with oil auction, because Franco is part of onerous concession scheme with which the Brazilian government plans to help finance Petrobras’ future investments without having to divest itself of capital. In order to do this, in 2010 the Brazilian government transferred the rights to 5 billion barrels boe believed to be present in six areas, to Petrobras, through the onerous concession scheme, in which the oil is produced by Petrobras and its profit returns to the national operator as investment capital. Of these 6 areas in the scheme Franco was the biggest, yet Petrobras has until September 2014 to confirm that the forecast oil is present in the areas or not. As it is now, the volume of recoverable oil has already greatly surpassed the 5 billion barrels boe forecast in the original contract.

Petrobras will only confirm the new Franco volumes when they deliver the commerciality declaration to the ANP, but high ranking sources who took part in the recent Franco exploratory campaign confirm the new studies did prove that there are volumes of around 10 billion boe in the play. The Brazilian government is now discussing weather it should anticipate a decision, which would renovate the 2010 onerous concession contract by giving Petrobras control of all the reserves in the 6 areas, irrespective of the total volumes found. If this is really approved by President Dilma Rouseff, it would be a tremendous financial boost to petrobras, which has been facing credit restrictions and which will soon have to pay US$2.25 billion as a bonus for the signing of the Libra pre-salt E&P contract.

Irrespective of the conditions negociated between the government and Petrobras concerning the access to the total reserves of the Franco pre-salt play and the other 5 areas in the onerous concession scheme, the national operator could already have tangible financial gains by including these reserves in its financial balance, increasing its financing capabilities and also increase its credit rating which has recently been downgraded by Moody’s.