IBP1057_19

ESTIMATION OF OFFSHORE BRAZILIAN

NATURAL GAS BREAK-EVEN PRICES
Wedja da S. Clementino¹, Claudia M. C. Bonelli²,
Gabriel de F. da Costa³, Marcelo F. Alfradique4

Copyright 2019, Brazilian Petroleum, Gas and Biofuels Institute - IBP

This Technical Paper was prepared for presentation at the Rio Pipeline Conference and Exhibition 2019,
held between 03 and 05 of September, in Rio de Janeiro. This Technical Paper was selected for presentation
by the Technical Committee of the event according to the information contained in the final paper submitted
by the author(s). The organizers are not supposed to translate or correct the submitted papers. The material
as it is presented, does not necessarily represent Brazilian Petroleum, Gas and Biofuels Institute’ opinion,
or that of its Members or Representatives. Authors consent to the publication of this Technical Paper in the
Rio Pipeline Conference and Exhibition 2019.

Abstract

Brazil has a high potential for oil and natural gas production in the coming years, mainly in the
pre-salt exploration blocks. However, there are still technological and economic challenges that
need to be tackled in order to enable the commercial use of natural gas from these areas. The pre-
salt natural gas is mainly associated with oil at a high gas-oil ratio (GOR) and with a considerable
content of contaminants, in particular Carbon Dioxide (CO2), implying an increase in costs for its
removal. Due to these technical difficulties, the produced gas has been chosen to be reinjected,
since this practice increases the pressure in the reservoir and improves the oil recovery factor,
also decreasing its viscosity. Thus, to estimate natural gas costs, specifically the pre-salt natural
gas break-even prices, cash flows were simulated for different projects, generating break-even
estimates of the produced and processed natural gas. For the study, the following premises were
considered: fields with a maximum production of 10 MMm³/d; distances to the shore of 100 km
to 300 km; CO2 contents of 0-3% to 40%; and the sale of the Natural Gas Liquids (NGL) produced
in the processing plants. It was observed in general lines that natural gas break-even in the pre-
salt areas are not homogeneous and can vary from US$ 1.50 /MMBtu to US$ 9.0 /MMBtu in most
cases, considering the different characteristics of fields.

Keywords: Natural Gas. Pre-Salt. Offshore. Break-Even. Price.

1. Introduction

The Santos Basin, together with the Campos Basin, emerges as one of the main oil
producing basins in Brazil. It is the site of several fields in production, including Lula, the largest
Brazilian oil producing field, as well as large reserves to be explored, especially in the pre-salt
layer (ANP, 2017).
These basins have a large volumetric potential, as can be observed, for example, by the
Carcará prospect in the BM-S-8 block. This block is among the largest in the pre-salt polygon,
with oil around 30º API and associated gas. According to Equinor estimates (EQUINOR, 2018),
it contains more than 2 billion recoverable barrels of oil equivalent. In 2012, the Pão de Açúcar
prospect discovery was announced, an gas and condensate field located within the license area of
the CM-539, at a water depth of 2,900 m in the Campos Basin, which also contains the pre-salt
discoveries of the Gávea and Seat. According to CTO (2012), the 1-REPF-12D-RJS well drilling,
known as Pão de Açúcar, indicated a complex carbonate reservoir with combined potential
resources of 1 billion barrels of oil and about 85 bcm of gas.
1
Oil and Gas Engineer – Planejamento de Sistemas Energéticos (PSE) UNICAMP
2
DSc. Chemical Engineer - Empresa de Pesquisa Energética (EPE)
3
Chemical Engineer - Empresa de Pesquisa Energética (EPE)
4
DSc. Chemical Engineer - Empresa de Pesquisa Energética (EPE)
 Another large volumetric potential located in the Campos Basin is the Wahoo prospect,
located in the CM-101 block of the BM-C-30 concession, whose production tests have already
assured a production of 7 Mbbl/d of oil and 4 MMm³/d of gas, with potential for a volume of up
to 15 Mbbl/d of oil. In addition, studies done by the oil company point to an in situ volume of 300
million barrels of oil (ANADARKO, 2010).
For the most part, the natural gas of pre-salt is associated with oil with a high Gas-Oil
ratio (GRO) and with considerable content of contaminants in some regions, in particular carbon
cioxide (CO2), implying an increase of the costs for its removal. Due to these difficulties, the gas
produced has been technically chosen to be reinjected, since this practice increases the pressure
in the reservoir and improves the oil recovery factor, also decreasing its viscosity.
Considering the high costs associated with the technologies available for the removal of
CO2 as well as the reduction in the volumes of natural gas available for commercialization after
this stage, it is fundamental to evaluate the economic viability of the commercial use of the natural
gas of the pre-salt, which will depend essentially of the investment costs for its exploration,
production, separation, removal of CO2, outflow and processing.
Therefore, in order to estimate natural gas costs, more specifically the feasibility of the
flow of natural gas to the mainland for typical Brazilian pre-salt projects, cash flows for different
projects were simulated based on investment cost information (CAPEX) and of operation (OPEX)
collected in the literature, as well as the typical operational parameters of E&P, flow and
processing. For this, three routes of natural gas gathering pipelines were considered, CO2 contents
of 0-3% to 40%; and the sale of Natural Gas Liquids (NGLs) produced in Natural Gas Processing
Units.

2. Technical Assumptions

2.1 CO2 content and removal techniques

According to Almeida (2018), the Campos Basin presents a predominance of CO2

concentrations in the range of 0.5%; however, concentrations of up to 20% in the Santos Basin
may occur. In the Santos Basin most of the analyzed wells presented low CO2 concentration, but
in some regions, such as in the Southeast, in ultra-deep waters, concentrations were high, varying
from 5% to 80% (Figure 1).

Figure 1: CO2 Concentration Map on the East Region of pre-salt, with a Structural Framework.
Source: Almeida et al (2018).
 The CO2 concentration of the natural gas associated with the oil in the fields of the pre-
salt requires that they pass through separation processes for commercial use, where according to
ANP's Resolution 16/2008, the gas should have maximum levels below 3% v/v. In addition, the
high levels of CO2 render the gathering of gas to the coast technically unfeasible, in view of its
corrosive effects that increase the costs associated with the protection and maintenance of
pipelines.
Carbon dioxide removal can be carried out through physical or chemical processes, such
as Chemical Absorption, Membrane Permeation, Physical Absorption, Adsorption, Cryogenic
Distillation and Hybrid Processes. According to Figure 2 presented by Baker and Lokhandwala
(2008) and adapted by Nakao (2010), the selection of the best CO2 capture technology for the
natural gas can be assessed in terms of different processes according to the process flow and the
composition of the gas to be treated.

Figure 2. Selection map for CO2 capture technology from natural gas (gas flow versus CO2 composition).
Source: Baker and Lokhandwala (2008), apud Nakao (2010).

The most commonly used capture method in the FPSO pre-salt platforms are the
membrane modules (IBP, 2017). Membranes are permeo-selective barriers in which the
component having the highest affinity will have a higher permeability rate. The CO2 emitted by
the oil and natural gas production platforms are not captured in their entirety by the membranes,
corresponding to a capture ratio between 85% and 90% of CO2. In addition, the membranes also
present selectivity parameters of CO2 and CH4 that generate natural gas losses, having as product
a CO2 rich gas that will later be injected into the well (RATHMANN, 2017).
The membrane module can be in spiral or hollow fiber sheet and has lower footprint than
that of a capture plant by chemical absorption. Therefore, in the case of the platforms to be used
in the exploitation of the pre-salt fields, the use of the membranes is justified mainly due to their
foot-print, since the layouts of the FPSO are well defined and the spaces are restricted, show
instability in the structure that hinders the allocation of chemical absorption equipment
(RATHMANN, 2017).
 2.2 Natural Gas Production

It is estimated that on average the pre-salt fields have a maximum production ranging
from 8 to 12 million m³ per day. In this sense, the study of fields with a maximum production
capacity of 10 MMm³ / d was considered. According to estimates based on Almeida (2018), the
contamination levels of natural gas considered in this study were between 0-3 mol% and 40%
mol CO2, whereas the gas with higher than 3% CO2 content is subjected to the separation process
before being transportation to shore.
The production curve was determined based on the average estimates made by EPE, the
gross production of pre-salt production units, as well as the consumption, flare and injection rates
equivalent for each type of natural gas. The consumption1 was defined as being 35.8% and the
flare of 5% for both cases. In gas production with 35% CO2, the injection rate was estimated as
44%, equivalent to the gas produced and the CO2 removed, for the production of gas with a
content of 0-3% CO2 injection was weighted as 3.6% (Figure 3).
Using the SAEP software (developed by EPE), the infrastructure required for the field´ s
development was estimated, with 8 wells being defined for 10 years; according to MME (2012),
the production decay factor was considered to be 8%.

Year (production phase)

Figure 3. Net Gas Production, Injection, Consumption and Flare rates.

Source: EPE. Notes: Net Production presented to the lower case (higher CO2 content); in the cases with lower CO2
percentual, the shares correspondent to the additional injection must be summed up to the Net Production;
consumption in the platforms is mainly associated to the operation of compressors

2.3 Natural Gas Flow and Processing

The natural gas from the pre-salt fields is drained to the shore, currently, by three pipeline
routes that contain medium extensions of 200 km and average flow capacity of 10 MMm³/day
(PETROBRAS, 2018). In this study, other possible routes were arbitrated according to the
distance of potential prospects from the Santos and Campos Basin to Processing Plants located
on the coast, namely Route 4 to Cubatão/SP, Route 5 to Porto do Açu/RJ or Route 6 to Porto

1
Consumption in the production platforms is associated with heat generation and operation of equipments.
In the offshore environment, most of the consumption is associated with operation of compressors.
Central/ES. Such pipelines extend for 100 km to 300 km, as may be observed in Figure 4, so these
pipeline extensions were chosen for the Case Studies, with variations of 50 km between each case.

Figure 4. Existent and Future gathering pipelines routes of the natural gas produced in the pre-salt.
Source: EPE.

In Processing Plants, natural gas is benefited and separated into products specified for
commercialization. One of the most important points of natural gas processing plants, according
to Grenada (2017) is the liquid recovery system, where ethane (C2), propane (C3) and other heavy
hydrocarbons (C5+) are separated. Basically, the recovery consists of three stages: dew-point
adjustment, fractionation and product specification and can be performed through simple cooling
methods; chilled absorption; turbo expansion and Joule-Thompson expansion. According to
Souza (2017), the process with the highest efficiency and high reliability is the Turbo-Expansion
type. The final processing product is the specified light gas, which can be compressed and
transported by pipelines or by vessels such as Compressed Natural Gas (CNG) or sent to a
liquefaction process to be transported by vessels such as Liquefied Natural Gas (LNG).
For the processing of the natural gas produced in this study, a processing plant of the
Turbo-Expansion type was considered, with inlet flows equivalent to the daily production of the
typical pre-salt medium field, over thirty years. The natural NGL were considered to be sold on
the market based on international prices.

3. Economic Assumptions

Based on information collected from the literature in terms of equipment costs and E &
P facilities, the costs of a typical Pre-Salt project defined for the cash flow simulations were
estimated. It should be noted that the costs of disposal were attributed according to the
methodology of estimation per meter.inch, considering reference costs of similar projects in terms
of diameter and extension. In addition, costs were corrected for the base year (December 2017)
according to IHS Markit's Capital Upstream Costs (UCCI) indices (2018). The CAPEX for the
removal of CO2 by membrane was estimated according to the MME (2014), as being US $ 230
million and OPEX at 5% p.a.
According to the energy content of the associated flows produced, the CAPEX values
were distributed proportionally between the oil and the gas, where about 92% of the costs are
considered as oil costs, with the exception of the costs of the export system2, totally allocated to
the natural gas. Operational (OPEX) and abandonment (ABEX) costs represent 6% (of which half
are fixed and half variable) and 7% of total CAPEX, respectively.
Table 1 summarizes the main technical and economic parameters considered for the
economic evaluation of the Exploration and Production project.

CAPEX OIL GAS

Exploration
Exploration Costs MMUS$ 58.32 4.53
Wells
Number of production wells 8 8
Unity Cost of production well MMUS$ 137.73 10.69
Total Cost of production wells MMUS$ 1,101.81 85.49
Production wells/Injection wells 2 2
Unity Cost of injection well MMUS$ 137.73 10.69
Total Cost of injection wells MMUS$ 550.9 42.74
Installations
Subsea systems MMUS$ 1,025.82 79.59
Surface installations MMUS$ - -
Platform structure MMUS$ 940.61 72.98
Total cost of installations MMUS$ 1,966.44 152.57
Treatment System
Membrane separation MMUS$ - 230
Export system
Meter.inch cost US$/meter.inch - 131,77
20 inches x
Meter.inch meter.inch -
100/150/200/250/300 km
OPEX
Operational Costs
Fixed operational costs % CAPEX p.a. 3% 3%
Variable Operational Costs with production % CAPEX p.a. 3% 3%
Membrane opex % CAPEX p.a. - 5%
ABEX
Abandonment Expenses % CAPEX 7% 7%

Table 1. CAPEX, OPEX and ABEX for Natural Gas Exploration and Production.
Source: EPE own elaboration, from Mata (2010), SINAVAL (2010) Ellis et. al (2013), Bispo (2016).

Based on the costs and production curves previously presented, the SAEP program was
used to make estimates of the cash flows of the E&P projects. For this, the following were
considered: the tax system of production sharing to carry out the E&P activity; the composition
of oil and natural gas based on the annual average of the ANP calculation memories (2018); the
reference prices of natural gas from the ANP calculation memory (2018); the reference prices of
oil, such as Brent price, which is equivalent to US$ 69.18 /bbl (December/17); and Government
Take of US$ 1.2 billion (Subscription Bonus) and US$ 206 million (Minimum Exploration
Program), with 42% of oil offered to the Union.
As economic assumptions, it was considered that 75% of the investments would come
from the entrepreneur's own capital, whose cost of capital (real rate) corresponds to 9.67% p.a.,

2
Pipelines intended for the movement of natural gas from the production platform to the processing
facilities.
with long-term interest rates of 6.50%, and profit reserves that can be accumulated up to 15% of
the profit of each period, being subject to the upper limit of 5% of the capital stock invested up to
that period (deflated equity). It was also considered the increase in the price level as 6.50% (p.a.)
for both oil and gas. The remaining 25% of the investments would be financed, with a cost of
capital at a rate of 7.89% p.a. and 20 years for amortization.
Regarding the depreciation of the assets, it was used an accelerated rate of 6% p.a. (16.4
years), a period calculated from the average weight of annual percentages of materials and
equipment (10% over 25 years), construction services (30% over 25 years), freight services (35%
in 10 years), buildings (20% in 10 years) and purchases of land (5% in 18 years). The other taxes
and charges were estimated according to Brazilian standardization defined for the period of
December 2017.
Thus, the natural gas break-even from the E&P project was calculated so that the NPV
of the project equals zero, given an Internal Rate of Return (IRR) of 9.67%.
For the cash flow of natural gas processing, IRPJ (Corporate Income Tax) of 25% and
CSLL (Social Contribution on Net Profit) of 9% were considered. Expenses were calculated based
on the CAPEX of the UPGN estimated to be US$ 521.49 million and OPEX 5% p.a., as estimated
by EPE (2018), and revenues as the sum of profits from the processing and sale of liquids.
Considering the average daily flow per year of the hypothetical field production presented in
Figure 3, the processing plant considered in the study will operate at a capacity of 5.7 MMm3/d.
The revenues generated by the sale of liquids were calculated from the volume of LPG
and C5+ obtained from the processing of gas (about 5% for consumption, 8% for LPG and 2% for
C5+), multiplied by its respective market values in December 2017, presented by ANP (2017):
LPG for US$ 0.91/gal and C5+ for $1.42/gal. The break-even of natural gas processed in
US$/MMBtu was set to NPV equal to zero, given a WACC (Weighted Average Cost of Capital)
of 9.67%.

4. Results and Discussion

Considering different CO2 contents, the natural gas break-even prices was estimated after
treatment and compressing on the platforms. However, the prices for CO2 contents above 20%
were higher than US$ 6.00 /MMBtu, which was considered economically non-justifiable
considering that the gas still needs to be transported to the shore and processed. In these cases,
the Cash Flows should allocate a higher amount of the costs to the oil, so that natural gas only
pay for the processes that are necessary for its own monetization (treatment and separation by
membranes). The break-even prices after E&P, treatment and compression (before transportation
to the shore and processing) are presented on Table 2.

CO2 Content Break-Even Price (US$/MMBtu)

0-3% 2.06
10% 3.06
20% 3.95

Table 2. Price of Natural Gas by CO2 content, before transportation to the shore and processing.
Source: EPE.

Regarding gathering pipelines, the costs of natural gas transportation are presented on
Table 3 based on the distance of the fields to the shore and on the CO2 content.
In terms of processing and sales of the NGL, it was observed that, in many cases, the
processing presents a negative cost, which means the sales of the NGL result in a revenue that is
higher than the processing costs itself. Table 4 presents the processing costs for each case.
 CO2 Costs of Transportation to Shore (US$/MMBtu)
Content 100 km 150 km 200 km 250 km 300 km
0-3% 0.99 1.49 1.99 2.48 2.98
10% 1.28 1.92 2.56 3.20 3.85
20% 1.81 2.71 3.61 4.51 5.42

Table 3. Costs of Natural Gas transportation to the Shore.

Source: EPE.

CO2 Content Processing Cost (US$/MMBtu)

0-3% - 1.48
10% - 1.13
20% - 0.60

Table 4. Costs of natural gas processing considering NGL sales.

Source: EPE.

Based on the estimates of costs and projections of the exploration and production of
natural gas from the pre-salt fields and their respective outflow and processing, we managed to
estimate the probable range of natural gas break-even prices for 15 cases with different CO2
contents and distances to the shore.
It was observed in general lines that natural gas break-even in the pre-salt areas are not
homogeneous and can vary from US$ 1.50 /MMBtu to US$ 9.0 /MMBtu, considering the different
characteristics of fields, in the case where natural gas is sent to processing plants on the shore so
that it can be specified and sold to the market. Figure 5 shows the results obtained when there is
sale of LPG and C5+, more common in Brazilian UPGNs today.

Figure 5. Break-even of natural gas after processing on onshore processing plants.

Source: EPE.

5. Conclusions

The economic justification for the implementation of the activity under study is the
favorable expectation of success in oil and gas exploitation of the Santos and Campos Basin pre-
salt reservoirs and the technical and economic challenges for the use of natural gas in relation to
option of reinjection. It is observed that the results are highly impacted by certain parameters,
such as production volumes and the high demands of intrinsic investments in oil and gas
exploration and production operations, as well as treatment and outflow.
The results of the economic analysis allow us to conclude that, based on the parameters
adopted, the natural gas break-even values can vary from US$ 1.50 to US$ 9.00 / MMBtu if
commercialization of LPG and C5+ is carried out and the revenues are discounted from the
processing costs. For cases with CO2 contents higher than 20%, the Cash Flows should consider
other parameters such as the payment of most E&P costs by the Oil, so that the natural gas
monetization on the national market turns out to be feasible.
These estimates only consider one of the possible strategies for oil and gas companies,
which is the outflow of natural gas to the shore for processing and delivery to the market. Other
strategies should be studied and contrasted with this one in further studies, such as the reinjection
of gas (considering technical feasibility limits), liquefaction and sale in the form of LNG, amongst
other possible alternatives.
It should be noted that the estimates of CAPEX, OPEX and ABEX used in the study were
based on literature sources and may vary considerably given the specificities of oil and gas
projects. In addition, the natural gas commercialization strategies may be particular to each
specific project, making estimates sensitive to several parameters that were not considered in the
present study.

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