The effect of productivity and country risk on development in the Brazilian Pre-salt Province

ABSTRACT

Twelve years after the first significant discovery in the pre-salt layer, pre-salt fields represent about 55% of Brazil’s oil production. Following an economic recession, an increase in the country credit risk, and the 2014 oil price collapse, we analyze the production of petroleum in the pre-salt zones by identifying: the break-even price (BEP), and the effect of oil price, price volatility, productivity, and country risk on wells drilled. To identify these effects on the number of wells drilled into the pre-salt zone, we estimate 100 cointegrating vector autoregression models that specify 10 measures of price and 10 break-even prices. The most accurate model measures oil prices using WTI, has a BEP of $62 per barrel (2018 prices). Results indicate the negative and positive effect, respectively, of raising the country risk and productivity on the number of development wells drilled into the pre-salt zone.

KEYWORDS:

• Pre-salt
• break-even price
• oil prices
• productivity
• country risk

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Acknowledgments

The authors thank very much Jacqueline Mariano, Paulo Antunes and Leonardo Pinto (from the Brazilian petroleum regulatory agency, ANP) and Kathleen Berger (from the Frederick S. Pardee Management Library at Boston University Questrom School of Business) for spending their time to provide crucial data for this paper and ANP for some data provided. The authors do not possess any proprietary information from ANP or Petrobras. All information presented at this work represents their own opinion based on data disclosed by Petrobras, ANP and the other sources. Many thanks to Johannes Schmidt for his valuable comments and suggestions to the early stages of this work. We thank two anonymous referees of Energy Sources, Part B: Economics, Planning, and Policy (ESPB) for helpful comments.

Supplemenary Material

Supplemental data for this article can be accessed here.

Notes

¹ Price only affects the short-run relation.

² The Brazilian state-controlled oil company ‒ initially a state-owned monopoly ‒ historically certifies about 95% of its reserves by the U.S. Securities and Exchange Commission (SEC) criteria. Currently, the certifying company is DeGolyer and MacNaughton (D&M) (Petrobras 2018a). Petrobras is controlled by the Federal Government, which is the majority shareholder.

³ It represents a BEP varying between about $12.5 and $125 per barrel (in 2018 prices) at $12.5 increments.