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Oil and gas executives will be glad to see the back of 2016. As the curtain falls on what has been an annus horribilis for the industry, the price of crude has rallied to above $50 a barrel, scant relief for the likes of Royal Dutch Shell, where rising debts continue to necessitate cost cutting and asset sales.

Shell has ended the year on something of a high, however, by getting back to what Shell does best: namely, developing technology, dealing with foreign governments and, crucially, discovering new oil.

The Anglo-Dutch giant plans to invest $10bn in deepwater production in Brazil over the next five years on top of the $30bn it has already deployed there, making it the largest foreign private sector investor in the nation by far, and second only to the Brazilian state-owned oil company Petrobras.

“Brazilian deepwater is such a high-quality business for us in our portfolio because this is where the lowest break-even prices can be realised; this is the most resilient part of our portfolio,” commented Shell chief executive Ben van Beurden in an interview in the Financial Times in November.

The move will also allow Shell to leverage the large number of assets in Brazil that it acquired via its £35bn takeover of BG Group, a welcome piece of good news compared with July, when its first full quarter results following the merger were dominated by a 72% fall in earnings compared with 2015.

In November, the company reported an 18% increase in profits in the three months to 30 September thanks in the main to swingeing cost cuts following the BG deal, which completed in February.

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By GlobalData

Untapped potential: regulatory changes open up Brazil pre-salt reserves

Shell’s bullish move in South America  is part of the company’s wider strategy to double its global deepwater production from about 450,000 barrels per day (bpd) to 900,000bpd by the early 2020s, with Brazil’s share of this production to increase from a small percentage in 2015 to roughly half.

For foreign players with deep pockets, the potential rewards in Brazil are huge. BP predicts that from 2016 to 2035, along with US shale and the Canadian oil sands, Brazilian deepwater plays will contribute all of the eleven million bpd of new non-OPEC oil supply. Burgeoning production from the country’s sub-salt oil fields may even make Brazil a major crude exporter with sales of around two million bpd by 2022.

In what now looks like a smart bit of business, Shell snapped up a 20% stake in the Libra deposit – home to an estimated 7.9 billion barrels of oil − in 2013, despite rules obliging Petrobras to be the sole operator of the field. Centrist president Michel Temer has since pushed through legislation aimed at scrapping this rule and in October Brazil’s Congress voted to ease restrictions on foreign investment.

“Petrobras is a world-class player when it comes to deepwater development but so are we.”

“I think it spreads the risk, it doesn’t necessarily make the entire sector and development of the sector reliant on a single skill pool, a Petrobras skill pool,” commented van Beurden. “Petrobras is a world-class player when it comes to deepwater development but so are we…  I think it would even work better if in some developments we were the operator and Petrobras was our partner.”

The CEO may also use industry auctions planned for 2017 and 2018 to deepen Shell’s downstream portfolio by bidding for a controlling stake in Petrobras’ fuel distribution subsidiary BR Distribuidora.

“If we participate in the 2018 bid round , the big deepwater pre-salt bid round, the real investments that will flow from that bid round will come somewhere in the 2020s,” said van Beurden.

Risk strategy: the fallout from the Petrobras scandal

Christian Stadler, professor of strategic management at Warwick Business School, spent four years inside Shell researching the company. He believes the multinational’s 103-year history in Brazil, coupled with its ability to leverage economies of scale – Shell already operates 5,500 energy stations in the country − will prove to be a significant advantage as it targets Brazil’s vast pre-salt reserves.

“Brazil is a calculated risk for Shell,” he says. “Large oil and gas operators are looking to reduce their exposure to risk in favour of large projects in areas where they know the investment environment and the geology well, increasing the likelihood of finding and exploiting new hydrocarbon reserves.

“The mega-merger with BG was driven mainly by the need for Shell to acquire new resources and that includes multiple assets off the Brazilian coast. Brazil plays to Shell’s strengths; it is familiar with how the nation works and big enough that the Brazilian Government is unlikely to stand in the way of E&P since its needs foreign investment. The bigger you are, the more seriously you are taken.”

Stadler sounds a note of caution, however, making reference to the corruption scandal that engulfed Petrobras and the left-wing Brazilian Government, leading to the impeachment of President Dilma Rousseff, who was accused of illegally moving funds between government budgets, in August 2016.

“It is by no means impossible that such a scandal will happen again in Brazil and if that affects the oil industry in terms of legal disputes then it could constitute a problem for foreign operators like Shell, who are heavily exposed there,” says Stadler. “That said, most of the remaining global oil reserves are situated in places that are politically sensitive – Nigeria, for example, where Shell is also big – so it is hard to avoid that, unless you operate somewhere like the UK, where [it] is much more expensive.”

New frontiers: pioneering technology in Parque das Conchas

Shell’s decision to double down on deepwater E&P in Brazil fits with its declared strategy to weather the low oil price environment by scaling down CAPEX and consolidating around existing core assets.

“My current capital constraints and the current capital investment programme is very much driven by things that have been awarded already and are under execution,” van Buerden told the FT.

In May 2016, Shell announced the start of the third and final phase of the deepwater Parque das Conchas development in Brazil’s Campos Basin, which is expected to add up to 20,000 barrels of oil equivalent per day at its peak. The fields have produced more than 100 million barrels since 2009.

“The current capital investment programme is very much driven by things that have been awarded already.”

“With this phased project, we have again demonstrated value from standardisation, synergies from contractual relationships and the strategic deployment of new technologies,” said Sawan. “These barrels, like other subsea tieback opportunities across our deepwater portfolio, have development cost advantages and will contribute to the strong production growth we expect from offshore Brazil.”

Operated by Shell (50%) and owned together  with ONGC (27%) and QPI (23%), Parque das Conchas Phase 3 comprises five producing wells in two Campos Basin fields (Massa and O-South) and two water-injection wells. The subsea wells are situated in water depths in excess of 5,900ft (1,800m).

It is in deepwater plays such as this that Shell can leverage its flair for technological innovation. For Parque das Conchas, Shell engineers used technology that provides a detailed picture of geology

3-5m away from the well while it is being drilled, deployed remote-controlled submarines to install 1,500hp electric pumps on the seabed and designed subsea risers that move with the ocean swell.

This type of expertise, coupled with its connections in Brazil and a diversified asset portfolio thanks to its takeover of BG, look set to make deepwater Brazil a worthwhile risk for the Anglo-Dutch giant.