In January 2015, Portugal popped up all over the news and not because of another record break by Cristiano Ronaldo. An English company named IONIQ Resources confirmed that they had conducted a study using revolutionary technology that found six potential oil fields in Portugal, amounting to, at least, 1 billion barrels or something around 43 thousand million Euros (25% of Portugal’s GDP).
Yet, after 22 months since this news was released nothing significant has been done. In this article, I will try to find an explanation for this absence of action and introduce the reader to some of the key components of oil contracts.
Portugal is known as one of the most advanced countries in terms of renewable technology and green energy generation. Let me take this opportunity to recover an awesome recent news, dated from May 16, when Portugal generated energy without recurring to fossil fuels during 107 straight hours (more than 4 days). However, as any developed country, this European corner cannot store enough energy to use at it pleases which, along with the nonexistence of fossil fuels, forces Portugal into the group of countries which imports more than 50% of the raw materials required for energy purposes and other primary uses.
Since 2005, Portugal spent around 7500 M€ every year in crude and 2.2 M€ in natural gas (LNG included). Along with the remaining refined products, Portugal spent more than 13000 M€ per year, 8% of the Portuguese gross GDP.
The interest in drilling in Portugal goes back to 1938, date when the first inland exploring permits were emitted for Lusitanian and Algarvian Basins (see Illustration 1). These permits changed hands several times during the first 30 years. During that time, data on more than 3 thousand km of reflective seismic and gravimetric tests as well as several boreholes (up to 500m deep) was collected, all in the Lusitanian Basin. These tests showed strong signals of oil presence. Some of this oil rigs even achieved a sub-commercial output.
After that, the interest in Portugal for oil exploration was intermittent, roughly following this commodity’s market value.
Nevertheless, from the late 70’s until the turn of the century, investments were made and a lot of different consortiums were created to search and explore, specially, inland oil. After that, those investments grew, stimulated largely by the bullish trend in oil generated by the Chinese economic growth projections (see Illustration 2). From all of those, only Mohave Oil & Gas achieved production stage and survived until 2006.
The year 2007 (when WTS oil peaked over 147 $/bbl) marks the first real commercial interest in Portuguese oil, with 12 new contracts signed: 5 onshore/offshore and 7 deep-offshore. However, the following steep drops in oil prices, spooked the investors again. Nevertheless, 2011 (again during another oil bullish trend) ended with two more concessions contracted in the Algarve deep offshore Basin (see Illustration 1).
When Mohave Oil & Gas closed in 2014, 3 consortiums came to the table to replace it. So, what’s the situation with now?
Putting the numbers down
Currently there are five main contracts of concession to perform studies across Portugal that were signed in different periods, the oldest dating back to 2007 and the most recent to 2015.
In summary, these contracts refer to the following zones (see Illustration 3):
- 2 inland areas assigned to Australis Oil & Gas Ltd in the Lusitanian Basin. The areas are named as “Batalha” and “Pombal” and the contract was signed on September 30th2015;
- Portfuel, petróleos e gás de Portugal Lda. signed a contract on September 25th2015 concerning two areas in the Algarve Basin, both inland;
- A consortium between Repsol and Partex have four deep-offshore areas. Repsol first acquired the areas “Lagosta” and “Lagostim” in late 2011 (at the time with RWE) but in 2015 (now with Partex) acquired other two Algarve zones called “Sapateira” and “Carangueijo”;
- GALP is the major player in terms of areas to explore after Partex. This Portuguese company established two consortiums back in 2007: one with Partex and Petrobras for the concession of the deep offshore areas “Camarão”, “Amêijoa”, “Mexilhão” and “Ostra” and other with Partex and Hardman regarding the areas of Alentejo Basin called “Lavagante”, “Santola” and “Gamba”. The first concession was situated in the Peniche Basin, above Lisbon and changed hands in May of 2013, when Petrobras gave place to Kosmos Energy LLC. The second contract was updated three times after the first signature data, prevailing always GALP as a partner, which, currently works along with ENI, the Italian energy giant.
Now that we know which areas are “active” in Portugal, let’s take a peek at the contracts signed and see what’s the real deal.
According to the law for oil activities, such as research, prospection or production, created in 1994:
- Contracts have a duration of 8 years for research and prospection, with an extension possibility up to two more years maximum. If the contract operator finds oil and wants to pass into production stage, 25 more years are added, counting from the date of the signing of the new contract (which can be prolonged for 15 years more).
- After the first five years of contract, the consortium must cut the concession area by 50%. If the contract comprehends various concessions, the 50% can be divided unequally, if each zone is cut at least by 25%.
- The Government may require, if needed for war or emergency, all or part of the oil produced by the consortiums with the purpose of assuring the strategic needs of the country. In this case, the Government will compensate the consortium by paying them at current market price.
- An environmental impact assessment is only required if the production stage is activated. Nevertheless, the consortium is responsible for assuring, through previous reports, operative measures to mitigate all environmental impacts during the studies.
- All the gas extracted during the production stage is totally owned by the consortium, which reserves the rights of sale, consumption, storage or even donation to the Government. The Government also allows the excess of gas to be burned in the platform torch.
- A tax is created to be applied over the production, calculated based on a progressive evolution. This tax is not applicable to Natural gas production.
Going through all the contracts and addends, it is possible to conclude that there are contracts extended over the 8+2 years that the law initially allows. For example, the contract signed in 2007 by the consortium HARDMAN-GALP-PARTEX (currently ENI-GALP) was extended 6 more years. Other curious aspect is the contract signed by the Portuguese Government and REPSOL-PARTEX, where the contract has a duration of 11 years. A situation defined in the law for oil activities (see link above) where contracts regarding deep-offshore concessions have a “special status”, allowing the consortiums to not fulfil certain rules, such as contract periods, concession reduction periods or research studies that are stated in the original contract.
Based on the information collected in the contracts published by ENMC (National Authority for Fuel Market), by the end of 2016, Portugal expects to collect more than 6 M€ (sum since 2007) from all the valid concessions, and 11 M€ more by the end of all contracts (with all the extensions approved until today). This amount includes concession rents (€/km2) and contract fees, one per contract and other per year of contract. Back to C. Ronaldo, our Captain earns almost 10 times more PER YEAR what Portugal earned already with oil prospection since 2007.
But hey!! The real deal must be when the black gold starts to pop out!
In this case, the rent per km2 rises in most of the locations until the 240€/km2. Moreover, Portugal receives a percentage of every barrel extracted and sold (after the consortiums recovers their investments, and after deducing operation costs). It’s almost impossible to estimate, without inside knowledge, how much would the production phase could cost (EIAs, platform constructions, storages, transport, manpower, etc.) but, for the sake of argument, let’s suppose that the consortium has already recovered all the investment and it’s now in a stage of production where it should share some profits with the State. The contracts define the following percentages from certain amount of crude:
Of course this table is far from a near reality but the goal here is to have some numbers, just to have a roughly idea of how these contracts work. So, in this utopic scenario, where all the concessions ended up finding oil, the first 15 million barrels produced and sold would inject in the public entity DGEG as much as 319 M€. This number of barrels can be translated to a daily production of around 13000 bbl/day, which is a really modest production level. So, let’s put some positivism and rise this daily output to another slightly higher, but still modest, number of 50 000 bbl/day (18.5 Mbbl/year). This number would add another 95 M€. So we are talking about almost a 400 M€ with a barrel at current prices and assuming a breakeven cost of 45€/bbl (Brent index).
So, back to the initial statement, Portugal spends around 7.5 B€ per year in crude which represents around 129 million barrels a year. If Portugal wanted to consume only national oil, the daily output of each consortium would have to be around the 60 000 barrels, this strategy would reduce the oil expense around 523 M€/year (something like 7%) from the annual budget for this commodity.
Is it worth it?
It is understandable that any income is important, especially in this case where a few studies are conducted and some seismic tests are performed having minimal impact in the environment. Furthermore, the production phase can bring a lot of extra income and advantages to the country as more employment, investments and, of course, business flow.
However, production without the necessary and duly (extensive and careful) research, with a more holistic approach, can become catastrophically costly – economically, socially and environmentally – for instance:
- Earthquakes – The recent EU-funded SHARE project, among several other national studies, clearly show that Portugal is an active, and possibly very strong, seismic hotspot;
- Leaks – Despite the advanced technology used in offshore drilling, strong Atlantic swells and the seismic risk mentioned before, increase the risk exposure to possible leaks (we all remember the BP Deep Horizon oil spill back in 2010).
- Protected zones – Portugal has many protected natural coastal and inland ecosystems, which are not only rich in biodiversity but are also a major source of income to the nation’s economy which can be affected in adverse ways.
Finally, focusing on the energy sector, Portugal’s efforts to achieve the 2020 targets as well as to keep the status of lead example in sustainability and renewable energy have to weight against the need to change for an oil economy. It’s late to follow the example of Norway but Portugal can actually achieve the same goals in a greener way. Other interest indicator would be the period of amortization from each consortium, since it’s totally different to talk about 5 years waits to see recurrent profit or 10 years. In the 21stcentury, 10 years is a lifetime technologically speaking, so who can assure how much the world’s economy will shift during that period?
Risks can be estimated. Risks can be minimized. But History tells us that sometimes the problem doesn’t reside in that which we can predict, but in that which we can’t. Is the expected return enough to cover that risk? That is a qualitative deliberation, one which the reader must decide for himself.
Jorge Seabra | Energy Procurement Consultant