The Report Company: As Petrobras slashes its production targets and OGX embarks on a new direction, BG’s figures continue to stand out in Brazil, but are there concerns about the current state of the oil and gas sector here as costs and local content requirements soar?

Nelson Silva: There is a common misconception regarding the local content requirements here, in that this is not in fact a government policy but a commitment made by Petrobras. Whoever offers the highest percentage of local content in the bid rounds becomes a contractor for that block. There is no 65 percent minimum requirement as is being suggested, but that is the kind of figure that companies are bidding and that is Petrobras’ target. Some projects will meet it, some won’t.

Our current contracts have 30-35 percent local content but they were signed in 2000, at a different time and in a different context. Of course we would like as much local content as possible, and it makes sense to have local suppliers rather than suppliers on the other side of the world, but this is not a blank cheque. We want more, but only under internationally competitive terms. We also have a graduate program, so we hire young, talented Brazilians, train them for six months and send them elsewhere, to many different countries, including the UK.

We also train welders and skilled workers in Rio Grande’s shipyards, not out of contractual obligation but from a decision to be a part of this process. There is a huge need to fill gaps there because not only are rigs being made but the second phase of construction of the yard itself is in progress – it’s like trying to build an aeroplane while it’s flying.

TRC: Does working so closely with Petrobras present its own challenges?

NS: Petrobras is the operator on our projects and they are highly capable, so we are happy with our relationship and President Dilma Rousseff herself has said that our partnership is an example for other companies to follow. Our contract is for 27 years and we will hopefully be doing business far beyond that, but plans are just plans and there are always elements of uncertainty.

We currently have one FPSO - floating production, storage and offloading unit - close to the full operational output of 100,000 barrels a day and our second and third FPSOs are close to completion. The first two, Cidade Angra dos Reis and Cidade de Sao Paulo, were completed ahead of schedule, and the third, Cidade de Paraty, is 80 percent complete and on schedule. We are building eight replicant FPSOs in Brazil at the shipyards, and there is a plan to have 14 FPSOs with Petrobras, with more to come in the future. We are confident that we can achieve that and reach the 600,000 barrels a day target that we have set for 2020.

TRC: BG has operated in Brazil since the 1990s, meaning that when the pre-salt oil discoveries were made, you were already well-established here. How much of that was good strategy and planning, and how much good fortune?

NS: The 1980s and 1990s were lost decades for Brazil but BG arrived in the middle of that believing there was the potential for something important they should be a part of. That is not luck; it is strategists looking beyond the northern seas to new opportunities.

There was gas in Bolivia and Brazil needed gas, so we bought 9.6 percent of the pipeline. In 1999 and 2000, as the Real depreciated by 100 percent and the Central Bank faltered, BG decided to increase its stake in the country. Investors were fleeing but BG was coming in, and as a Brazilian I admire that strategy, taking a risk on the country in the middle of one of its worst economic crises. It could have gone wrong, but there was a brave, solid plan behind it. In 12 years we went from participating in the most important pipeline in South America, to having the biggest gas distributor in Brazil, Comgas, to making its biggest oil and gas discovery.

We knew the theories about the pre-salt, and were buying into ultra-deepwater technology even then, when the challenges looked enormous. As a result, what once took us 400 days to drill can now take 180 days, and from ‘spud’ to ‘TD’ (from the drill bit first hitting rock to completing its journey) in 40 days. In 2000 you couldn’t imagine that kind of efficiency, but that was when we made our first big acquisitions.

TRC: Why did the company decide to sell Comgas?

NS: In the 13 years we controlled the company, we increased the number of customers threefold and the size of the network fourfold, investing annually more than ten times what the government had previously. We also dramatically improved safety, reducing incidents from 7.2 per million man-hours to 1 for every 11 million man hours. We had one accident in 2011 and we considered that one too many. We delivered performance, but it wouldn’t have meant anything if we hadn’t improved safety. It was a highly successful example of privatisation in Brazil and it showed our commitment to the country and our belief in it.

The decision to sell was part of an all-encompassing strategy to concentrate on the upstream part of the business, the production, not just in Brazil but in the rest of the world too. We want to raise US$5 billion in the next two years to invest in that expensive area, and that means divesting some of our assets. It's a gigantic amount that will make BG comfortably the biggest foreign investor in Brazil. No other company comes even close.

TRC: Where will the majority of this money come from?

NS: We are in talks with BNDES, but there is no doubt that, with oil projects, it can take several years to become cash positive. We are confident that we can do it quickly, though, and we’re already selling pre-salt oil. Add in the cash from BG Group, project financing and the help of institutions like BNDES and we will get there.

Nowadays, the pre-salt industry is a game of costs. You cannot exclude technology, because it can always improve efficiency, but right now the industry is not trying to jump a technological barrier, it is about doing what we do even better, reducing times, and improving productivity, making exploration even more cost-efficient.

As you learn and improve your processes, you decrease the risks. Make no mistake, risk is always there and is always to be managed, but as we proved with Comgas, we can manage risk and keep it to tolerable levels. But if you don't follow processes, if you try to cut corners, sooner or later you will run into a major issue.

TRC: What is BG’s strategy for the coming years?

NS: BG has a great base in the country and that is because we trusted and we had faith when many people were turning their backs on it. We want innovation. We want technology in practice, not for the science or for curiosity but developed together with Brazilian universities and institutes, to generate intelligence all over the country and apply it to innovation, to equipment, to processes that both we and the operator can use.

Our sustainability strategy is focussed on education, incorporating research and development, social investments, local content and environmental protection. Fifty percent of the billions of dollars we are investing is spent on drilling, so whatever we can come up with to optimise this area, to save time and money, will have a huge impact.