THE PRE-SALT PETROLEUM DISCOVERY OFFSHORE BRAZIL: WHAT MARKETING OPPORTUNITY DOES THIS CREATE FOR BRITISH OIL AND GAS COMPANY, BG GROUP?

Transcription

1 THE PRE-SALT PETROLEUM DISCOVERY OFFSHORE BRAZIL: WHAT MARKETING OPPORTUNITY DOES THIS CREATE FOR BRITISH OIL AND GAS COMPANY, BG GROUP? Sally Vinod Khatumal 1 ABSTRACT:The Terms of Reference (TOR) of this Marketing Report requires an analysis of the marketing opportunity presented to BG Group by the discovery offshore Brazil of petroleum resources known as the pre-salt or sub-salt reserves. The Report requires a critical analysis to be carried out, referring to relevant marketing principles and the application of appropriate models to assess BG s operating environments in Brazil and its potential for strategic success with particular reference to its assets of pre-salt reserves whose products upon exploitation of these oil and gas resources will be taken to market. 1 The author holds an LLM in Petroleum Law and Policy with Distinction and is currently an M.Sc. Candidate in International Oil and Gas Management at the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland, UK. She also holds an LLB (Hons) and a BA (Hons) in French, and was called to the Bar of Sierra Leone in A corporate and commercial lawyer in Sierra Leone, she is a member of the International Bar Association, the Sierra Leone Bar Association, FIDA, and a student member of the Association of International Petroleum Negotiators (AIPN). salvin304@yahoo.com 1

2 EXECUTIVE SUMMARY Energy consumption in its various forms cuts across all human activity, and marketable energy, whether fuels or electricity, is a basic input for the production and marketing of goods and services, thereby causing energy prices and availability to be of interest to consumers and producers. A new frontier has been opened for Brazil in the Santos, Campos and Espirito Santo Basins. Former President Lula da Silva described the country s newfound wealth during the inaugural extraction from the tupi superfields as a second independence for Brazil (Kaye and Graefe, 2011). Brazil s pre-salt petroleum discoveries present an opportunity for international oil and gas companies to harness petroleum resources and bring them to market upon production. The pre-salt discoveries are important because of the enormity of oil and gas reserves under the salt layers. The focus here is on BG group and what the pre-salt assets mean for the company s strategic success in relation to the opportunities the resources will create for this oil and gas company with a specialism in gas markets. The goal of this marketing opportunity report is to examine the resources as products owned by BG Group and the target markets that they will serve efficiently and how this will enhance BG s expansion strategy and positioning strategy thereby creating a competitive advantage for the company and supporting its sustainability in the energy market. 2

3 TABLE OF CONTENTS ABBREVIATIONS 4 1. INTRODUCTION OVERVIEW OF THE PETROLEUM INDUSTRY IN BRAZIL Oil and Gas in Brazil Company Profile of BG Group The Pre-salt Discoveries Competitors in the Market 9 3. ENVIRONMENTAL FORCES IN BRAZIL Macro environment: PESTEL Analysis Micro environment: SWOT Analysis of BG Group ANALYSIS OF BG GROUP S MARKETING OPPORTUNITY The Opportunity The Customers: Segmenting, Targeting and Positioning Forecasting CONCLUSIONS...16 REFERENCE LIST.. 17 APPENDIX

4 ABBREVIATIONS BCF BOE BOED BBL/D CNOOC EIA E&P FDI FPSO Vessel FRSU FT IEA IOC LNG Mtpa MMCF/d O&G PESTEL PETROBRAS SWOT TCF TOR U.S Billion Cubic Feet Barrels of oil equivalent Barrels of oil equivalent per day Barrels of liquids per day China National Offshore Oil Corporation Energy Information Administration Exploration and Production Foreign Direct Investment Floating Production Storage and Offloading vessel Floating Regasification and Storage Unit Financial Times International Energy Agency International Oil Company Liquefied Natural Gas Metric Tonnes per annum Million Cubic Feet per day Oil and Gas Political Economic Social Technological Environmental and Legal Petroleo Brasileiro S.A Strengths Weaknesses Opportunities and Threats Trillion cubic feet Terms of Reference United States 4

5 INTRODUCTION This report will discuss the marketing opportunity created for international oil and gas companies by the enormous pre-salt petroleum discoveries offshore Brazil, selecting to examine one such international company, a British independent petroleum exploration and production Company, BG Group Plc. which has a strong focus on gas sales and distribution including Liquefied Natural Gas (LNG). If BG s activities in Brazil for the past sixteen years have been successful, the pre-salt discovery may be set to enhance the position of this firm whose competitive advantage should position it to create and deliver value for its customers both within and outside Brazil. The pre-salts are therefore important due to the significance of petroleum accumulations in the region. Brazil, having been listed as the world s ninth largest producer as at 2009, its oil production has experienced steady growth in the last few years and reached 2 million barrels per day in Production is expected to gain a higher growth due mainly to exploitation in the pre-salt deposits located offshore (Brazilian O&G Sector, Swiss Business Hub Report, 2011). Whilst it is certain that the development of the pre-salt petroleum deposits require significant investments in state-of-the-art technologies to access them, it is believed to present enormous opportunities for suppliers too (Brazilian O&G Sector, 2011 Report). As for BG Group s activities in Brazil, nothing is more important than for an entity to find and exploit new market opportunities especially when the regions with significant petroleum deposits are dwindling. According to Nelson Silva, President of BG Group Brazil, Brazil will be by far the most important country in BG s operations by 2020, and whilst aiming for production output of 400 million barrels of oil equivalent (boe), (Flick, J., 2011), the company plans a ten billion-dollar investment enterprise, a move which will make the company the biggest foreign investor in Brazil (Flick, J., 2013). It is clear from the foregoing statement that BG Group considers Brazil a vital part of its strategic success. This Marketing opportunity report aims to show that BG Group has a significant opportunity in the presalt reserves offshore Brazil to enhance its business portfolio for competitive positioning that will contribute to sustaining its market success. The analysis will be founded on principles of Marketing, thereby looking at the petroleum industry in Brazil and the external and internal environments in which BG operates. In looking at how its positioning strategy will be executed I shall look at BG s potential segments and target customers that the products from the pre-salt regions will serve. The research approach consists therefore of secondary literature review by the use of texts, journal articles, reports critical to the case study, and reliable and trusted websites capable of providing authoritative data. Following the Executive Summary, the Report is divided into five chapters. Chapter one is the Introduction, briefly presenting BG Group and showing how this research work is structured. Chapter two gives an overview of the petroleum industry in Brazil whilst chapter three analyses the 5

6 environmental influences relating to BG s operations. The fourth chapter analyses BG s marketing opportunity and the research concludes in chapter five. 2. OVERVIEW OF THE PETROLEUM INDUSTRY IN BRAZIL 2.1 Company Profile of BG Group Plc. BG Group Plc. ( BG ) is a British exploration and production company listed both in London Stock Exchange and the United States (US) over-the-counter International OTCQX market. BG Group occupies a position in the global energy market as a leading player especially in natural gas, operating responsibly and delivering outstanding value to shareholders by connecting competitively-priced resources to high-value markets (BG Group Annual Report, 2012). With activities in over twenty-five countries in five continents the company has a wide business portfolio of exploration and production (E&P) of oil and gas and Liquefied Natural Gas (LNG) interests as well as transmission and distribution interests. BG Group has a deep understanding of gas markets and a track record of discovering and commercialising petroleum reserves with experience in the gas value chain from exploration to delivery to the consumer (BG Group, Homepage). In 2012 BG made a total operating profit of $8 billion paying dividends to its shareholders at 10% more than that paid in the previous year (BG Group Annual Report, 2012). In 2011 the Company reported for its proven reserves, 12.8 trillion cubic feet (tcf) of natural gas, 1.1 trillion barrels of oil and an annual production of 234 million barrels of oil equivalent (boe). It is one of the major E&P companies in the North Sea and has also entered the lucrative shale gas market of the US via an alliance with a mining and exploration company, EXCO Resources Limited. Headquartered in the United Kingdom (UK), BG employs over 6,000 employees from more than 70 nationalities, the majority of whom work outside the UK. BG Group is one of the first oil and gas groups to take an interest in Brazil when it entered in 1994 to help build a $2billion gas pipeline to Bolivia. This has created first entry advantages for the company (Financial Times, May 2012). Today BG holds world class assets in the pre-salt discoveries offshore Brazil and is so far the only international O&G company with participation in the five big discoveries in the pre-salt Santos basin: Lula, Iracema, Sapinhoa, Iara and Carioca (Company website, Press Release, 8 January, 2013). BG Group is therefore an established presence in Brazil which enjoys and maintains a good relationship with State-run Petrobras, the government of Brazil as well as Brazilian Development Bank, BNDES, Brazil s State bank and principal financial agent (Silva, 2012). 6

7 2.2 Oil and Gas in Brazil As an energy consumer Brazil is the ninth largest in the world and third largest in the western hemisphere behind the U.S and Canada. Its primary energy consumption has increased by one-third in the last decade by virtue of its sustained economic growth. Additionally the country has increased its production of oil and ethanol. Increasing its domestic oil production is one of the government s long term goals, so the discovery of significant pre-salts deposits is a potential to transform Brazil to one of the largest oil producers in the world (EIA, Feb. 2012). In 2010, 2.7 million barrels of liquids per day was produced, 75% of which was crude oil. Most of the oil produced in Brazil comes from the southeastern region in the states of Rio de Janeiro and Espirito Santo, is of heavy grade and over 90% is located offshore in very deep water. The state oil company Petrobras remains the dominant participant in Brazil s oil sector and holds important interests in the upstream, midstream and downstream activities. Six fields in the Campos Basin, operated by Petrobras, account for more than half of the crude oil production in Brazil and they produce between 100,000 and 350,000 bbl/d. Petrobras had a monopoly over oil-related activities until 1997 when the Brazilian government opened the sector to competition. Therefore international oil and gas companies also play a role in production. Brazil continued to be a net liquids exporter and remained so until 2011 when the economy grew rapidly driving up the demand for fuel. The Agency charged with monitoring the oil sector is the National Petroleum Agency (ANP) and it is responsible for issuing exploration and production licences and ensuring compliance with relevant regulations. The operating environment in Brazil has changed after recent legislation was created following the pre-salt discoveries. This will be discussed in paragraph 2.3 below. Proven natural gas in Brazil in 2012 is reported by Oil and Gas Journal (cited in US EIA 2012) to be 14.7 tcf. The majority of gas reserves in Brazil are held in the Campos, Espirito Santo and Santos Basins. In spite of Brazil s substantial natural gas reserves, production has been slow in recent years because of the lack of capacity in domestic transportation and low domestic prices. Most of the 445 billion cubic feet (bcf) produced in 2010 was associated with oil. Indeed natural gas forms a small part of Brazil s overall energy mix being only 7% of total energy consumption for Again Petrobras plays a dominant role in Brazil s natural gas supply chain. The company controls the majority of gas reserves and also is responsible for most of Brazil s gas production as well as for gas imports from Bolivia. It controls the national transmission network and holds an interest in eighteen of Brazil s twenty-seven state-owned natural gas distribution companies. Onshore production of gas goes mostly for local consumption due to lack of transport infrastructure. Petrobras plans to develop the sector 7

8 by bringing on stream several natural gas projects. A new Natural Gas law passed in 2009 which created a separate regulatory framework is expected to facilitate private investment in the natural gas sector. To meet its gas demand Brazil currently imports gas by pipeline from Bolivia (78%) and LNG imports come from Trinidad and Tobago, Qatar, and Nigeria. LNG imports are expected to increase more than pipeline imports. The country has two liquefied natural gas (LNG) regasification terminals- both of which are floating regasification and storage units (FRSU) with a combined send-out capacity of 740 million cubic feet per day (MMcf/d) and Petrobras plans to commission a third terminal in 2013 which will have a capacity of 495 MMcf/d..2.3 The Pre-salt Discoveries The pre-salts are geological formations of oil deposits located under thick layers of shifting salt in ultradeep waters of about 18,000 feet under the seabed in the continental shelf offshore Brazil on the coast of Rio de Janeiro, Sao Paulo and Espirito Santo states. The reservoirs span an area of about 149,000 km 2 (Petrobras Report, 2010). In 2006 the first deposit, Tupi, was found with an estimated 8 billion barrels of reserves including oil and natural gas (IEA World Energy Outlook, 2009). Soon after, in 2007, other similar discoveries were made: Carioca, Iara and Guara. Studies carried out have given the belief that the total volume of oil and gas recoverable to be more than 50 bboe, about four times greater than Brazil s reserves in 2009 (IEA, 2009). By this significant volume, the pre-salt discoveries have generated new opportunities while at the same time created new challenges for business internationally. Whereas they have a potential to position Brazil as the sixth world oil producer by 2035, the depth of most of the fields poses a challenge for E&P activities (IEA, 2009). The potential of the pre-salt resources prompted the need for a change of the legal framework governing petroleum exploitation in Brazil. In 2010 the Brazilian Congress enacted three laws establishing the new legal system to address the new discoveries of the Pre-Salt area and the changing petroleum environment (Zacour, et al, 2012). The new system replaces the concession-style system with a production sharing regime giving the federal government greater control of its petroleum resources (Watson, 2010). The implication is that state-owned Petrobras gets a minimum operating stake of 30% in all new pre-salt fields and will be Operator. The new production sharing system will however not affect those pre-salt areas (28%) already granted under the concession system (Watson, 2010); also unaffected are onshore or shallow water concession grants. BG Group has interests in the pre-salt areas of Campos, Santos and Espirito Santo Basins. Blocks BM-S- 9 is one of BG s big five discoveries in the Santos basin where the company has 30% interest, Repsol Sinopec Brazil has 25% and Petrobras 45%. BG anticipates production from this Basin to be 2.3 million boed by They also have BM-S-10; BM-S-11, BM-S-50 and BM-S-52 (BG Homepage, 2012). 8

9 2.4 Competitors in the Market BG Group has had a presence in Brazil since 1994 and when the market initially opened up to competition in 1997 Royal Dutch Shell was the first international oil company (IOC) to produce oil in Brazil. Now, nearly twenty years in Brazil, it is clear that BG and Shell can no longer have the market to themselves. BG faces increased competition since what its competitors produce accounts for a third of BG s total volumes (Leahy, FT, May 2012). A number of the major IOCs and other energy firms are active in Brazil s O&G market: BP which has bought $7 billion in assets from Devon Energy; Exxon Mobil, Chevron, Repsol, El Paso, Galp Energia, China s Sinopec which has bought 30% of Galp Energia s Brazilian assets for $2.5 billion in 2011 and in 2010 paid $7.1 billion for 40% of Repsol s assets in Brazil (FT, May 2012). Norwegian Statoil is Operator with 60% interest in near-by Peregrino field in Block BM-C-7, in the Campos Basin. There are other firms such as Anadarko, ONGC and TNK- BO (FT, May 2012), and the mining giant, Vale, now involved in petroleum E&P in Brazil (Ernst & Young, 2011). The competition also stems from local companies in Brazil, prominent among which is OGX Petroleo e Gas, with a large complement of former Petrobras employees, has started production from the Campos basin in 2011 (EIA, 2012; Ernst & Young, 2011). BG as a natural gas company is the largest UK investor in Brazil with $5 billion tied up in assets and another $10 billion to be invested. It recently divested its stakes in Comgas, Brazil s natural gas distributor, and maintains a stake in the gas pipeline between Brazil and Bolivia. (Leahy, FT, 2012). But the dominant player in the sector is Petrobras with important positions in upstream, mid, and downstream activities (EIA, 2012). Mr. Silva, BG s Head of Brazilian operations told Financial Times in April 2012 that the company plans to invest another $2 billion in research and development in an endeavour to address the chronic shortage of skilled professionals in the industry (FT May 2012). 3. ENVIRONMENTAL FORCES IN BRAZIL 3.1 Macro environment: PESTEL Analysis To analyse the macro environment I have chosen the PESTEL framework. The macro environment is the larger external environment of forces that shape opportunities or pose threats to the organisation. Thus the PESTEL framework is used to identify the impact or influences on the organisation by what might drive change in terms of the political, economic, social, technological, environmental and legal forces (Kotler & Armstrong, 2008; Johnson, Whittington and Scholes, 2011). Some of these changes could be government policies, new laws, tax changes, trade barriers and demographic changes. 9

10 PESTEL ANALYSIS Political Economic Social Technological Environmental Legal Political stability and geopolitics in the Brazilian environment implies a positive business environment for the oil and gas sector. No foreign policy objectives that could be detrimental to the country s overall commercial objectives. Additionally, the government has made a commitment to use the new oil revenues for the public good (Ernst & Young, 2011; 2012). This change in position in the ranking of global players has also seen a change in Brazil s legal system to address the new wealth created in the pre-salts discoveries. Brazil is an attractive destination for foreign direct investment (FDI). Economically Brazil is one of the most prosperous and stable countries in Latin America with a gross domestic product (GDP) of $2.47 trillion in By 2017 the economy is expected to grow to $3.17 trillion (Lucintel Report, ). It has strong internal markets and prices of fuels are determined more by domestic policies than by international trends (Ernst & Young, 2012). However, as its growth momentum continues high tax and interest rates, and inflation trends are major concerns for businesses. Bureaucracy and complexity also associated with tax obligations in achieving compliance at the federal, state and municipal levels. These are factors that can have a direct impact on BG s business success in Brazil. Social and Cultural: Brazil s population is one of the highest in the world estimated to be 201,009,622 in 2013(CIA World Factbook, 2013). Its growing skilled labour force is available at lower costs and a strong workforce is a key driver for economic development. However the country still has a shortage of skilled personnel in various sectors including the oil and gas, shipyards and infrastructure sectors. Work permits issued by the Ministry of Labour in 2011 totalled 53,441 and this is still not enough to cope with the high level demands created by the pre-salts discoveries (Ernst & Young, 2012). The use of technology is at the centre of oil and gas exploitation. Apart from the novel technology required to access the prospects lying in the pre-salt regions, there are gas monetisation and transport considerations such as transporting gas to shore instead of flaring and other issues relating to the Floating Production Storage and Offloading (FPSO) unit logistics (Ernst & Young, 2011).BG will be using a number of FPSOs in presalt E&P. Environmental Research and regulations aimed at addressing environmental issues are gaining a sense of urgency especially after the BP - Deepwater Horizon disaster of 2010 in the Gulf of Mexico. The pre-salt fields have created an increase in economic activity in Brazil. With Brazil s fossil fuel market expanding, this will likely expand its carbon footprint. (Ernst & Young, 2012). BG will need a deeper assessment of risks and safety in the pre-salt area. For the pre-salt discoveries the legal framework has changed from the Concession system to a system of Production Sharing Contract which means that legal ownership in the petroleum rests with the Federal government and IOCs will take their share based on the terms of the contract. The new legislation also provides that state-owned Petrobras will be Operator in all pre-salt projects with a minimum of 30% interest in each project. Later on in 2013, Brazil plans to hold new bidding rounds for oil and natural gas concessions and also the 1 st Auction for new exploration licences in the subsalt regions. BG intends to participate which would mean potentially more assets to exploit in the region (Fick, 2012). 3.2 Micro environment: SWOT Analysis of BG Group The SWOT analysis is a strategic tool used by an organisation to evaluate its internal factors (micro environment) by looking at its strengths and weaknesses and comparing them to the forces of the 10

11 external environment thus identifying opportunities and threats that may help it serve its customers and achieve its overall objectives (Kotler & Armstrong, 2008). Some of these factors include competitors, customers, suppliers, distribution channels and the public. This can help ensure that key requirements of the market and particular competencies of BG Group render a strategic fit. STRENGTHS BG is an LNG major, with vertically integrated operations and a wide global presence. One of the very early entrants into the Brazilian O&G sector and has benefitted from first-mover advantages in terms of the calibre of assets it has acquired in the country by significant acreage positions especially the unique Santos Basin estimated to be 6-8 billion boe net to the company. WEAKNESSES The shortage of skilled staff to cope with its increasing activities in Brazil while at the same time to be in compliance of local content requirements all go to creating challenges for the company. BG s track record for value creation is founded on a number of competitive advantages including specialism in gas, world-class exploration performance, a unique LNG model (of flexible contracts to respond to changes in demand and customer requirements) and commercial agility (Annual Report, 2012). As an example BG moved quickly to divest its interest in Brazil s Comgas to acquire some of the prolific assets in the pre-salt regions. BG has a deep knowledge of local and international markets and while it maintains its distinctive gas capabilities, the company has adapted its approach to oil and secured a material exposure to oil prices (ibid.) It has the skills to compete along the entire gas value chain. It can identify high value markets where there is demand, find the resources and connect economically to those markets by pipelines or vessels (ibid.). Consistent leading exploration performance, outdoing other major companies in the exploration categories (Wood Mackenzie, 2005). Has a strong balance sheet OPPORTUNITIES Opportunities for significant growth in its activities including executing more strategic contract and the potential to increase focus in oil refining and supply. BG s business segments could see a focus on crude oil sale and export BG s focus on R&D and collaboration with especially Petrobras will lead to enhanced capabilities in new technology. THREATS Competition from other IOCs operating in the O&G market place in Brazil. Potential environmental challenges regarding the inherent geological and geophysical properties of the subsalt are an ever-present threat to the safety of operations. Another threat may come from substitute energy fuels like ethanol and other renewables, even if benign. 11

12 Development opportunity for associated gas exportation through pipeline from Lula field to Mexilhao. Potential increase in global demand for oil and gas resources. Looking at the foregoing analysis of the external environment and BG s internal environment above, one can deduce that Brazil is not only attractive and stable to operate in but also BG s strengths and opportunities available to it are sufficient to maintain its competitive advantage and to handle weaknesses or threats that may confront the company. Several references have been alluded to above regarding the huge opportunities the pre-salt resources present, so the prospects for growth seem good. 4. Analysis of BG Group s Marketing Opportunity To identify, discover and capture new resources is a strategy that O&G firms do not ignore. The Head of BG s operations in Brazil, Nelson Silva, answered what he liked most about Brazil as being BM-S-9, BM-S-10, BM-S-11, BM-S-50 and BM-S-52 (Financial Times, May 2012). These codes which have come to be known as the big five are some of the most coveted blocks in the Santos Basin in Brazil. Accessible only by deep water drilling these reserves are said to be going to produce nearly as much as the entire UK North Sea in the next decade, which will launch Brazil in the top five oil producers of the world (Ibid). According to Mr. Silva this is also crucial for BG s future as it is the only foreign oil and gas company to hold stakes in all five offshore blocks, a fact which promises to make BG the second biggest O&G entity in Brazil after Petrobras. 4.1 The Opportunity Opportunities are said to be unsatisfied customer needs that the organisation has a good chance of meeting successfully (Lewison, 1996). In the first three quarters of 2011 there were nineteen major O&G well discoveries in Brazil - the highest number in the world and seventeen of them were in the subsalt regions of the Santos, Espirito Santo and Campos Basins (Weedin, 2012).The pre-salt (subsalt) fields consist of lighter and sweeter (less sulphur content) oil that is not only easier to process but also commands a higher price in global markets (Kay and Graefe, 2011). The implication of this is that it presents an opportunity for profits although as Kay and Graefe point out, the unprecedented depth of the subsalt fields signifies that production will be difficult and costly. The global community is however not losing sight of how Brazil s anticipated export capacity will play a major role in the global energy market (Kay and Graefe, 2011) which means also that the discoveries present an increase in BG s business portfolio. Viewing it in the particular perspective of Latin America, the two largest net oil exporters Mexico and Venezuela have been forecast to decline in production (Kay 12

13 and Graefe, 2011), which means the opportunities are wide ranging and will impact BG both directly and indirectly. Whilst global demand for oil continues to increase, access to new sources of supply become critical and in Brazil where BG is making good progress in the Santos Basin, one of the key hydrocarbon plays, this will help address such rise in demand (IEA World Energy Outlook, 2011 Special Report). In 2012, overall global demand for crude oil increased by about 1 million bopd (IEA). 4.2 The Customers: Segmenting, Targeting and Positioning The much needed O&G as products is one thing to have but the critical success factors for BG would also include having a market for these products; customers that BG would serve efficiently by understanding what they want or need. I have stated among its strengths in the above SWOT analysis, the company s knowledge of the markets and its ability to connect to those markets. BG must first get an overview of the overall market potential and how much of the market they can capture. BG Group should be able to identify a target market for its products and ascertain who their ideal customers for the oil and gas coming from their pre-salt assets would be (Kotler & Armstrong, 2008). Given that they have been operating for many years they already have customers, but it may be that the potential increase in reserves due to its huge subsalt assets will mean targeting other customers for their increased portfolio of assets. So it may well be a combination of actual and potential customers. BG s business segments are divided into several activities: (i) its upstream business of oil and gas exploration and production; and in Brazil in particular, in 2012 BG lifted seven cargoes totalling over 7 million barrels of crude oil from FPSO 1 from the Lula fields for export. FPSO 2 started production in January 2013 and FPSO 3 is on course for production later in the year. Then (ii) its downstream business segment of LNG shipping and marketing with facilities for liquefaction and regasification to maximise the value of its supplies (BG Homepage). In 2012 net production from Brazil was 9.3 million boe. During 2011 BG s LNG business segment benefitted from strong market demand, especially in Asia where it delivers 86% of its LNG cargoes to global markets. BG has even signed further agreements to supply LNG volumes (BG Homepage). Who are the customers? Due to the nature of the products BG s customers are mostly other businesses, so it operates in a business to business market, selling to national energy authorities, petroleum companies and refineries. Its crude oil is sold to refineries and LNG s complex processes go through various phases, from the well head via pipeline to liquefaction facilities and warmed in regasification terminals onshore for ultimate supply of the LNG product (BG Homepage; Annual Report, 2012). It is 13

14 clear that gas from the pre-salt fields will boost BG s gas sales, whilst crude oil will enhance sales in the oil business segment. What kind of customers does BG target then? BG supplies the world s largest energy markets (BG Homepage) so this means that it has a wide international segment of target customers. It has customers throughout the world both on a long-term and short-term basis (Annual Report, 2012). Locally in Brazil, after the company divested its interest in Comgas it is the assumption that it may not be servicing the local segment at the moment. BG has for its customers the United States to whom it sells its oil and LNG until USA s shale gas development increased, Europe including the UK, home to BG, and a wide customer base in Asia. Singapore, South Korea, China, India, and Japan are some of its key markets. At the moment BG has a plethora of contracts signed last year for petroleum products of differing durations some to supply until 2035, e.g., with CNOOC; with Singapore Energy Market Authority for the supply of 2.7 metric tonnes per annum of LNG for the next twenty years. (See Annual Report 2012 under Marketing ). The Company Report states (at pages 8-25) that in addition to its own resources BG also buys gas through long-term purchase agreements or on the spot market so as to meet the demands of its customers. This tells the role the pre-salt reserves will play for BG s customer base in terms of customers wants and needs, whether existing or potential customers. Moreover, given that economic growth in emerging markets especially in Asia, will continue to increase, since India and China have more than doubled their global energy demand, BG believes that the global demand for gas will grow at a compound rate of 2.7% per annum through to 2020 (Andrew Gould, Chairman, BG Group, Annual Report pp.8-25), so this means they will expect their market share to increase. In terms of oil, BG s CEO, Chris Finlayson said in his annual statement, as global demand for oil continues to grow, new sources of supply will be critical. Brazil where BG Group continues to make a good progress with interests in the Santos Basin, will be one of the key resource plays that will help supply this rising demand (Annual Report, 2012, pp. 8-9). The envisaged high demand for energy raw materials could mean that BG s already targeted customers could still remain the same to benefit from the products of the pre-salt fields. Assessing the pressure of demand for its oil, gas and LNG, BG may not have in mind a fresh or new set of targeted customers for the pre-salt hydrocarbons since it has its existing international segment of differentiated market, but it may well be either way. The evidence so far leans more to the idea that the targeted groups of customers/organisations will be largely those that BG already has globally. For it targeting strategy, BG s market coverage strategy may vary depending on the product and the target markets. It is differentiated especially in relation to its LNG product and this year the firm expects profits for LNG alone to be in the range of $2.5 billion to $2.7 billion based on market conditions at the 14

15 start of January 2013 (Annual Report, 2012). But the firm may also use concentrated or undifferentiated market coverage strategies (Kotler & Armstrong, 2008), especially when crude oil price is usually linked to the spot market price. With BG s market segmentation, it is justifiable to discern that its positioning lends to much competitive advantage for sustained growth. 4.3 Forecasting The outlook for BG seems very positive. BG s Chief Executive Chris Finlayson, in his annual statement referring to our major projects in Australia and Brazil had this to say, In Brazil.we are also making good progress. BG Group has excellent relationships with Petrobras and the partnership is working well (Chief Executive s Statement, Annual Report 2012, p.9). For instance, in pursuit of BG s presalts operational activities, two FPSOs (FPSO 2 and FPSO 3) are due onstream to start production in the second quarter of 2013 on the Saphinoa and giant Lula (formerly called Tupi superfield). By 2017 thirteen FPSOs are also due onstream with an expected aggregate capacity of 2.3 million boed. BG anticipates net production from Brazil to be over 600,000 boed by 2020 (BG Annual Report, 2012). BG s analysis also indicates that strong supply and demand will continue. As BG continues to capture opportunities to market LNG and demand continues to outweigh supply, this industry is expected to grow at 12% annually.. 15

16 CONCLUSIONS I have discussed in this research work the many opportunities that the pre-salt discoveries offshore Brazil would create for the British oil and gas firm, BG Group. The opportunities however go beyond BG Group because these discoveries put Brazil on a higher rung of the ladder on which world energy players are climbing. The marketing opportunity also throws a huge light on state-owned Petrobras who is largely in charge not only to make a profit to benefit Brazil as the owners of their natural resources but also to ensure that this novel challenge in oil and gas ultra-deep drilling in shifting salts is executed to the highest standards. As promising as the subsalts are, the challenges are many starting from skills and infrastructure to finances and laws, and they will test Brazil as a people and Petrobras as an experienced organisation with deep technological know-how. The future is bright for Brazil and the opportunities in the market are many but human health and safety must rank top in considering this marketing opportunity. The future is bright for BG also because environmentally gas is a cleaner fuel source and most power generation infrastructures are changing to the gas- fired type in the developed world so the demand for gas will continue to grow as BG continues to grow and deliver value for its customers as well as its shareholders. 16

17 REFERENCE LIST SECONDARY SOURCES Books Etzel, M.J., Walker, B.J., Stanton, W.J (1997) Marketing 11 th Ed., New York, McGraw-Hill. Hooley, G.J. and Saunders, J (1993) Competitive Positioning: The Key to Market Success, Hertfordshire, Prentice Hall International (UK) Ltd. Johnson,G., Whittington, R., Scholes, K. (2011) Exploring Strategy : Text and Cases 11 th Ed., Harlow, Pearson Prentice Hall Kotler, P. and Armstrong, G. (2008) Principles of Marketing 12 th Ed., New Jersey, Pearson Prentice Hall. Lewison, D.M. (1996) Marketing Management: An Overview, Orlando, Florida, Harcourt Brace College Publishers. McDonald, M. & Martin, C. (2003) Marketing A Complete Guide, New York, Palgrave Macmillan. Journals Chassie, K., (2002) Marketing Opportunity Analysis IEEE, Vol.21, Issue 2, pp [online] Available at [accessed 05 April 2013]. Financial Times (2012) Investing in Brazil: BG has Five Big Reasons why country is key to its future, Financial Times of Thursday 17 May Kay, S., and Graefe, L. (2011) Brazil s Oil Discoveries Bring New Challenges, EconSouth, Vol.13, No.1, First Quarter 2011 [online] Available at [Accessed 04 May 2013]. The Economist (2011) Brazil s Oil Boom Filling up the Future [online 05 November 2011]. Available at [accessed 16 April 2013 Watson, E. (2010) Brazil approves oil laws, opens presalt region for development Oil & Gas Journal, ISSN , Vol.108, Issue 47, pp (13 December, 2010). Zacour, C., Pereira, T.Z., Crostofaro, A.L.R., Francisco, F.F., (2012) Petrobras and the New Regulatory Framework for the Exploration and Production of Oil and Gas in the Brazilian PreSalt Journal of World Energy Law and Business [online 26 May 2012]. Available at [accessed 02 April

18 OTHER SOURCES Internet BG Group (2012) Annual Report and Accounts 2012 [online] Available at [accessed 15 April 2013]. CIA World Factbook [online]. Available at [accessed 24 April 2013]. EIA Brazil: Country Analysis US Energy Information Administration 2012 [online] Available at [accessed 19 April 2013]. EIA International Energy Outlook 2011 [online] Available at [accessed 19 April 2013]. Ernst and Young, (2011) Brazil Oil and Gas Realities in a new frontier [online]. Available at realities_in_a_new_frontier_2011 [accessed 12 April 2013]. Ernst and Young, (2011) Doing Business in Brazil [online] Available at [accessed 12 April 2013]. Ernst and Young, (2012) Sustainable Brazil An outlook on the oil, ethanol and gas markets [online] Available at An_outlook_on_the_oil_ethanol_and_gas_markets_2012 [accessed 12 April 2013]. Fick, J. (2011) BG Group s Brazil Unit to Invest $10B over 10 Years - Report [online 24 January 2011]. Available at [accessed 03 April 2013]. Fick, J. (2012) BG: Brazil subsalt output to match North Sea Peak [online 1 September, 2012). Available at [accessed 03 April 2013]. Fick, J. (2013) Marketwatch -The Wall Street Journal [online April 2013]. Available at [accessed 03 April 2013]. IEA World Energy Outlook, 2011 Special Report, Are We entering the golden age of Gas? [online] Available at [accessed o4 May 2013]. Leahy, J., (2012) Brazil Oil and Gas Attract Foreign Groups Financial Times [online 13 March 2012]. Available at feab49a.htm [accessed 13 April 2013]. Lucintel Report (2012) Brazil Country Analysis [online] Available at [accessed 10 April 2013]. 18

19 Petrobras Home Page, [accessed 31 March 2013]. Petrobras Report (2010) The Impact of Pre-Salt: a long-term perspective Oxford Analytica [online]. Available at [accessed 31 March 2013]. Silva, N., (2012) Reserve, Resource and Production BG Group: Brazil Overview Available at [accessed 19 March 2013]. Swiss Business Hub: Report on Brazil (2011) Brazil Oil and Gas Sector [online]. Available at [accessed 19 April 2013]. U.S Energy Information Administration (2012) Country Analysis Briefs Brazil [online]. Available at [accessed 10 April 2013]. Weedin, S., (2012) Brazil s Subsalt Region Drives Major Oil, Gas Discoveries [online 8 February 2012]. Available at [accessed 05 April 2013]. Wood Mackenzie (2005) Exploration Strategy and Performance [online] Available at [accessed 04 May 2013]. 19

20 APPENDIX: The Pre-Salt Regions and the Geology Offshore Brazil Source: The Economist (5th November, 2011): 'Brazil's Oil Boom Filling Up the Future' 20