Wednesday, April 16, 2008

Oil At Carnival

In Brazil, Another Gusher
If its size is confirmed, a vast new oil find would catapult Brazil into the world's oil-producing elite. But extraction will be difficult
by Joshua Schneyer
Among energy investors, they are becoming known as Brazilian bombshells: a barrage of announcements about oil and gas discoveries—some confirmed, others speculative, and each more spectacular than the one before. Together, they suggest that Brazil could be on the cusp of transformation, from a once energy-poor developing nation into a major oil exporter.
The latest of the announcements came Monday, when the head of ANP, Brazil's government oil regulator, revealed "unofficial" figures from a new reservoir, known as Carioca, which may hold 33 billion barrels of oil and gas. If confirmed, it would be the world's largest discovery in at least 32 years. Carioca, which is located in the Santos Basin, 170 miles from shore underneath 2,000 meters of water, would follow on the November mega-discovery by state oil company Petrobras (PBR) of the offshore Tupi field, with its already confirmed reserves of 5 billion to 8 billion barrels, and a later discovery known as Jupiter, a natural gas area that Petrobras says is as big as Tupi and perhaps even more important for gas-hungry Brazil.
Unconfirmed Estimates
If confirmed, a 33-billion-barrels find would trail just two larger oil reservoirs, in Saudi Arabia and Kuwait. Those fields were each discovered more than 60 years ago, but together still account for nearly 8% of global oil output. With a single field, Brazil could potentially top all the proved reserves in the United States, estimated at 29.9 billion barrels, according to BP's 2007 Statistical Review of World Energy. Mexico's 35-billion-barrel Cantarell field, discovered in 1976, was largely responsible for that country becoming the world's fifth-largest oil producer.
"Carioca would be the third-largest oil field in the world," said Haroldo Lima, director of ANP, at an energy seminar Monday.
But, unsurprisingly for the oil business, which is fueled by industry rumor, the facts about the Carioca discovery are, at best, hard to pin down.
Start with the report itself. Lima claimed he got the 33-billion-barrel estimate for Carioca "in a nonofficial way, through back channels, but from people at the company (Petrobras)." On Tuesday, Brazil's securities regulator, CVM, chided Lima for a potential leak of insider information. Lima claimed the Carioca figures had also appeared elsewhere, including in magazines, making them public domain.
More Recoverable?
Typical for Petrobras, which often initially downplays discoveries but has sometimes leaked discovery data, the company said that Lima's estimate was premature and further drilling was needed to quantify Carioca reserves. "We've got a discovery, but more work is needed before we have a full account of reserves," said Jorge Zelada, Petrobras international director, at a breakfast Tuesday. Just two months ago, Spain's Repsol YPF (REP), a 25% partner in the Carioca discovery, released a far more tempered assessment, saying it expected Carioca contained "at least 500 million barrels."
Lima hinted Monday that Carioca's alleged 33 billion barrels were all recoverable reserves, saying Carioca appeared five times larger than Tupi (which itself holds between 5 billion and 8 billion recoverable barrels). The distinction would be vital, since in most offshore reservoirs only around a third of oil is recoverable.
But analyst reports, including from Citibank (C), largely dismissed the idea, saying Brazil's Carioca field would then top even the largest Saudi reservoir in terms of total oil. Experts said even a figure of 10 billion recoverable barrels at Carioca would be remarkable. Combined with the other recent discoveries, it could vault Brazil, which currently has proved reserves of 12 billion barrels, into the world's oil elite, perhaps between Nigeria (36 billion) and Venezuela (80 billion).
Technological Challenges
Regardless of whether the Carioca field proves to be enormous, or merely large, Brazil's energy sector is experiencing a major reversal of fortunes. The country, which is the eighth-largest oil consumer, was dependent on imports for nearly all its oil until the 1970s, when Petrobras began tapping Brazil's offshore discoveries. It finally became self-sufficient in oil production last year. The latest spree of discoveries comes as global crude oil futures trade at record highs, passing $113 a barrel on Apr. 15. Brazil would be in a position to export much of its new petroleum output, Petrobras' Zelada said, since its motorists now rely on cheaper, local sugarcane ethanol, instead of gasoline, for half of their vehicle fuel.
Still, some energy experts question whether Brazil can fully exploit its new reserves. The country is relatively new at drilling and producing oil in water deeper than 6,000 feet, and that's where the discoveries lie. Tupi, Jupiter, and Carioca are located 100 to 200 miles from shore, at depths up to 4.5 miles beneath the sea surface. The reservoirs lie underneath layers of rock, sand, and a particularly tough-to-drill layer of salt that can be up to 1.3 miles thick.
Production from fields like these represents a new technological frontier, and the high cost of drilling that deep will become a steep hurdle if oil prices drop. Even Petrobras admits it hasn't mastered the technical points of how to produce the hydrocarbons (at piping hot temperatures and from high-pressure reservoirs), or bring them to shore.
No Saudi Arabia
With so much information still unavailable, measuring Carioca's potential impact on future oil supplies "is an exercise in futility," said Sophie Aldebert, an associate director at Cambridge Energy Research Associates in Rio de Janeiro. "There are still far too many variables."
That hasn't kept some investors from getting excited. Past "leaks" about big discoveries, such as Tupi last year, were initially dismissed by Petrobras but later proved true. After Lima's Monday announcement, shares surged in the companies involved at Carioca. U.S.-traded shares of Petrobras, which holds a 45% operating stake in Carioca, closed up 8%. Britain's BG Group (BG), which holds a 30% stake, rose 10% in U.S. trading, and Repsol YPF, with its 25% stake, surged 17% to a new high.
Other companies with nearby deep exploration stakes also rose. Exxon Mobil (XOM), which holds an operating role at another Brazilian block underneath the salt layer, rose to near a three-month high on Apr. 15. Hess (HES), with stakes in a field adjacent to Carioca, rose to its highest level this year.
Deeper oil reserves mean Petrobras must also write bigger checks to ramp up production. The company's Brazilian production last year was 1.8 million barrels per day, a small fraction of Saudi Arabia's 9 million barrels per day. And the desert kingdom has far lower costs to extract the oil that lies just under its sandy ground. In terms of production, Aldebert says "Brazil is never going to be a Saudi Arabia."
Public-Private Tension
Petrobras will have to pay dearly to expand its use of drilling rigs, which are in short supply these days. On Monday, Petrobras awarded Norway's SeaDrill (SDRL) with contracts worth up to $4.1 billion for deepwater rigs. Petrobras has also signed a letter of understanding with Texas-based Noble (NE) for drilling contracts worth as much as $4 billion. Petrobras Chief Executive Jose Sergio Gabrielli says Petrobras will likely boost its planned spending of $112 billion between 2008 and 2012.
Brazil's oil patch has been open to private companies, including foreign oil majors, since the late 1990s, when Petrobras lost a monopoly role. The government holds annual auctions for exploration acreage, and the foreign companies operating in Brazil include Chevron (CVX), Shell (RDSA), StatoilHydro (STOL), and Eni SpA (ENI). But as new discoveries and high oil prices make Brazil's explorations more promising, the government is rethinking the terms it will offer private investors in the future. It's considering boosting the royalties that Brazil charges to extract its oil and gas, Lima said, so that more of the profits go to government coffers.
"Petrobras has taken the biggest exploration risks and should get the biggest rewards," said CEO Gabrielli earlier this year. One bill floating around Brazil's Congress would limit private companies to minority roles in new discoveries underneath the salt cap. Brazil's government already took 41 areas off the auction block in November, frustrating private oil companies.
But Brazil has no intention of closing off its oil sector to private investment, according to officials at Petrobras and ANP. Those executives say they intend to benefit from the drilling expertise of partners like BG and Repsol. Still, at a time when private oil companies are losing ground against national oil companies worldwide—state-controlled companies control nearly nine of 10 barrels of oil reserves—the private outfits are watching Brazil with some concern. Recently Venezuela, Ecuador, Bolivia, and Argentina all have sharply increased oil and gas royalties or limited private producers to selling their oil and gas locally, at discount prices.
For years, Brazil has named its offshore oil fields after local fish. Its biggest fields include Barracuda, Marlin, and Albacore. The catch: Fish names aren't assigned to fields until their commercial potential is proven and production plans are under way. Discoveries like Carioca, Jupiter, and Tupi aren't there yet. And it's not clear yet if they will sink or swim.

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