The next oil giant?

Text I

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

In the past two years Brazil has discovered the largest oil deposits in the country’s history and the world’s most promising fields since the discoveries made in Kashagan in Kazakhstan in 2000. This has put Brazil well on its way to becoming a major producer in the future, but technological and financial hurdles will have to be overcome first.  

The finds are located in the Santos oil Basin, 300 km from the coast at Rio de Janeiro in south-eastern Brazil. The first discovery—the giant Tupi field—was made in November 2007. Potential reserves are estimated by Petróleo Brasileiro (Petrobras, the statecontrolled oil company) at 5-8bn barrels of oil equivalent (boe), which should make it the largest-ever deep-water oilfield discovery. Partner company British Gas is more optimistic, estimating that the field could contain 12-13bn boe.

The Tupi discovery was followed by other large finds, including Sugar Loaf, to the south-west of Tupi, in December 2007, and the Jupiter natural-gas field, located east of Tupi, in January 2008. The three fields constitute the largest hydrocarbons discoveries in the cluster area of the Santos Basin. The government estimates reserves at Sugar Loaf could be even larger than those of Tupi, at around 33bn boe, and that the Jupiter field could have “similar dimensions” to Tupi.

Other discoveries in the area include Parati, Bem te-vi, Carioca, Iara, Tupi Sul and Iati.

The president of the Agência Nacional de Petróleo (ANP, the industry regulating agency) puts total potential reserves in the Santos Basin at 80bn boe. If the new discoveries are found to be commercially viable, Brazil could become one of the world’s major oil-producing and exporting countries.

Two successful wells—Caramba and Guara— have already been drilled in the Sugar Loaf field by Petrobras in association with Portuguese Galp Energy in the first case, and with BG and Spanish Repsol in the second. Projected initial production at Tupi is estimated at 100,000 barrels/day under a pilot project scheduled to start next year. In the medium term, production from Tupi alone is expected to reach around 1m b/d by 2012.

With oil production averaging 1.9m b/d in 2008, the extra capacity might lift Brazil’s output to levels similar to Latin America’s two main oil producers, Venezuela and Mexico, who both produce 2.5-3m b/d.

Yet full development of the fields will pose serious geological challenges. The onset of a sharp global economic slowdown will throw up further complications, as financing constraints hinder investment and lower oil prices bring into question the government’s preference for a production-sharing (rather than concessionary) framework.

The reserves are located in the so-called “presalt” area (below the thick salt layer and more than 4km below the sea bed, under a series of layers of rock and salt). Until now, Brazil’s reserves have been found in post-salt formations—above the salt layer.

The depth of the oil reservoirs is not the main challenge, since Petrobras ranks among the world’s bestqualified companies in offshore deep-water exploration and is already exploring fields located at a similar depth.

The depth and thickness of the salt formation poses more problems. Unlike drilling through rock, which can be difficult owing to its thickness but once drilled remains stable, it is tough to maintain the dimensions of the hole after drilling through salt. Another challenge is the temperature shock of the oil as it travels up to the surface.

The technology needed and the subsequent development and maintenance of the reservoirs will be expensive. The development cost of each sub-salt well is estimated at US$100-150m, and Tupi alone could require as many as 200 wells. Developing the entire Tupi area could cost around US$600bn over the life of the wells. Unexpected geological or operational issues— such as longer drilling times, and increases in the rental costs of rigs—could further raise costs. The availability of deep-water rigs could also delay Brazil’s oil plans, as globally these are in short supply.

Extracted from THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier,

retrieved on 22 December 2009.

The following extracts were taken from the article “Is Brazil the “New Saudi Arabia’, published in Money Morning, on March 18th, 2009. The extract which is NOT aligned with the information found in Text I is