Lagniappe

 

 

Oliver L Campbell:
Tupi, or not Tupi, that is the question

Tupi layer sketch / The Oil Drum

With apologies to Shakespeare, the question is just how large is the Tupi field? Secondly, how large are Brazil’s offshore oil reserves in total? The Brazilian government announced in November 2007 that the Tupi reserves were between five an eight billion barrels of oil. To a non geologist, it is incredible this volume can be predicated on the strength of just two wells drilled into the Tupi formation--though two were drilled in a nearby area--but 3D seismic imaging is a marvellous tool. Petrobras believe the field can produce 100,000 b/d within three years and 200,000 b/d within five years. These are relatively modest volumes but subsequently BG, a partner in the oil find, stated they thought the Tupi field could hold between 12 and 30 billion barrels, and maintained production could peak at as much as 1,000,000 b/d. This figure was supported by Wood Mackenzie, though they warned this would not happen till after 2020.

However, the matter does not end there, since Petrobras said that Tupi field is just a small part of the Santos Basin which could hold much higher reserves. This was confirmed when Petrobras announced another large discovery, the Carioca Sugar Loaf field some 50 miles west of Tupi, that may hold reserves of some 40 billion barrels. This was closely followed by the disclosure, in January 2008, of another large find, the Jupiter field, which Petrobras believe can hold reserves as large as those of Tupi. Taking the Espirito Santo, Campos and Santos basins together, it has been estimated total reserves could be as high as 60 to100 billion barrels

This escalation by a factor of ten--8 to 80 million barrels-- in such a short time is extraordinary and stretches the imagination. It would place Brazil 8th in the batting order of countries--just ahead of Russia. With offshore reserves of 80 billion barrels, Brazil could produce 4,000,000 barrels a day for 55 years. This would be enough to meet increasing local consumption of, say, 1,000,000 b/d and still leave 3,000,000 b/d for export, thus turning Brazil into a major oil exporting country.

However, is this pie in the sky? The fact is substantial production will not be reached for some ten years, and nobody knows how much investment will be required nor what the per-barrel production (lifting) cost will be. Some idea of the investment required can be deduced from the cost of the first Tupi well which was $240 millions. Cost of the second well fell to $60 millions as Petrobras climbed the learning curve and had some infrastructure already in place. A spokesman for the company believes costs will fall further to $30 millions per well when the commercial stage is reached.

The per-barrel cost depends on just how productive the Tupi field is--the higher the daily production becomes, the lower the per barrel cost achieved. The cost in the North Sea has been as high as $20 a barrel and that is a much simpler operation with a sea depth of only 500 feet versus over 7,000 feet in Tupi. While no expert, I cannot see the cost being much less than $30 per barrel, unless the wells are spectacularly prolific. Drilling ships are expensive and so are the anchored tankers which serve as facilities for floating production, storage and offloading (FPSOs).

Petrobras has a 65 percent share in the field and its lucky partners, BG Group and Galp Energia, hold 25 and 10 percent respectively. Just after the discovery, the decision was taken to withdraw 41 blocks, close to the Tupi field, from the 312 blocks that were to be auctioned in the 9th bidding round. The blocks can either be granted to Petrobras or be auctioned under tougher conditions in the near future. Don’t be under any illusion, despite a public holding, Petrobras is first and foremost a state oil company. However, because of the huge amounts required for investment, the company may not be able to go it alone and be obliged to seek partners.

The advantage of this is it would increase know-how since companies like Chevron, Devon Energy, Eni, Royal Dutch Shell, BP, and ExxonMobil have ultra deepwater drilling experience, though not all of drilling through a thick salt layer. It would also speed up the pace of development since investment funds would be immediately available from such major players. Wood Mackenzie has estimated the investment required for developing Tupi alone at between $50 billion and $10 billion, so it is a game for the big leaguers. The good news is that production is of light oil--with an API of 28º--which Brazil needs to replace volumes it currently imports. There is also a large quantity of associated gas, particularly in the Jupiter field, which the country urgently needs. However, till the oil comes on stream, Brazil will have to rely on gas imports from Bolivia.

What does all this tell us? Firstly, that Brazil has huge oil reserves offshore, but that further drilling is required to quantify them with any reasonable certainty. Secondly, that the greatest problem is one of cost, which will largely determine how soon the investment is recouped--it is likely the cost of producing oil offshore Brazil will exceed that of other ultra deep oil provinces, including the Gulf of Mexico. Thirdly, that the estimates of reserves, investment and production cost are so wide that you can pick a number for each and come up with a different profitability.

The costs of drilling through some 7,000 feet of water and 17,000 feet into the earth will be high initially, but they should fall as more experience is obtained and the technology is improved. Just how high production costs per barrel will be much depends on how prolific the wells are. However, with oil prices in excess of $60 a barrel, there should still be a good profit margin.

The final point is that Petrobras will have a negative cash flow for, say, three to five years until a significant volume of production comes on stream. But, however long the wait, the Tupi discovery is a truly exciting one. Add to it the Carioca Sugar Loaf and Jupiter finds, and discoveries to be made in adjacent areas, and Brazil will have some of the largest oil reserves in the world.

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

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Petroleumworld News 03/07/08

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