In this portion of the interview, Mr. Moshiri and I discuss what’s going on 6,000 miles south of the U.S., offshore Brazil. There, over the past couple of years, we’ve learned about gigantic oil resources, buried many miles under the deepwater seabed.

To date, the most prolific oil-bearing locales offshore Brazil are in the “pre-salt” zones of the Campos and Santos Basins. Looking forward, there are many more basins left to explore along the Brazilian coastline.

In short, the future for energy development is bright down in Brazil. Here’s more of my discussion with Mr. Moshiri.

BWK: There’s news coming out of Brazil almost every week, from Petrobras and other companies that are working down there. Chevron has a large presence in Brazil. Where do you see things going now that Brazil is coming towards the end of rewriting its offshore oil laws, creating a pre-salt development entity? What do you see happening down there?

AM: First of all, the Santos and Campos Basins of Brazil are very attractive. Geologically, (these are) fantastic basins. Petrobras has done a marvelous job of handling this, in the fashion that should be an example for others.

BWK: How is Petrobras setting an example?

AM: Even as a pioneer in the deepwater, Petrobras invited IOCs (international oil companies) in a very systematic manner, starting around 1996 — and I’ve been involved with that for about 15 years. It’s (a model for) how to get IOCs involved, how to work with them closely, how to expand the relationship. We (at Chevron) have a relationship with Petrobras not just in Brazil, but outside of Brazil, where we are partners in West Africa as well. So from Brazil’s point of view, I think they’re taking the right steps since the late 1990s.

BWK: What about the new laws concerning development of the pre-salt oil resources?

AM: Regarding the pre-salt itself, and the new terms and conditions that they’ve put forward (i.e., the government of Brazil), there is a change from what it was before. But at the moment, (the pre-salt) is still an exploration play. There are going to be good surprises. There are going to be not so good surprises. To be honest, that’s exactly what happened in the U.S. Gulf of Mexico (GOM).

Until we understand the geology better, until we know what it is, (then) I think we, Petrobras and others can move ahead.

What we know today is that the petroleum system is there. The right parameters are there. Some of them probably, in some areas, will be higher or lower from the reservoir characters’ sake.

It’s a carbonate, deepwater. You can drill one well, and the next well may not be as good as the last one you drilled.

Until we assess that? Whether or not Petrobras is going to do it, or we are going to do it, is … a decision that will be up to the government of Brazil. But nonetheless, those are the two basins (Santos and Campos) that have been our focus.

BWK: Can you discuss Chevron’s major efforts in Brazil?

AM: As you know, we have Project Frade on the street.

BWK Note: Mr. Moshiri didn’t go into details in our recorded discussion. But according to Chevron’s web-site, Chevron holds a 51.7% interest in the Frade deepwater oil development project, which it also operates. The oil field lies in water depths of approximately 3,700 feet, 230 miles northeast of Río de Janeiro in the Campos Basin. Frade is a subsea development with wells tied back to a floating production, storage and offloading vessel (FPSO) — see image below. The project has an estimated price tag of $2.8 billion. Development is ongoing. The estimated output should be 68,000 barrels of crude oil and 25 million cubic feet of natural gas per day, starting in 2011.

BWK: And other large projects?

AM: (In addition to Frade), we are committed to another project called Papa Terra, which just went through E&D (engineering and design) earlier this year.

BWK Note: Chevron holds a 37.5% interest in Papa Terra, with Petrobras as the operator. Papa Terra has a planned capacity of 140,000 barrels per day of oil from a field that lies under about 3,900 feet of water.

AM: And the other thing we value a lot is our relationship (with Petrobras), and how Petrobras complements what we know and what they know to get the best out of every development and every activity.

We are hoping that the sub-salt selection activity (after the new oil law goes into effect), and to be able to work with the terms and conditions that put forward, will help get where we are for the post-salt. The same attitudes will be there, that help to collaborate on the post-salt.

BWK Note: When Mr. Moshiri references “post-salt,” he means the shallower projects, above the massive salt zone, where Chevron was working before the pre-salt discoveries of the past three years. Here’s a seismic illustration of the layers.

BWK Note (cont.): These earlier, post-salt projects — seen above in representative seismic cross-section — will remain subject to Brazil’s previous oil development law.

AM: What I mentioned about Mexico (earlier in the interview), versus Brazil, is that Brazil is very focused on production and capital efficiency. And it’s very unique.

I know that Mr. Gabrielli (Sergio Gabrielli, CEO of Petrobras) probably doesn’t want me to call his oil company a national oil company, which it’s not.

Petrobras is very focused on (capital efficiency), and it’s very much in line with what we think. If Petrobras knows that something is not working, or it’s too much, or whatever? I think they do build flexibility into the system to make sure they do the right thing. Therefore I’m optimistic about Brazil.

I feel like it’s not totally petro-politics (in Brazil). In some other countries, it is totally petro-politics. (In Brazil), it is petro-economics. If economics doesn’t drive them where they want to go, they would bring in other companies. They’ll create flexibility. I’ve seen that for 15 years.

BWK: So you believe Chevron has a solid relation with Petrobras?

AM: For us, we (Chevron) operate Frade. Papa Terra, our new development, will be operated by Petrobras. I have full confidence in Petrobras, that the project will be delivered and operated. Therefore we are complementing each other. That’s the reason that development in Brazil gets handled at a much faster pace than what we’ve seen in other places in the world.

BWK: One last point about Brazil. Last year, about July 2009, a senior member of the National Petroleum Agency (ANP) of Brazil said that “there’s no risk in the pre-salt.” Do you agree or differ with that assessment?

AM: As a geologist, you know that Mother Nature will always give us a surprise. Even in mature basins, we’ll always get some surprises. We hope always for the better. But I think his comment was aligned with knowing the basins. His comment was misunderstood in the form of ‘no risk.’

BWK: A lot of people use the word risk, but don’t really understand its meaning in the world of oil exploration.

AM: (The) comment goes back a few years ago. None of us knew that (the pre-salt) basin was existing there. We drilled a couple wells below the salt, but everybody’s focus was post-salt. But a couple discoveries? And continuing exploration? Petrobras and others? We are finding out that yes, this could be a significant basin.

It wasn’t a matter of drilling the well. It’s a matter of knowing the basin. Like with the Wilcox in the GOM.

BWK Note: Wilcox is a highly productive, oil-bearing formation, covering a vast area, that’s a target for many shallow, deep and ultra-deep wells in the U.S. part of the GOM.

AM: One of the things we focus on is understanding the prospectivity of a basin. I think he (the ANP man last year) was referring to that. Yes, there are several prospects in here. If you do your homework, your geology, your technical work, probably your risk is extremely reduced.

No doubt about it, (offshore Brazil) pre-salt is a basin. A basin (with) carbonate reservoirs that can perform very well. You need to find where the oil is, and where the productivity is going to come from.

Therefore I put it (the comment of the ANP man) in the framework of yes, we identify a basin, and the more work we do, the more risk will come down.

This last comment pretty much sums up Chevron’s approach to energy development. Do the work. Then do even more work. Don’t be afraid to spend money and apply technology to obtain the data you need. And the more work you do, the more the risk comes down. It’s what makes Chevron a successful oil finder.

Great Opportunities Offshore Brazil

The bottom line is that there are phenomenal opportunities for future energy exploration and development offshore Brazil. Developing Brazil’s pre-salt energy resources will require hundreds of billions of dollars of capital. Brazil will need hundreds of modern drilling ships and related service vessels. The long-term effort will require world-class exploration and development technology. And it all has to be operated by superb and skilled people.

Chevron is one of the world’s best-run independent oil companies. It has a solid record, over the past century, of successful exploration and development. Chevron has great financial strength, and a deep pool of technical competence. Chevron’s success — certainly in deepwater development — is built upon its highly skilled and talented people.

I expect that, as things unfold, Chevron will be right in the thick of things offshore Brazil, working closely with the Brazilian government, Petrobras and other partners.

Until we meet again,
Byron King
Whiskey & Gunpowder

September 8, 2010

Still Profiting from Deepwater Drilling was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In one of these adventures, Tintin discovers oil on old American Indian lands. In a series of panels, a little construction boom transforms a wilderness into a busy city in a matter of hours. It’s funny, but it also makes a point: After you discover oil, there is a whole lot that comes after that. The infrastructure of the oil business, you might say. I was thinking of Tintin after reading more about Brazil’s big oil discoveries.

You’ve probably heard about Brazil’s Tupi and Carioca, which may be the two biggest oil fields discovered in the last 30 years.

The Tupi field may hold 8 billion barrels of oil. If true, only the 15 billion-barrel Kashagan field in Kazakhstan, discovered in 2000, is larger. Tupi, though, may be small potatoes next to Carioca. This latter field may hold 33 billion barrels of oil. Again, if true, Carioca would be the third biggest oil discovery in history, behind only the mammoth Ghawar in Saudi Arabia and the Burgan in Kuwait. Brazil has another field it is assessing now, called Jupiter, which could be of the same scale as Tupi.

What makes these discoveries particularly remarkable, in addition to their size, is where they are. They lie underwater, hundreds of miles off the coast of Brazil. Call it “blue water energy.”

Tupi’s oil, for instance, is 7,000 feet underwater and beneath another 7,000 feet of rock, sand and salt. It costs about $240 million just to drill the well there, which is like paying a big cover charge to hear a band you may or may not be happy with. Who knows how many more hundreds of millions it could take to get the oil out and to market?

One thing is for sure. Petrobras, the Brazilian oil company that discovered the oil, will spend a lot of money trying. Already, Petrobras has plans to spend more than $20 billion for marine support vessels and offshore drilling equipment. Those are big numbers, especially when you consider how tight the market already is for these things — not to mention the shortage of men and material to make more.

For perspective, consider that Petrobras has already leased nearly 80% of the world’s deep-water drilling vessels. It will certainly try to lock up more rigs and vessels. But so is the whole industry, which is why drilling companies are making money hand over fist like rose sellers on Valentine’s Day.

It’s not just in Brazilian waters that big prizes lurk. There are meaningful discoveries of oil and gas in the South China Sea, off the west coast of Africa and even in the waters off Trinidad and in many more wet places. Soon we could be poking around for oil beneath the Arctic seabed.

We’ll need lots of subsea wells and platforms and other goodies to put out there in those watery plains. Just consider the pipelines alone. We’ll need miles and miles of offshore pipelines to bring the oil to market. See the next chart, which shows the miles of pipeline needed by region:

According to Quest Offshore, between 2007-2011, the industry will have laid down 35,000 miles of pipeline. That’s a lot of steel. And a lot of pipelay barges to do the work. And crews. It’s a demand that should continue for years to come, even if the oil price comes down.

That’s only part of the story, though. Here’s the other: the existing miles of pipelines that are getting old. I’ve often talked about the creaky infrastructure surrounding everything from roads and bridges to water and power supply. Matt Simmons, the oft-quoted energy analyst, likes to say, “Rust never sleeps.”

The problem is particularly acute in seawater. It’s more troublesome because you can’t see it. Such infrastructure requires a lot of maintenance, which is not cheap. On the heels of two decades of low oil prices, much of the industry deferred a lot of maintenance. This problem extends beyond just the offshore oil and gas business.

The whole oil and gas infrastructure is a “vast spider web of steel.” There are over 335,000 miles of pipelines in the U.S. alone.

It’s a massive opportunity. The offshore boom, and Brazil’s offshore scores, only adds to the urgency of it all.

If Herge, the artist behind the Tintin series, were alive today, he wouldn’t be surprised to see the rush of infrastructure that follows big oil discoveries. Some things never change. He probably would be surprised, though, to hear about oil fields deep under the world’s big blue seas.

Regards,
Chris Mayer
August 8, 2008

P.S.: The mining industry is always an interesting investment area. There can be a lot of reward in choosing the right mining stock to own, but there is also a lot of risk. The operating costs are sky-high, and you’re not always sure you can get a good return on your investment. But there is a way that you can tap into all the profits of mining without having to incur any of the expense that the miners themselves go through. It’s called the Chaffee Royalty Program, and it’s open to new investors for a short time.

Underwater Mining was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.