Alan von Altendorf's  Instablog

Petrobras has announced that first oil produced from pre-salt Tupi extended well test was ferried ashore.

The work of processing the first 264,000 barrels from the Tupi field began Thursday at the Revap refinery in Sao Jose dos Campos, Sao Paulo state, the company said in a statement. [Energy-Pedia wire]

Certainly that sounds like good news, until you consider it apparently took 160 days to produce at an average of 2000 bopd -- far less than the 14,000 bopd that Petrobras announced in May.

BW Offshore's FPSO BW Cidade de São Vicente received first oil in 2200m water depth on the Petrobras-operated Tupi field offshore Brazil 25 April. The FPSO arrived at the field in March 2009 [source: BW website]
 

This first extended well test of the subsalt formations began producing at a rate of 14,000 b/d of oil and should peak around 30,000 b/d, operator Petrobras says. [PennEnergy]

Then the problems began.

Jul. 2009 - BG Group said Wednesday it is making steady progress with operator Petrobras in the development of the large Tupi oil field discovered offshore Brazil.  An extended well test on Tupi, which peaked at 14,800 bopd, was temporarily suspended to conduct some routine maintenance. [Rigzone]

Aug. 2009 - The FPSO BW Cidade de São Vicente received first oil late April and has since been operating successfully. Due to subsea problems experienced by Petrobras the unit is currently on standby at 95% of full rate due to lack of oil production. [BW website]

I accept that operating an arguably novel ultradeep well can be complicated and require engineering adjustments. But I have some questions about what Petrobras has learned after five months of fiddling with the iron.

1. Was it necessary to work over or reperf the well?

2. Did asphalt or gas coning gum up the tree?

3. Is 3-RJS-646 producing? at what rate?

The world was led to believe that Tupi is the biggest oil discovery in the Western Hemisphere since Cantarell. Maybe so. That's why it would be nice to have more transparency from Petrobras.

A big resource that can't be produced isn't much of a resource.


Disclosure: no position long or short in PBR or any ETF or oil options.

The Jubilee oil field offshore Ghana was discovered by Tullow in partnership with Anadarko in 2007. It's a remarkable story in several respects. The deepwater Tano Basin had been previously surveyed and drilled by Phillips in the 1970s, by Arco in the late 1980s, and successively by Amoco, Hunt, and Dana Oil in the 1990s based on two 3D seismic surveys commissioned by Ghana's national oil company. Tullow did a splendid job of finding a reservoir that everyone else missed.

Privately-held Kosmos Energy LLC of Dallas was awarded a block in 2006 that overlaps about 2/3 of Jubilee and became an investment partner with Tullow and Anadarko. I haven't looked at the details of that deal, but Kosmos had $100 million in private equity cash to fund four exploration wells.

That $100 million is now worth $4 billion, according to the Wall Street Journal.

Exxon is close to inking a $4 billion deal to acquire a stake in the Jubilee oil field off the coast of Ghana, the oil company’s biggest investment in a decade. Exxon would buy the 23.5% stake held by Kosmos Energy.

Let's say hypothetically that Jubilee has 400 million bbl recoverable, and that Tullow's estimate of $5 billion subsea and topside expense is correct. Exxon paid $4 billion for a 1/4 share of production and probably have to pony up another $1 billion as its share of development expense. That values Jubilee at $20-$25 billion if you consider cost overruns and interest expense on borrowed money. Let's assume that the Republic of Ghana is going to get something in taxes, royalties, fees, local goods and services, training, and special gifts under the table. So Jubilee is a $28 billion asset.

400 million bbl x $50 = $20 billion

Ooops. Obviously there's something wrong with my arithmetic. Maybe Exxon's $4 billion includes its capex contribution, which values the project at $20 billion total (breakeven at $50 a barrel).

I'm certain Tullow and Anadarko will flip their shares to CNOOC and Shell, both of which expressed interest and prompted Exxon to move fast and first. Some industry analysts expect Exxon to make a corporate takeover offer for Tullow, which is exactly how supermajors grew oil reserves in the past couple decades -- by merger and acquisition.

But Exxon's $4 billion says they aren't betting on $50 oil, the long term average. They need $100 a barrel to make Jubilee a risk-free investment with 10% annual return in my opinion.

Disclosure: no position in companies mentioned, ETFs, or oil options.

I've been busy doing research and preparing for a trip to Europe, so forgive me for missing last month's E&P news from Brazil. Readers will perhaps recall that I said Exxon would make or break the ultradeep pre-salt story.

And so they have, with a timely tragi-comic assist from Petrobras.

RIO DE JANEIRO (Reuters) - A consortium of companies failed to find oil in deep waters off Brazil's coast, officials said Wednesday, a sign the South American nation's push to become an energy exporter is still fraught with risks.

The news came a day after state-run Petrobras said it suspended production at a pilot well in the massive Tupi field, highlighting the challenges of pumping crude through a thick layer of salt miles below the ocean's surface.

Such setbacks may prove a blow to government assertions that Brazil's sub-salt fields have no exploration risk -- a key argument for a pending legal overhaul that would change terms for oil companies investing in new offshore projects.

A consortium including Exxon Mobil, Hess Corp and Petrobras did not report an oil find in the Guarani well of BM-S-22 bloc after drilling there, according to statements by Hess and Exxon Mobil.

A Deutsche Bank report released Wednesday put the total cost of the well at $140 million.

Exxon Mobil, operator of the project, said in an e-mailed statement: "We are evaluating the results of the BM-S-22 drilling program in order to plan a location of a third well to help us further evaluate the BM-S-22 block."

On Monday, Petrobras said it had to halt production at a well in the Tupi field, which [they claim] contains at least 5 billion barrels of oil, because of an equipment problem. It did not say when the well would be functioning again.

The incidents demonstrate two key risks of developing sub-salt fields -- the chance oil reserves may be less than expected and the difficulty of producing under deep water at extreme temperatures and high pressures.

74.125.155.132/search?q=cache:Cx-R4olcbF...

 

July 22 (Bloomberg) -- A Brazilian oil well drilled by Exxon Mobil Corp in the country’s so-called pre-salt offshore fields which showed no sign of oil was "a mistake," Brazilian Energy Minister Edison LoBao said today.

 

Petroleo Brasileiro, the state-controlled oil company, recommended the well be drilled in a different location, Lobao said today in an interview in Brasilia. "The dry well occurred because they drilled in the wrong place. It was a mistake," he said. "There is no risk with the pre-salt."

http://www.blooomberg.com/apps/news?pid=20601072&sid=aquzUL8D9egA

Bwahaha. No risk with pre-salt, eh?

Disclosure: no position long or short in any of the companies discussed.

This is going to be a near-term 2010 call, based on production data charted by Rembrandt Koppelaar, employment and GDP outlook by Mish, and the growing threat of "ruthless default" consumer debt repudiation in the United States:

People do not care about credit scores any longer. What does that give you? Nothing. The lenders are canceling lines left and right. Most people do not qualify for a mortgage. Stores are no longer giving out their CCs. There is no more credit available for those that are near the edge. There is no downside to walking away any longer. Debt repudiation is the biggest systemic risk we face. It is staring right at us.

If we agree that demand for oil is inelastic, which means people will pay whatever it costs to operate their cars, trucks, jet aircraft and military vehicles, then the price of oil is determined entirely by effective (cash-in-pocket) demand.

I don't expect the US dollar to crash or to dramatically appreciate in 2010. There is a demonstrated consensus among central banks to deploy currency swaps as needed, and I disbelieve that commodity speculation is a sticky factor, so my oil forecast for 2010 is based solely on fundamentals.

Let's assume that US and world economic output are joined at the hip. There will be no recovery or net growth in 2009-2010. Mish explains:

In plain English, the first 2.5% of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades. If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

So, the demand outlook is weak -- i.e., fewer dollars in private and public purses, with a continued emphasis on saving more and spending less. Second quarter industrial earnings beat expectations only because they cut costs. I anticipate demand for oil to remain depressed.





































Similar weakness in Japan, Spain, France, and Italy:





































All eyes are on China and India at the moment, expecting them to grow and consume more oil, therefore bidding up the world price of crude. While it's true that China is on a capex spending spree, acquiring production and reserves wherever it can, Chinese and Indian oil consumption (10 million b/d) is small compared to OECD + OPEC (50 million b/d).

I don't subscribe to the "last barrel" marginal pricing theory. There are too many players and byzantine price regulation in every jurisdiction on earth. At present, Chinese growth is picking up slack from soft OECD demand.

Another myth is the notion of OPEC "spare capacity." While it's true that Saudi Arabia can lower their output from time to time, to support an orderly market and keep petrodollar speculation in check, it's highly significant that Saudi production has been more or less flat for over a decade:























The global picture aggregates OPEC, OECD, and emerging market supply. There is no immediate threat of "peak oil" shortages or shocks in 2010:





































I expect global supply to bounce around 73 million b/d, rain or shine, and WTI to trade at $60-$65 the rest of this year and next on 2% World GDP "recovery."

Disclosure: no position in oil, E&P, or commodity indexes.

I can't find a fundamental supply-demand explanation for why crude oil prices are rising steadily, so I decided to take a look at war risk. Traders and suppliers often factor potential disruptions well in advance, raising prices incrementally rather than panic too late and bid erratically. Buy on the rumor, sell on the news.

Certainly, some risk can be attributed to perceived dollar weakness, massive U.S. Treasury requirements, and worries about inflation. A barrel of oil tomorrow will cost more dollars than today.

But war risk seems to be front and center in the minds of oil ministers and traders, as far as I can judge from press reports. There are too many trouble spots to say that one or two are pivotal. Rather, the background worry of peak oil has magnified a dozen supply and transportation threats into an overall sense of foreboding (and a bit of paranoia) about global oil insecurity.

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The stock market is on a tear because the US Treasury and Federal Reserve will do whatever is necessary to prop up banks and automakers. Very reassuring. Wonderful.

How much of it will trickle down to mom-and-pop small business is an open question. Most big firms have cut their consultants and all other nonessential expenses like entertainment, interior design, advertising, travel, free food (at Google) and, of course, construction -- all of which were supplied by mom-and-pop small business.

The SBA sez small firms:

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Tags: US Market, Economy

May 05 07:03 am | Link | 1 Comment