A Global Glut of Deepwater Oil...With One Major Exception

It’s boom time for offshore drilling. Not in the US, of course, but that shouldn’t come as any surprise. After all, there are few “enemies” Congress pursues with more gusto than that of conspicuous productivity.

Almost three weeks have past since President Barack Obama passed a 7-year moratorium on drilling for oil and natural gas within 125 miles of the Florida coast. And still, unremarkably, the industry soldiers on…elsewhere.

Indeed, production from deepwater drilling, having doubled over the past five years to some five million barrels per day, continues to capture a larger piece of the total global supply pie. Thanks mostly to new discoveries and ongoing investment in exploration and development in Brazil and West Africa, that figure is projected to double by 2020, when contributions from the deep will make up more than 10% of total global production.

Of the deepwater discoveries made during the past decade, Brazil boasts 7 of the top ten, as measured by volume. At very best estimates, fields Tupi (2006), Jupiter (2008), Franco (2010), Lara (2008), Jubarte (2001), Mexilhao (2001) and the newly discovered Libra deposit (2010), could contain up to 40 billion barrels of oil equivalent – about half the size of Saudi’s elephant Ghawar Field.

That may sound like a bit of a stretch and, to be fair, many of these discoveries are relatively fresh and estimates can vary quite a bit on the size of the deposits. Moreover, governments with total or majority control over their national reserves tend, as governments do, to err on the side of optimism when evaluating the size of their own fields. But that’s probably as true for Saudi and Russia, say, as it is for Brazil and the West African nations. Overestimating the size of one’s endowment is nothing new, after all.

Nevertheless, even if only one third of Brazil’s recently discovered deepwater deposits end up in the “recoverable” basket, that still puts the total reserves more or less on par with Alaska’s Prudhoe Bay giant…a field discovered more than four decades ago which is laboring under an 11% annual decline rate. And the South American field leader is showing no signs of slowing down, either.

Given its recent spate of discoveries, it should come as little surprise that Brazil is doubling down on its deepwater bet, a tactic seen in sharper relief when compared to the post BP blowout response by the US.

“The Department of Interior (DOI) is pretty much squashing offshore development in the name of safety,” Byron King, our resident oil man noted in yesterday’s 5-Minute Forecast. “‘No more blowouts’ is a nice slogan, but it seems that the DOI wants to achieve that worthy goal by just shutting down offshore development for all purposes.

“Since June,” continued Byron, “the DOI has approved less than one new offshore drilling permit per week – and only in shallow waters, less than 500 feet depth. Almost NONE of the permits are for exploration wells, with the few approvals being for developmental drilling in known areas.

“It’s a recipe for falling future output and eventual energy shortages in the US,” concluded Byron, to which 5 editor Dave Gonigam astutely added, “And it stands in stark contrast to what other governments are doing.” Indeed.

Already South America’s largest economy, Brazil hopes to increase its deepwater production from 1.4 million barrels per day, as measured in 2009, to 3.5 million by 2020. Deepwater production in the US, by comparison, looks set to remain stable at 1.2 million barrels per day…after having only increased from 1 million barrels per day since 2000.

Elsewhere, too, nations unable to afford the luxury of environmental hysteria are taking advantage of the political fallout in the US to advance their own deepwater programs. Where the Gulf of Mexico remains paralyzed, the Gulf of Guinea, for example, flourishes with exploration activity. Reports The Wall Street Journal:

“Tullow [Oil PLC] in July announced a significant discovery off Ghana after drilling in 4,685 feet of water. A nearby field, estimated to contain up to 1.5 billion barrels of oil, is scheduled for first production in December.

“Chevron, meanwhile, announced the acquisition of three large deep-water exploration blocks in Liberia. It plans to begin drilling there this year. The company also bought deep-water acreage in the Turkish Black Sea and in China.”

With the BP disaster still fresh in the minds of many Americans, the Obama administration has obviously decided it cannot afford the political cost of more deepwater drilling. The Brazilians and West Africans, however, seem to have decided they cannot afford not to drill.

Joel Bowman
for The Daily Reckoning