Brazil Forward Looking on Oil Production

I was in Houston this month, attending the Offshore Technology Conference. I have to confess that I’m humbled. Really, for as much as I think I know about the energy biz after a mere 30-plus years… a walk (a LONG walk, to be sure) around the packed floor of the immense Reliant Center AND the massive Reliant Stadium reveals how much I have left to learn.

Wrapping Your Brain Around the OTC

Sometimes when 70,000 people head to Reliant Stadium, it’s to watch the Houston Texans play football. The spectators understand what’s going on down on the field. In true Texas fashion, they know the rules of football. There are 22 players moving back and forth, with the rest of the two teams and coaching staffs on the sidelines. It’s something around which you can wrap your brain.

But the OTC? How do you wrap your brain around the OTC, its several thousand exhibitors and many dozens of speakers?

Do you want to know how to do seismic work on the other side of the world? How to build work ships the size of aircraft carriers? How to anchor a 75,000-ton rig in swift-moving water, while dangling a 20,000-ton riser-string that’s nearly two miles deep? How to drill oil wells 250 miles out at sea? In 9,000 feet of water? Through 14,000 feet of rock? Through 8,000 feet of salt? Into fluids with pressures of 25,000 pounds per square inch? (By comparison, your household water pressure might be about 40 psi.) Into super-heated oil filled with poisonous gases? How to move that super-heated oil to the seabed from beneath four miles of the earth’s crust? Then how to move that oil across hundreds of miles of ocean bottom, and do it in the freezing waters of the deep ocean, even at the equator and, of course up in the Arctic? Do you know how to do that? Where does the technology come from? Who builds the equipment? How do you pay for it? Where is the work force to accomplish these tasks? What about the government policies that influence it, for better and worse? How do you make 25- and 50-year plans — yeah, it takes THAT long — in a world where prices and policies change by the month? How about the national cultures that nurture (or suppress) the whole process?

Which Battle? Which War?

Let’s look at things from the standpoint of national cultures. When I attended the Naval War College a few years ago, going through a course for senior officers, one professor said something that stuck with me: “Your job is not to fight the last battle of the last war. It’s to fight the first battle of the next war.”

“The first battle of the next war?” Damn right. Sure, you’re going to study history. Sure, you’re going to read about the last war and its last battles. But you have to understand that things change. You have to realize that everybody else is studying the last battle of the last war. So you probably have no real advantage going into the next great effort. The other guy has read the same book.

Thus, if you want to succeed, you have to get ahead of the future. You have to write a new book. It’s YOUR book. Indeed, you have to invent that future. You have to decide what you want to do, and then acquire the people and equipment to get it done.

Brazil — Gearing up for the First Battle of the Next War

Where am I going with this? Let’s look at Brazil, for example. The Brazilians are gearing up for the first battle of the next war, so to speak. They intend to survive as a prosperous, industrialized country in the 21st century, despite intense future competition across the world for energy fuels and other natural resources.

Down in Brazil, they’re in something like national rapture at the prospect of drilling up the deep pre-salt hydrocarbon plays in the offshore basins. The estimates are that the deep basins off Brazil hold between 20-100 billion barrels of oil. Maybe more.

The entire nation of Brazil, apparently, revels in the prospect of investing over $120 billion in offshore development in just the next eight years. They have a plan. It’s their moonshot. The Brazilians believe that the offshore environment will bring their industries firmly into the modern era. Brazil wants to be a world power in the 21st century. And the oil? Well, of course they have plans for that oil.

As a nation, Brazil cannot wait to move ahead into its offshore realm. Just Petrobras, the national oil company, wants 40 new drilling rigs, each over 60,000 tons; and 32 new production units, each near 100,000 tons; and about 130 large supply vessels, each over 100,000 tons.

Petrobras has plans to emplace HUNDREDS of subsea systems on the deep ocean bottom to bring that oil into production. The Brazilians will lay thousands of miles of underwater pipeline, with all the associated ship-support and other equipment that entails.

The Brazilians are not living in the frozen past. They’re not hostage to paralyzing myths. The Brazilians envision a future for their nation, and they’re acting on it. They see hundreds of deep-water oil wells pulling petroleum out of the crust from many miles down and piping it ashore to their refineries and industries. Indeed, Brazil plans to win that first battle of the next war. And it’s cutting the steel with which to do it.

Meanwhile, Back in the US of A…

Meanwhile in the U.S., the policy battles rage endlessly over offshore development. Authorize? Don’t authorize. Explore? Don’t explore. Lease? Don’t lease. Drill? Don’t drill. Produce? Don’t produce.

Whenever the proponents of offshore development score a win, the opponents take it all to federal court for years on end. Years later, some judge makes a decision. Then comes the inevitable appeal. And then everyone goes back to litigate some more after the appeal. There’s no end. I’ve spent my adult life watching this ping-pong match play out.

What’s at the heart of the issue? A broken political process. Or you might call it a political “process” that works too well. Really, it seems that much of the U.S. energy mind-set is stuck firmly in the past. In essence, the debate is over how to fight the last battle of the last war.

Living in a 40-Year-Old Past

For example, again and again, the opponents of offshore development in the U.S. summon up their favorite bete noir — the images of the Santa Barbara oil spill of 1969. An event from four decades ago — before most Americans now living were even born — has become the iconic reason not to develop, say, offshore California. And this is despite the fact that the exploration, drilling and environmental technology of today is far advanced from what existed 40 years ago.

Think about it. Do you have a better computer today than 40 years ago — if you even used computers back then? A better television? A better car? Are there better airliners? Better heart transplants? You get the idea. But some people learn something and never let it go.

Along those lines, the other day, I visited the facilities of Cameron Intl., here in Houston. Cameron makes blowout preventers for deep-sea drilling, and a large host of other drilling-related equipment. Having been around the oil industry for over 30 years now, I can say that the new technology for safe drilling is beyond astonishing. Just the quality control alone is awesome. For example, EVERY HEAT of steel that goes into certain of Cameron’s subsea products goes through a rigorous quality-assurance check. Every heat.

Meanwhile, it’s not just California where the offshore is off-limits. Most of the rest of the U.S. offshore is locked up as well, except the western Gulf of Mexico and (grudgingly) some of northern Alaska. As one wag has put it, when it comes to offshore development, much of the U.S. political class is living in “The No Zone.”

The Future Is Right Now

But the last battle of the last war — the Battle of Santa Barbara — is over. The images of oil on the beaches led the U.S. to shut down much of its offshore drilling effort, and for many decades. Meanwhile, the mess got cleaned up. It’s history. The energy industry figured out what happened and fixed a lot of problems. Now where do we go? Because you have to go somewhere, sometime. You can’t live in the past — at least not for too long. Or can you? Well, you can try to live in the Good Old Days, but eventually, the future will overtake you. And in the world of energy, the future is right now.

Welcome to the Future

A year ago, the price of oil was $120 per barrel and rising. Indeed, by last July, the price was $147 per barrel. And when that happened, you might recall that the world economy didn’t work very well. It was oil prices; it was bad banks; it was a lot of things that went wrong. And then the economy cratered. That took down the oil price. So now the price of oil is in the $50s.

Look back. How did oil ever reach $147 per barrel? Was there really not enough to go around? That’s what some people thought. But then why did the price suddenly tumble, if not just plain drop off a cliff? Did people anticipate a demand crash? Again, that’s what other people thought.

Now we have oil in the $50s. What does that mean? With oil in the $50s, does it mean that the world has “too much” oil? Or not enough? Well, what’s your time frame? A day? A week? A month? A year? Five years? Fifteen years?

With oil in the $50s, yes there will probably be adequate supplies for the next few months. You can calm down. The oil you’ll burn in September is being loaded onboard distant tankers right now.

But with oil in the $50s, will there be adequate oil supplies in, say, 2012, if not 2020? I doubt it. At least not for the U.S. Because with oil in the $50s, some of that 2012 oil — and much of that 2020 oil — won’t see the light of day. There’s just not enough cash flow for the energy business to do its thing — like drill enough wells. Hey, the future is now.

Future oil production requires current exploration and development. Except we’re not drilling. We’re not developing. So welcome to the future. With oil in the $50s, it’s a no-brainer to predict future shortages.

For Now, Keep Drilling

One thing is certain. If the energy industry does not stay focused and capitalized, we’re in a lot of trouble — and I mean sooner, rather than later. That’s why a big trade show like the OTC is so important. The OTC embodies the new developments in offshore technology. It gets right into your face.

Almost every booth at OTC has some item on display that’s better than what used to be on display. Yesterday, for example, I saw a remarkable new invention from FMC Technologies that dramatically improves the safety and efficiency of the “fracturing” process (“frac-ing”) by opening up shale beds to yield natural gas. It’s what the late efficiency guru Edward Deming would have called an “incremental improvement” to an existing process. But it’s brilliant and elegant. And when this new equipment goes into widespread use, it will offer a dramatic improvement.

Ideas and improvements like this from FMC Technologies — and countless more on display at the OTC — will allow the energy industry to keep providing hydrocarbon molecules to us earthlings for as long as we want to burn them. (Burn them? That’s another story entirely.)

The OTC shows off what the U.S. has at its disposal, if it chooses to develop its offshore energy resources. Here are the tools with which to fight the first battle of the next war.

And the OTC also shines a light on how many U.S. policymakers and opinion leaders are living in the past, patting themselves on the back as they fight that last battle of the last war. Meanwhile the energy clock is running down, and other nations and cultures are shopping their wares.

That’s all for now. Thanks for reading…

Until we meet again,
Byron King

May 20, 2009

The Daily Reckoning