Still Profiting from Deepwater Drilling

Not long ago, I interviewed Ali Moshiri, President of Chevron Africa and Latin America Exploration and Production Company. We discussed his role at Chevron, where he runs energy exploration and development in the vast Atlantic Basin. We also discussed Mr. Moshiri’s views on what Mexico needs to do to breathe new life into its oil industry.

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

The Daily Reckoning