Underwater Mining

The Adventures of Tintin is a comic book series started back in 1929. My nine-year-old son loves it. I enjoy reading it along with him because the hero of the series, a young Belgian reporter named Tintin, often finds himself in interesting historical settings and exotic places. (My favorite story is “The Blue Lotus,” which takes place during Japan’s occupation of China in the 1930s.)

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.