Hess, Shell, ExxonMobil may contest this novel idea for Tupi development

Implications: Senior Correspondent Eric Watkins reported in the August 25 issue of the Oil & Gas Journal that the presalt oil fields in the deep water of Brazil are likely to be contiguous. Eduardo Molinari of Petrobras announced that recent seismic studies in the Tupi discovery area of 2007 indicate that the reservoirs are connected. Besides Petrobras, BG, Galp Energia, Repsol-YPF, Royal Dutch Shell, ExxonMobil and Hess Corporation all hold acreage in the region. Under Brazilian law, contiguous concession areas become subject to joint exploration to avoid unnecessary drilling. Brazil, wanting more control over the assets, could invoke the rule. Brazil’s Mines and Energy Minister, Edison Lobao has proposed that a separate company be established for that purpose. Tupi oil is a sovereign asset and should be fully protected for all of the people. Petrobras would then become a service provider to the explorers. Brazil’s president appears to support the concept.

Analysis:  The oil companies will surely consider this proposal carefully and react forcefully if they see ownership and loss of control in the joint exploration company. Taken at face value, the pronouncement of Brazil’s president that the presalt oil belongs to “all of the Brazilians” is rather ominous in that it ignores the obvious fact that some significant fraction belongs to the shareholders of the oil companies. Of course, political rhetoric rarely becomes policy and populists slogans resound nicely in a nation where many citizens need more than what they have. All the same, it is another worry for oil companies with real preoccupations about the sources of future hydrocarbon supplies. Though of small conciliatory value, Tupi ranks as one of the highest extraction costs areas in the world. It would hurt to lose it. But the Arctic beckons. While it too is a high cost arena, at least in the margins of the Arctic Ocean controlled by the Americans, Europeans and Canadians, the political environment is much milder than the weather. The major international oil companies, acutely aware of diminishing returns from foreign concessions, seek alternatives. Attractive terms are still possible in the South China Sea, the Gulf of Tonkin, the Gulf of Thailand, the shallow waters north of Australia and the Gulf of Papua. The Structures are smaller but crude oil quality is good and there are large natural gas deposits even if some of them have high carbon dioxide content. The game for the majors is far from over.