Friday, November 09, 2007

An Elephant in Perspective

Enthusiasm about Brazil's new giant oilfield, Tupi, has sharply boosted the stock price of Petrobras, which owns 65% of the offshore block in which the field is located. If the estimates of its total reserves prove accurate, in the range of 5-8 billion barrels of oil equivalent, then it would be one of the largest finds in recent years. While this one discovery might not change our perspective on the long-term capability of global oil supplies to keep up with demand, or our proximity to a peak in global production, it has all sorts of interesting implications. As such, it probably deserves even wider coverage than it is getting.

Using the skewed math of the industry's critics, Tupi's reserves amount to only a three-month supply of oil for a world that consumes 85 million barrels per day. A drop in the bucket, right? But of course the world's supply of oil is made up of the output of thousands of oilfields, most much smaller than Tupi and only a relative handful larger. And it's those few, large fields, which can sustain a high output for decades, that are the bedrock upon which our entire oil edifice rests. Tupi's prospective reserves would put it in that top league and, together with possible extensions and adjacent fields, make Brazil a much bigger factor in oil markets. It also raises questions about how many more such "elephants" are waiting to be discovered, as technology extends our reach into ever deeper waters offshore.

As things stand now, Brazil is a modest net importer of oil, on the order of 200,000 barrels per day (bpd,) but with a steadily rising production profile. Even without Tupi, it has another million bpd of new production coming onstream in the next several years. That should vault it past Venezuela's stagnating output and make Brazil the largest oil producer in South America and a key oil exporter. Add Tupi into the mix, and Brazil begins to look like the next Norway, or at least another Mexico: an important new factor in non-OPEC supply.

Guessing at Tupi's ultimate production is beyond my technical skills. Alaska's Prudhoe Bay and associated smaller fields, which contained about twice as much oil, peaked at 2 million bpd and produced over one million for 19 straight years. Well into decline, it still accounts for more than 10% of US oil production. Viewed in that light, one oil field--it it's big enough--can affect the fortunes of an entire country. Together with Brazil's potential to become a much bigger exporter of ethanol from sugar cane, the country's net contribution to global liquid fuels markets over the next decade or two might be on a par with that of Canada's oil sands, with a corresponding influence on world oil prices.

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