Brazilian president Luiz Inacio Lula da Silva put the country’s recent massive oil find down to the fact that God was a Brazilian…

The country’s government and the state-run oil company Petrobras announced two weeks ago that exploration of its Tupi offshore field showed it had enough to increase national oil reserves by a staggering 50%. Indeed, it has been said the discovery could quickly propel Brazil into the top 10 global oil producers.

This is fantastic news for the economy of Brazil. Personally, however, I believe the oil find can be explained without reference to superstition.

I believe the oil was discovered because deepwater exploration technology has come on leaps and bounds over the last ten years… I also believe that the fact that oil is in a particular location can be put down to random biological and geological processes. I do not think a higher power is involved… but each to his own…

This discovery is good news and has led to some peak oil detractors pointing their fingers in delight. They point to this discovery as proof that peak oil is nothing more than a theory and we are in no danger of running out of oil.

However, the simple fact is that this oil find is not cheap oil. It is expensive oil.

No more cheap oil

I have never been a fanatic peak oiliest, but I do believe that the era of cheap oil has gone for good. There are many exciting new technologies being developed by oil majors to extract the difficult oil. However, they need a high oil price for this because it is a very expensive business.

Within the past 15 years or so, deepwater has evolved from being a technological frontier to a strategically-important component of the world’s oil industry. Due to this history, in relative terms, the deepwater and ultra-deepwater regions of the world are still underexplored and hold considerable potential.

Significant deepwater locations include the gulf of Mexico, the Arctic regions, offshore West Africa, offshore North Africa, offshore South America, the South China Sea and the margins of the Indian Ocean.

From the exploration standpoint, deepwater fields tend to be few, but in terms of discovery and exploitation, they are extremely productive. In the deepwater trends of the Gulf of Mexico, for example, there are deeply-buried turbidite sands that have yielded in excess of 20,000 barrels of oil per day.

The subsea market is going to continue to grow and it is likely that more discoveries will be made. The supply chain for the offshore sector is close to or at full capacity, which leads to a seller’s market in equipment and services.

There are severe constraints in fabrication facilities, manpower, equipment and material availability, leading to cost-inflation overall. Any operator that is planning an offshore project, and certainly a deepwater project, needs to order critical equipment early and keep the time between discovery and production as low as possible.

In the subsea equipment field, the trend is for operators to develop long-term relationships with their suppliers. These relationships will almost certainly last for 15–20 years and more per project.

Due to the unique conditions of each deepwater project, not every contractor possesses the abilities necessary to bid on every job, and the proverbial “low-cost bidder” is not necessarily the one being chosen.

So in the future, the money will be flowing offshore, and into deep water... Keep an eye on where the money is going, but do this by looking at facts, not by seeking divine inspiration… P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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