Bonanza for Drilling and Service  companies

Tue Mar 11, 2008 9:00am EDT

HOUSTON, March 11 (Reuters) - Deep below the ocean floor off Brazil is Tupi, possibly the largest offshore oil field ever discovered.

Brazil controls Tupi, but getting crude oil out will create billions in revenue for oilfield service companies like Halliburton Co (HAL.N: Quote, Profile, Research) and Transocean Inc (RIG.N: Quote, Profile, Research) that have the expertise needed to tap the extremely complex reservoir.

Brazilian state oil company Petrobras’ (PETR4.SA: Quote, Profile, Research) Tupi field in the Santos basin has estimated recoverable crude oil reserves of between 5 billion to 8 billion barrels, and is the second-largest oil find in the past 20 years.

But an enormous shifting salt formation located 3.7 miles below the ocean floor covers Tupi, making exploration and production a technological challenge.

Service companies that provide deepwater drilling rigs, subsea production systems, directional drilling and offshore engineering and construction services will benefit from spending on Tupi, analysts and investors said.

“All of these companies are going to share in what is going to easily be $100 billion to $200 billion of capital spending to develop Tupi,” said John Olson, who runs hedge funds for Houston Energy Partners. “All of this is at the very outer end of drilling technology.”

Brazil’s state oil company has said it plans an extended production test in 2009 and a 100,000 barrel per day pilot project is slated for late 2010 or early 2011.

Portuguese oil company Galp Energia (GALP.LS: Quote, Profile, Research) holds a 10 percent in the consortium exploring Tupi, while U.K.’s BG Group Plc (BG.L: Quote, Profile, Research) holds a 25

BIG BUSINESS

Tupi’s big numbers have the oilfield services sector abuzz.

In a recent presentation to investors, Robert Long, the chief executive officer of the world’s largest drilling contractor Transocean, described Brazil as one of the hottest deepwater markets in the world.

“It’s going to be so big that it will help everybody,” Mike Breard, energy analyst with Dallas-based Hodges Capital Management, said. “When every rig is sold out, and you add demand, it helps everybody.”

Rapid growth in deepwater markets around the world has caused tight supplies for drilling rigs, a market where short-term daily contracts have topped $600,000.

Still, the companies that have an existing relationship with Petrobras including Schlumberger Ltd (SLB.N: Quote, Profile, Research), Halliburton, Transocean Inc, Noble Corp (NE.N: Quote, Profile, Research), Pride International Inc (PDE.N: Quote, Profile, Research) and Diamond Offshore Drilling Inc (DO.N: Quote, Profile, Research), may have an edge over newer competitors, analysts said.

“I think the established companies are in a better position,” Mark Urness, analyst with Calyon Securities in New York, said. “Four U.S. drilling contractors have half the market down there, so one would assume they have a good shot at the business.”

And Halliburton, which has headquarters in Dubai and Houston, has already worked on Tupi.

On its fourth-quarter earnings call, Tim Probert, Halliburton’s vice president of strategy and development, told analysts his company has worked on Tupi since 2003, developing a plan to drill through the massive salt formation. 

So far, Halliburton has supplied seismic interpretation software, drill bits and well testing services, Probert told analysts.

And an executive with Pride International told analysts on its quarterly call that it expects Petrobras will add five to 10 high-specification drill ships between now and 2012.

Still, Calyon Securities’ Urness cautioned that Petrobras, which is expected to watch costs, will consider all bidders including possible newer entrants like Norway’s SeaDrill Ltd (SDRL.OL: Quote, Profile, Research), a drilling contractor that has been been aggressively growing its business.

Petrobras will also steer business toward other Brazilian companies, Urness said.

Others poised to benefit from work on the Santos basin formation include engineering and construction firm McDermott International Inc (MDR.N: Quote, Profile, Research); Dril-Quip Inc (DRQ.N: Quote, Profile, Research), which make offshore drilling and production equipment, as well as Cameron International Inc (CAM.N: Quote, Profile, Research), which manufactures subsea production systems and other equipment, analysts said.

Tags: energy investments

This entry was posted on Tuesday, March 11th, 2008 at 9:12 pm and is filed under Brazil, Transocean (RIG), drilling/service companies, oil supply. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.