Brazil-West African Connection Sparks Subsalt Oil Search

CABINDA, Angola (Dow Jones), Apr. 9, 2010

Over the past four decades, the operations now owned by Chevron Corp. in Angola's Cabinda province have crept from just offshore to 50 miles out to sea.

But as it drills further out and deeper down, the company is looking to a model 3,000 miles across the Atlantic Ocean to the coast of South America for guidance.

Chevron is just one of several companies and African governments taking a fresh look at West African prospects as they seek to replicate the huge discoveries made in a Brazilian region with a similar geology.

At Chevron's local offices in Cabinda, John Baltz, head of production for Southern Africa, says "you see a lot of similarities" with Brazil in terms of oil reservoirs.

These reservoirs, known as subsalt, lie beneath the thick layer of salt that started to accumulate 150 million years ago, when the single southern supercontinent, the Gondwana, began to split into Africa and South America.

In the past, when oil companies were looking for similarities between oil reservoirs, they would generally move to the neighboring country -- for instance from Angola to Congo.

But unlike those above the salt layer, the geological structures below have generally remained unchanged since the Gondwana broke up. That makes it worth looking on both the western coast of Africa and the eastern side of Brazil, experts say.

Recent improvements in seismic imaging are unlocking geological secrets, says Bernie Vining, a regional director at U.K. oil and gas consultancy Gaffney, Cline & Associates Ltd.

These new techniques led to giant finds in the previously overlooked Brazil subsalt; in 2007, Brazil's Petroleo Brasileiro S.A., or Petrobras, made the Western Hemisphere's largest oil discovery in 30 years, the Tupi field, with estimated recoverable reserves of between 5 billion and 8 billion barrels of oil equivalent.

And thanks to the giant Brazilian finds, subsalt drilling, long considered expensive and difficult for most companies, is now moving center-stage. The Brazil connection is seen as an opportunity for African countries keen to increase their future oil revenue, for small companies that want to raise cash on the market and for oil majors struggling to replenish their reserves.

For example, discoveries in Northeastern Brazil have rekindled interest in the country that lies on the opposite side of the South Atlantic, Gabon -- long neglected by exploration companies. "There is a big interest in Gabon because of the interest in Brazil," said Jim Martin, a vice-president at consultancy CGGVeritas, which is advising the Gabonese government on its next licensing round, which starts in May.

As a result, Martin said, CGGVeritas has decided to use data on the Latin American country in the licensing and will emphasize the potential of subsalt blocks to possible bidders, he said.

Subsalt exploration is particularly critical for Gabon, whose mature oil basins have been declining from their 1997 peak of 371,000 barrels a day in 1997 to 235,000 barrels a day in 2008.

But Angola is the country with the most to gain from the Brazilian connection, analysts and geologists say. Angolan state-owned oil company Sonangol recently decided to postpone its next licensing round in part because it wants assess its subsalt layers, which geologists say are similar to Brazil's.

Gaffney Cline's Vining says that, geologically, the subsalt regions of Angola and Brazil were formerly next to each other, and therefore may have similar subsalt petroleum systems.

Says Marcio Mello, chairman of Brazilian geology consultancy and oil company High Resolution Technology & Petroleum, "What exists here [in Brazil], exists there [in Angola], even the rocks containing oil are the same. It's a certainty, not a possibility. Giant deposits will be found there."

Consultancy IHS Global Insight said in a recent report that "the ultra-deepwater prospects are expected to garner particular interest due to common geological features with Brazil's sub-salt areas."

BP has already made at least five significant discoveries in the Angolan subsalt.

By early 2011, U.S. independent oil company Cobalt International Energy Inc. intends to drill subsalt wells in Angola. At the turn of the year, the Houston, TX-based company raised $1 billion -- the largest ever U.S. IPO for an exploration and production company -- partly on hopes they will contain reservoirs similar to those found in Brazil.

It paid $24 million for the Angolan licenses in 2007.

The company says the two geological structures it is set to drill there could hold 4.8 billion barrels of oil, based on seismic imaging analyzed by U.S. geological firm DeGolyer and MacNaughton.

Cobalt also has key assets in the U.S. Gulf of Mexico, which Chevron's Baltz says also has similarities with Angola's offshore.

Sebastiao Gaspar Martins, head of research at Sonangol, says that "if Brazil is talking about billions [of barrels in reserves], I think we can also think in terms of billions" in Angola, because the subsalt reservoirs are "practically the same" on both sides of the Atlantic

The search for oil beneath the salt in Angola is set to intensify in the coming months. Sonangol plans to drill one or two subsalt wells there between this year and 2012, Martins says.

Houston-based Vaalco Energy Inc. is set to drill Angolan prospects that include subsalt reservoirs early next year. And U.K. oil independent Soco International PLC intends to drill a subsalt well in the neighboring Democratic Republic of Congo in the second half of this year.

To be sure, there are dangers to overstating the geological similarity to Brazil. Soco's deputy chief executive and chief financial officer, Roger Cagle, warns that the company's prospects in West African subsalt aren't on the same scale as those in Brazil. He says the Congolese subsalt prospects Soco is looking to drill could carry 600 million barrels of recoverable oil equivalent.

High Resolution's Mello warns that Angolan subsalt reservoirs may not lie at the same depth as Brazil's, which increases the likelihood of finding natural gas rather than more-valuable oil.

Thom Payne, an analyst at U.K.-based consultancy Douglas-Westwood, also tempers optimism with caution. "There could be big reserves, but you need to see how much of that you can get out of the ground," Payne said, adding that the cost of developing the subsalt region off Africa could be very high.

"Companies will observe very closely at what cost Petrobras will end up developing the Brazilian subsalt reserves. "Drilling below the salt layer is expensive. Payne says exploring the Angolan subsalt region will probably be very capital-intensive and technologically challenging because the oil may lie even deeper below the sea bed than in Brazil. "You need very large reserves to make it worthwhile," he said.

Despite the risks and costs, all companies have high hopes of finding more oil when subsalt drilling intensifies. And when it comes to drilling Angola's offshore, Chevron's Baltz says "we've only begun to scratch the surface."

Copyright (c) 2010 Dow Jones & Company, Inc.

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