Oil industry faces challenge of deep water extraction

Global demand for energy is pushing the frontier of oil exploration into deep-water locations below the ocean floor. In these locations, the water is too deep for operators to use conventional freestanding steel platforms. The environment, usually classified as having a water depth of over 400m, demands more complex and costly technological solutions, including the use of floating drilling platforms. Current centres of interest include the Gulf of Mexico, the waters off West Africa and the South China Sea. However the most significant recent finds have been made on the continental shelf located off the east coast of Brazil in the Campos and Santos basins. Preliminary tests suggest that two fields, Tupi and Carioca, have significant potential.

Comments from a US-based petroleum consultant, later cited by Haraldo Lima of Brazil's National Petroleum Agency, suggest that Carioca could be part of the third largest field ever discovered. However the full potential is not yet clear. It will depend on the ability of companies such as Petrobras of Brazil, Repsol YPF of Spain and BG of the UK to overcome the practical issues that surround the extraction of oil and gas from beneath 2000m of sea and 2000m of salt rock. These include operating in conditions of extreme cold in deep water, heat in rocks within the earth's crust and at high pressure.

Chris Palmer, Head of Global Emerging Markets at Gartmore, will address an audience of professional investors about the new era of energy exploration in the US next week. He highlights how many mature economies have failed to solve their own energy supply requirements at a time when demand from emerging economies is growing. This has created a ‘supply crunch'. New research suggests that this, combined with the currency effect of the weak dollar, could push the oil price well over today's trading range around $115 per barrel.

According to Mr Palmer, "New frontier discoveries offer the prospect of changing the geopolitics of energy. We already have a situation where emerging markets dominate global oil exports. In terms of known reserves, Brazil barely featured in the energy rankings in early 2007. If recent finds prove to be commercially viable, the country could be listed as the holder of the eighth largest oil reserves in the world."

However the testing and extraction process will be complex and costly. Drilling Tupi's first well is estimated to have cost $240m, although costs per well have now declined. State-controlled Petrobras, which has stakes in both Tupi and Carioca, had a capital expenditure budget of $15bln in 2007. This budget is expected to increase significantly as exploratory work continues within new fields.

The Gartmore Emerging Markets Opportunities Fund and the Gartmore SICAV Emerging Markets Fund are positioned to take advantage of the new era in energy exploration. The Funds are overweight Petrobras, seen as a leader in deep-water exploration, and also have overweight positions in companies expected to see spill-over benefits such as Usiminas, the producer of steel plate, relative to the benchmark. Tenaris, the producer of seamless pipework used in oil lines, is also held within Gartmore's Global Emerging Market portfolio.