Brazil Prepares to Surprise Drillers This Time With Gas
Comment of the Day

February 12 2013

Commentary by Eoin Treacy

Brazil Prepares to Surprise Drillers This Time With Gas

This article by Rodrigo Orihuela for Bloomberg may be of interest to subscribers. Here is a section
Shale deposits exceed Brazil's so-called pre-salt gas reserves, ANP head Magda Chambriard said last month to reporters, in Rio de Janeiro. Brazil also holds other types of unconventional gas, such as so-called tight sands and carbon gas, according to the ANP. Pre-salt refers to Brazil's off-shore deposits, the world's biggest crude discoveries this century. Shell, already Brazil's third-largest oil producer, is preparing to drill its first on-shore gas well in the second half of the year while it waits for the ANP to issue rules for the December auction, the company's press office said in an e-mailed response to questions.

Shell will drill in the state of Minas Gerais, where closely-held Petra Energia SA is becoming the leading unconventional gas explorer in Brazil, focusing on so-called tight gas sandstones and tight gas carbonates, according to an e-mailed response to questions. The company has discovered gas in 12 of 14 wells it drilled in the Sao Francisco basin.

Unconventional gas gives companies an opportunity to operate blocks in Brazil where state-run Petroleo Brasileiro SA, / or Petrobras, is guaranteed a majority stake in all pre-salt operations.

Eoin Treacy's view Unconventional oil and gas is a game changer for the North American energy industry. Such has been the effect of increased supply on pricing that the spread between WTI and Brent crudes has moved from relative stability in the decades to 2010 to a substantially more volatile environment since. The development of the technology to access unconventional reserves was developed in the USA and it has been the first country to benefit from increased supply. However, as this technological knowhow permeates the global energy sector other countries will inevitably also seek to exploit their own unconventional oil and gas reserves.

The short-term outlook for energy pricing remains finely balanced as Middle Eastern politics, Asian demand growth and perceptions of global economic growth potential vie for attention. Over the next decade, as new sources of supply come online, the tightness that has been such a feature of the energy landscape for the last decade should moderate.

In the meantime Brent Crude is testing the $120 area and is somewhat overbought following an impressive rally over the last month. Some consolidation of recent gains appears likely but a sustained move back below $115 would be required to confirm more than a temporary pause in this area.

As well as its involvement in Brazilian unconventional oil and gas development Royal Dutch Shell is also at the forefront of such moves in China and can therefore be considered to offer truly global exposure to the unconventional oil and gas sector. In common with the wider major oil sector, the share encountered resistance two weeks ago and has returned to test the progression of higher major reaction lows. A clear upward dynamic will be required to confirm the return of demand in this area.

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