Investor Briefing July 2017 Investor Risk from Total's and BP's Plans
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Investor Briefing July 2017 Amazon Reef Investor risk from Total’s and BP’s plans This briefing outlines Total’s and BP’s spill modelling and a number of requests controversial plans to commence deep remain outstanding. On May 3, the water exploration drilling in the Foz de Federal Prosecutor for the State of Amapá Amazonas (the Mouth of the Amazon) - an recommended the suspension of the area of exceptional ecological significance environmental licensing process.3 off the northern coast of Brazil. It highlights Total has called the Mouth of the the risks the companies face as well as Amazon basin “a difficult and challenging concerns regarding their assessment of play.”4 Since the 1970’s, there have been the risk of and response to an oil spill. We 95 attempts to discover oil5 in the Mouth suggest questions investors should ask of the Amazon basin and none have been the companies to understand whether successful. Experts have highlighted the various risks are being adequately that while the region has significant assessed, mitigated, and managed. development opportunities, it also has In May 2013 Total E&P do Brasil Ltd “significant operational hazards”.6 as operator (in a partnership with BP and Given the presence of a newly Petrobras) won licenses for oil exploration photographed and not yet fully at five blocks in the Mouth of the Amazon documented unique reef system in the basin. A BP-Petrobras partnership and Mouth of the Amazon basin, Total and BP’s a Brazilian oil company Queiroz Galvão plans are attracting increasing scrutiny. Exploração e Produção S/A took the other two respectively. Total has announced its Major Risks for Investors intention to commence its exploration campaign in late August or early September • High-profile, ecologically significant 2017 at two of its blocks.1 The company region hopes to drill between seven and nine wells • Expert & regulator concern about oil and has until August 2021 to carry out its spill modelling entire exploration programme.2 Federal Prosecutor recommending The Brazilian Institute of Environment • suspension of licensing process and Renewable Natural Resources (IBAMA) is currently reviewing Environmental • Growing pressure from civil society Impact Assessments, oil spill modelling, and local community groups and related studies - the last step before • Technically challenging project with issuing final approval to Total. IBAMA estimated $85-$100 break-even price has recently rejected Total’s latest oil 02 Commercially There are questions whether the Mouth Total acknowledged at its 2017 AGM of the Amazon basin holds commercially that there was an average of 8 years exploitable exploitable oil resources. BP has previously between exploration and production unsuccessfully invested in exploration for similar projects.12 Accordingly, the resources drilling in the Mouth of the Amazon basin. profitability of the Mouth of the Amazon In 2004 it announced that drilling in Block project will be determined by market BM-FZA-1 in the Mouth of the Amazon conditions into the 2030s. Oil prices may had cost more than $60million due to the be impacted by both already anticipated remote position of the blocks and swirling advances in transportation technology currents but had not been a commercial as well as government policies to address success.7 It has been reported that the global climate change. Meeting the company found insignificant amounts of ambitions of the Paris Agreement will gas rather than oil.8 According to Total, in mean immediate and drastic action to a submission to Ibama, “the probability limit emissions and prevent fossil fuel of finding hydrocarbons in commercial extraction. Accordingly, investors need quantities in the blocks is relatively low, to carefully scrutinise company claims considering the geological and geophysical regarding breakeven prices for and the studies being conducted at this time...”.9 compatibility with Paris Agreement of While Total has claimed that this project projects like the Mouth of the Amazon. has been evaluated within prices scenarios of $40-$60 bbl,10 energy analyst Wood Mackenzie estimates break-even prices of $85-$10011 Investors should ensure that Total as operator will be in a position to maintain the highest standards of health & safety and environmental protection if reducing the operating costs of an ultra- deepwater project. IBAMA criticises Total’s hydrodynamic module…upon which the accuracy of oil dispersion modelling is highly dependent as “statistically incoherent” in places 03 Operational Industry geologists have long believed that Brazil’s north-east deep-water sector Questions for Total and BP challenges — from the maritime border with French Guiana to the Amazon Estuary — may • Given BP’s previous unsuccessful host a major oil play, mirroring the prolific experience in the Mouth of the West African Play across the Atlantic.13 Amazon basin, the area’s recently However, although the first drilling blocks confirmed ecological significance, were allocated in the basin in the 1960s, and current market conditions, no oil has yet been found14 and companies why do the companies consider have faced challenges in exploring the this project a strategically sensible basin due to the treacherous operating allocation of capital? conditions. Since the 1970’s, there have • Given Total’s own acknowledgement been 95 attempts to discover oil15 in the of the challenging operational Mouth of the Amazon basin and none were conditions and the company’s successful, with 27 wells abandoned due ‘downplaying’ of the potential of to mechanical accidents.16 References a significant find, why has Total to exploratory drilling by industry prioritised this exploration play over and industry press often refers to the other portfolio options? 1718 challenging conditions. Total itself has • Given Wood Mackenzie’s estimate called the Amazon mouth basin “a difficult of a break even price of $85-$100, 19 and challenging play. can Total explain why it is confident Academic experts have also highlighted about significantly lower break-even that while the region has significant prices? How specifically will the development opportunities, it also has company reduce costs? How will the “significant operational hazards” and that company ensure that cost reductions “Chief among the hazards are intense and will not compromise health & safety highly variable ocean currents capable of standards and/or environmental delaying, disrupting, or damaging oil and protection? gas exploration and production efforts.”20 What is the anticipated internal rate Remote operated vehicles will likely be • of return for this project? deployed in the event of a well blowout. Experts have pointed out that “the ability to effectively operate robotic vehicles in a western boundary current regime such as the NBC [North Brazil Current] has yet to be demonstrated.”21 04 An area of A unique coral reef system A unique ecosystem Confirmation of the discovery of a coral • Coral reefs are not generally found at ecological reef at the Amazon mouth was announced the mouths of great rivers such as the in April 2016 by an international team of Amazon River.27 significance 39 scientists from 10 universities led by • Unlike shallow reefs like the Great Barrier the Federal University of Rio de Janeiro.22 Reef, the Amazon Reef is subjected to The team conducted three expeditions extreme conditions: low light or none in 2010, 2012 and 2014 primarily to for the deepest parts, strong currents, research Amazon plumes although they the sediment the Amazon River it carries also wanted to examine claims made in a into the Mouth of the Amazon basin. 1977 scientific paper about catching reef Accordingly, some of the corals at the fish along the continental shelf.23 Amazon Reef have unique characteristics, In January 2017, Greenpeace captured and do not use photosynthesis but rather the first underwater images of the Amazon chemosynthesis. Chemosynthesis is a Reef. Brazilian scientists participating process that produces organic matter in the Greenpeace expedition also and energy from carbon dioxide, water established that the area of the Amazon and other inorganic substances (like Reef is far larger than originally thought. ammonia, iron, nitrite and sulphur) It is now estimated to extend over fifty without the presence of light. thousand km2 and as far as the coast of • The 2016 study recorded 60 species French Guiana, with some reef structures of sponges, 73 reef fish species (many at depths of 200 meters.24 According to of them carnivorous), as well as spiny scientists, only five per cent of the Amazon lobsters, starfish and other reef life.28 Reef has been documented to date.25 The unique oceanographic conditions, metabolic features and species discovered provide evidence that the Amazon Reef constitutes an entirely new biome or major ecological community type (such as tropical rainforest, grassland or desert) with characteristics distinct from coral reefs found elsewhere.26 Its discovery is being celebrated as one of the most important in marine biology in recent decades. This is something totally new and different from what is present in any other part of the globe Fabiano Thompson,Federal University of Rio de Janeiro29 05 One of Total’s planned wells is only 28km In early May, the Federal Prosecutor from the Amazon Reef. Total’s oil spill of the State of Amapá intervened modelling acknowledges that in a worst to recommended the suspension of case scenario, an oil spill could impact the environmental licensing.