Just a year ago the energy world was atwitter about the potential of deepwater exploration. Especially attractive were the three areas that made up what was being called the Golden Triangle: parts of West Africa, along with the U.S. Gulf of Mexico, and Brazil's Santos Basin.
Now, only Africa continues along, mostly unchanged. Following the April BP (NYSE: BP ) and Transocean (NYSE: RIG ) tragedy, "No Drilling" signs might as well have been posted across the Gulf. And if you've been watching the leader of Big Oil, ExxonMobil (NYSE: XOM ) , work off Brazil's coast, you might have a twinge of doubt about whether the so-called pre-salt Santos Basin will ultimately justify the hype that's been thrust upon it.
That hype began in 2007 when Petrobras (NYSE: PBR ) , Brazil's state oil company, gained worldwide notice by drilling in nearly 10,000 feet of water and on through a layer of salt about 15,000 feet thick. With that Herculean effort, it came away with a discovery that may hold as much as 8 billion barrels of light crude. Called the Tupi field, it was the biggest find in our hemisphere since the now-declining Cantarell field was found offshore Mexico in 1976.
The excitement surrounding Tupi quickly attracted operators from around the world, including Exxon, which teamed up with U.S.-based Hess (NYSE: HES ) , each taking 40% interests along with 20% for Petrobras. Amazingly, it appeared at first that the Azulao-1, their initial well, had hit another big reservoir, possibly the size of Tupi. At least that's how it was portrayed by the excited media.
It's normal to determine the size of a structure by drilling other holes near a discovery well. Unfortunately, and maybe even surprisingly, the second Exxon and Hess well, called Guarani, ultimately proved to be a dry hole. That was a disappointment, but not a major setback. But as Exxon has just confirmed, its third well, the Sabia-1, was also dry.
The approach the companies will now take thus becomes open to question. The deepwater wells in Brazil cost six figures each -- which obviously is tougher on Hess than on Exxon. But despite Petrobras and others having added discoveries after Tupi, it's now clear that finding oil in the pre-salt isn't a sure thing. (We're wondering how the ebullience that resulted from the Azulao well could have been so far off the mark.)
But clearly the Santos Basin isn't about to become devoid of activity. Petrobras recently completed a record share offering that added nearly $70 billion to its coffers for an ambitious multiyear program. And other companies -- including Spain's Repsol (NYSE: REP ) and China's Sinopec (NYSE: SNP ) -- are teaming up in joint ventures to make the expensive drilling more tolerable.
ExxonMobil will likely just pause to re-evaluate its plans for Brazil. There's clearly oil in the Santos Basin, and I'm betting that the big company will ultimately find its share.