Chevron May Delay $2.8 Billion Brazilian Oil Field

By Megumi Yamanaka and Jeb Blount

Aug. 6 (Bloomberg) -- Chevron Corp., faced with falling oil output, and its partners may be forced to delay the start of a $2.8 billion oil project in Brazil by three months because a platform and rig will be delivered behind schedule.

Chief Executive Officer David O'Reilly, 61, has postponed eight major developments in the past two years due to equipment failures and escalating costs, and may struggle to fulfill his pledge to boost production by 3 percent annually through 2010. The second-largest U.S. oil company said on Aug. 1 it may miss this year's output target.

Production at the offshore Frade field in Brazil may only begin in March and reach a peak of about 100,000 barrels a day in two years, said officials at one of the project partners, who asked not to be identified before an announcement. ``If there are any more delays, March sounds right,'' said Luis Felipe Reis, Chevron Brasil's communications manager.

Demand for deep-sea rigs and platforms has increased order backlogs at shipyards in Asia to record levels, with deliveries stretching into 2012. Crude oil's 64 percent gain in a year and depleting reserves in shallower waters are prompting oil companies including Chevron, Exxon Mobil Corp. and Total SA to step up exploration and production.

``It's not unusual to have some slippages in this tight labor and materials market,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. Delays in commissioning of new fields are ``contributing to the bullish cycle for oil,'' he said.

Stakeholders

Frade, operated and 51.74 percent owned by Chevron, is expected to start in 2009, partner Petroleo Brasileiro SA said in a written reply to questions. Brazil's state-controlled Petrobras owns 30 of the project and Japanese investors led by Inpex Holdings Inc. the remaining 18.26 percent.

The field, discovered in 1986, was expected to start pumping oil by December this year, Chevron Brasil's Reis said.

A floating production, storage and offloading vessel, or FPSO, that is being built in Dubai and is delayed, as is a drill rig from Singapore, Reis said in an interview yesterday in Petropolis, Brazil.

The FPSO ship being built in Dubai is due to arrive in Brazil in September, Petrobras's press office said in the written reply. Inpex's Tokyo-based spokesman Kazuya Honda said the field will start some time next year, declining to elaborate.

Frade, which means `monkfish', is located in the north of the Campos Basin, a region responsible for more than 80 percent of Brazil's oil output. The field's wells are located at water depths of between 1,000 and 1,200 meters, according to Petrobras. Campos Basin fields are named after fish.

Falling Output

Chevron's second-quarter profit missed analysts' estimates after output fell and the company's refineries lost more than $8 million a day. The shares fell 0.4 percent to $82.49 yesterday and have declined 12 percent this year.

San Ramon, California-based Chevron said Aug. 1 its oil and natural-gas production dropped to the equivalent of 2.54 million barrels of crude a day, the lowest since the second quarter of 2005. The company won't reach its full-year output target of 2.65 million barrels a day if crude remains above $70 a barrel, spokesman Jim Aleveras told investors on a conference call.

Brazil, South America's second-biggest producer, has opened its doors to foreign investors at a time when international oil companies are struggling to boost output as nations from Russia to Venezuela reduce access to reserves.

``Brazil's getting additional supplies to the market,'' Hirofumi Kawachi, an energy analyst at Mizuho Investors Securities Co. in Tokyo, said by phone. ``It's taking advantage of technology owned by major oil companies to extract oil from fields in the deep sea and places that are hard to reach.''

Japanese Investors

Texaco Brasil, the Chevron unit that bought exploration rights to the Frade field in 1999, paid $6.06 million, 24 times more than the $250,000 minimum bid, according to Brazil's National Petroleum Agency, which ran the auction. The Japanese venture, Frade Japão Petróleo, bought a stake from Petrobras in July 1999.

Frade is the first Brazilian project in which Japanese companies hold a stake to produce oil, helping Asia's largest economy reduce its dependence on supplies from the Middle East.

Inpex, which owns 37.5 percent of the Japanese venture, wants to increase global production to about 700,000 barrels of oil equivalent a day between 2015 and 2020, or growth of 3.1 percent a year to March 2011, it said in May. Japan Oil, Gas and Metals National Corp., the trade ministry's agency, has a 50 percent stake, and Sojitz Corp. owns 12.5 percent.

Japan didn't import any oil from Brazil in the year ended March 31. Oil imports from the Middle East, led by Saudi Arabia, accounted about 86 percent of the total that year, according to Japan's trade ministry.

To contact the reporter on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net; Jeb Blount in Petropolis, Brazil, at jblount@bloomberg.net