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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

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Is This Europe’s Newest Oil & Gas Producer?

Porto oil refinery

Few countries have a hydrocarbon history as difficult and convoluted as Portugal. It has lost its colonies just as Angola’s oil production was on the brink of multiplying – later even Mozambique turned out to be a superb gas-producing region with giant fields like Rovuma. Currently, Portugal has no oil production whatsoever, perhaps a noteworthy reminder that the progenitor of the leading Portuguese oil company, Galp Energia, was established specifically for the purposes of exploration and production in Africa, not in Europe. Recently, a new spark of activity has generated substantial buzz in Portugal, entertaining a hope that there might in fact be oil in Portugal, yet the prospects of it being produced commercially still look vague.

The media hype reached its apex in 2015 when a British company named IONIQ Resources has stated it had located six oil-bearing deposits in Portugal with reserves totaling at least 1 billion barrels. Government officials were prudent in their managing of public expectations, for a good reason – despite having no production whatsoever, upstream activities in Portuguese waters are a heated political subject. The Portuguese Green Party, as well as the Left Bloc (Bloco de Esquerda), upon the support of which the government depends, are fiercely opposing any form of oil-drilling activity, whilst the Communists oppose foreign companies’ participation in exploiting resources which they deem to be national.

So far António Costa’s government has done a fairly good job of keeping fiscal stability and kick-starting economic growth – since 2014 the economy keeps on expanding underpinned by a 17-year high GDP year-on-year increase of 2.7 percent in 2017. Oil could potentially boost Portugal’s economic standing further, however, in view of the difficulties of keeping a viable government, the development of new fields has been stalled. On May 16, 2018 the Costa government issued a temporary moratorium on the allocation of future oil & gas concessions in the country, covering not only the onshore part, but also (perhaps unexpectedly) the offshore. Despite giving in to political pressures, the authorities found a partial way out, by exempting 3 blocks that are held by a joint venture of ENI and Galp, as well as sparing them the inconvenience of additional environmental impact studies. Related: Oil Falls Despite Crude Inventory Draw

The overarching fear of those against any sort of drilling is that it will transform the nation to the worse – oil rigs would taint the pristine beaches of Portugal that tourists are increasingly fond of and bring about environmental damage not seen before. Adding insult to injury for oil enthusiasts, Portugal has become a leading voice in the sphere of renewables, especially with regard to wind energy (11 TWh produced in 2017). In total, renewables now account for 44 percent of the country’s electricity consumption, boasting noteworthy achievements like running exclusively on renewables for 4 days in a row. For many, developing oil deposits would be tantamount to compromising past successes in emissions-free energy sectors.

Thus, when ENI’s Santola well will be drilled this September, it will run against several currents. Yet there is plenty room for optimism, too - ENI and Galp affirm that the Alentejo Basin shares many similarities (source rock, geological structure) to the Canadian Grand Banks offshore of Newfoundland. Further still, exploration drilling has a long tradition in Portugal, with Shell, ExxonMobil (then Esso) and Chevron (Texaco) spudding intensively in 1974-1977. Most of the wells drilled in the past were onshore or in shallow waters to the north of the Alentejo Basin, where most of future drilling will supposedly take place. In fact, the Alentejo Basin has witnessed only two wells spudded, both quite a distance away from Santola.

Santola will be spudded in a water depth of 1km, some 46km from the Portuguese coast (the operator distinctly points out that the rig will not be seen from the coastline), most likely using the Saipem 12 000 drillship previously used in Morocco. If Santola finds commercial quantities of oil, things might get difficult for drillers – Algarve is Portugal’s foremost tourist destination, annually attracting more than 7 million people and generating billions of income. Local campaign groups have been very vocal about their having zero tolerance towards offshore drilling, citing the 2002 catastrophic oil spill of Liberian-flagged tanker MV Prestige off the coast of Galicia. At the same time, Portugal’s offshore is a massive uncharted territory for explorers - thanks to its islands in the Atlantic Ocean (Azores, Madeira etc.), Portugal has the 11th largest exclusive economic zone in the world, so this might be only the first step in an oil-appraising marathon. Related: Oil Prices Slide As China Imposes 25% Tariff On U.S. Oil

From an economic point of view, domestic oil would be a boon for Portugal and Galp, the national oil champion-cum-refining-monopoly. Wielding 330 kbpd of processing capacity at the Sines and Matosinhos refineries which were recently upgraded to a Nelson complexity of 8.6, Portugal has turned into a net product exporter. In 2017, 34 percent of the 18.5 mt of oil products refined (6.3 mt) went to exports, supplied mostly to Spain, France and the United States. Moreover, domestic market development are also of considerable interest - bunker fuel and jet fuel demand have demonstrated double-digit growth last year (up by 20 percent and 15 percent, respectively) as commercial activity is intensifying on the back of a recovering economy. A stable supply of jet fuel will be essential for the Portuguese energy sector as the government is intent to commission Lisbon’s second international airport in Montijo in 2022.

It is also important to note the role ENI has played in pushing forward projects in offshore zones previously thought to be low-interest ones. Having brought Mozambique onto the world LNG market with the Mamba and Coral gas finds in 2012, buttressed by the offshore Mediterranean’s largest-ever gas find, Zohr, in 2015, ENI has become one of the most successful offshore actors out there. A potential Portuguese success might be the icing on the cake for the Italian company. It would also cost many sleepless nights for Portuguese politicians, for whom conjoining the interests of the tourism industry and the country’s oil sector might be a real head-scratcher.

By Viktor Katona for Oilprice.com

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