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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Brazil's Petrobras Goes for the Gold

In the investing world, little is certain beyond the fact that energy stocks are usually a wise place to park money, as global demand is consistently outstripping production.

Smart money should be taking a serious look at Brazil, which under former President Lula da Silva got its financial house in order, and over the last four years has made a number of offshore oil finds in the southern Atlantic in Brazil's Exclusive Economic Zone that last week led Francisco Nepomuceno Filho, Petrobras London head of exploration and production, to comment during an interview, "Brazil as a whole could have a potential of the same size of the North Sea, including Norway and the U.K." Britain and Norway's North Sea reserves were eventually estimated at about 62 billion barrels prior to their development.

Nepomuceno's comments should not be taken lightly, as Petroleo Brasileiro S.A., more familiarly known as Petrobras, is Brazil's most important energy conglomerate, the world's 20th largest energy concern and the country's largest company.

Nepomuceno was addressing the issue of Petrobras discovering yet another offshore field, Lula/Cernambi, which is estimated to contain an eye-watering 7 -11 billion barrels of recoverable crude, leading the deposit to be labeled the one of the Western Hemisphere's biggest oil discovery in the last three decades.

Now, the bad news - Lula/Cernambi's reserves lie more than three miles beneath the south Atlantic's waters, and are covered by a layer of salt deposits. To exploit Lula/Cernambi, along with Petrobras' other offshore deposits, which include the Tupi oil field discovered in 2007, with estimated reserves of 33 billion barrels, and the Jupiter oilfield discovered in 2008 with 12 billion barrels, a massive injection of investor cash will be required.

Two month ago however Petrobras announced that Lula field's well 9-RJS-660 reached an average production of 28,436 barrels of oil per day, and was the first well to produce on a commercial basis in the Santos Basin pre-salt deposits.

Brazil's major offshore oilfields are located in the Campos basin area, at depths from less than a quarter-mile to more than three miles beneath the waves. The basin contributes 67 percent of Brazil's domestic oil production, but as the deposits are developed, this percentage will rise. Along Brazil's northeastern coast are several small- and medium-size fields located in shallow waters of Ceara-Mundau (Ceara state), Potiguar (Rio Grande do Norte state) and Sergipe-Alagoas (Sergipe and Alagoas states) basins, which have already begun production from fixed platforms.

A small but hugely significant development is that earlier this year Brazil became a net oil exporter for the first time. Western oil majors are already crowing into the scene to exploit the Santos Basin, including Total, BP and Shell. Since 2000 Brazil has gone from importing 790,000 barrels per day (bpd) to current net exports of 480,000 bpd. Of a current total production of 2.1 million bpd, Petrobras is seeking to increase domestic oil production to 3.95 million bpd by 2020, a 6.5 percent year-over-year increase and the nation's overall export figure will but significantly higher, as other companies are planning to add production as well.

So, what does this mean for savvy investors?

Simple - Petrobras expansion plans will require a lot of investment capital. Recent delays in Petrobras releasing of its 2011-15 business plan indicate that the company is likely focusing on reducing capex capital expenditure costs. Petrobras' previous investment plan, covering 2010-2014, envisioned total investments of $224 billion. Needless to say, that didn't happen.

Risk? Brazil is one of the fastest growing countries in the world and among the best of emerging nations in terms of rule of law and honest and well-regulated financial markets, friendly towards foreign investment capital. Consider the perils of investing in the other BRIC (Brazil, Russia, India and China) nations, with their torturous bureaucracies (all three) and xenophobic nationalism (Russia and China.) Finally, Brazil is the BRIC least reliant on exports, as its domestic economy is solidly growing.

So, Brazilian energy stocks to watch and possibly buy? Besides Petrobras (PBR), its subsidiary, Petrobras Energia Participaciones S.A. (PZE) is another stock to investigate. While this article does not cover Brazilian gas assets, Ultrapar PtpADR (UGP), which is involved in liquefied petroleum gas distribution.

So guys, get out your checkbooks and ask your brokers to check the progress of Latin America's emerging superpower and its energy sector.

The ultimate icing on the cake? A tax-deductible business trip to Rio de Janeiro to check on your investments.

Pack your swimsuit.

Oh, and don't forget, you slackers - Petrobras is already a big supplier of oil to China.

By. John C.K. Daly of OilPrice.com




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