Last November Petrobras (NYSE:PRB), the state-controlled oil giant of Brazil,
announced that it had found between 5 billion and 8 billon barrels of light,
sweet crude in a field called "Tupi."
This field is wedged under a layer of salt deep beneath the floor of the
Atlantic Ocean. Some geologists believe there is even more oil in the "pre-salt"
fields.
Extracting oil from Tupi is a gigantic technical challenge. The salt has
acted as a "perfect seal" to preserve the oil, according the director of
Petrobras' projects in the pre-salt fields.
Other big-time integrated international oil companies such as BP (NYSE:BP)
and Norway's StatoilHydro (NYSE:STO) have tried to make similar discoveries.
They learned that these kind of fossil fuel deposits are deep below the surface
and very hard to exploit.
Now all the major oil companies are caught in this mindless liquidation of
commodity assets and hedge
funds dumping shares like hot potatoes. Take a look at the one year
chart below on the Energy Select Sector SPDR (NYSE:XLE) to see the damage.
It sure looks very oversold, and after the impact of Hurricane Ike on
production we might see this sector begin to change.
Back to PBR and Brazilian oil, which just keeps getting more interesting
every week. Now it has been announced that it's Iara discovery will add an
additional 3 to 4 billion barrels of oil.
This is enough oil to supply the nation of Brazil with all it needs for the
next 5 years. Most of Petrobras' planned investment in exploration and
production of $65 billion over the next 5 years will be spent on the new fields.
Petrobras' president says that the company's plans for expansion are
predicated on oil at $35 a barrel. He also was heard to say that the company has
the financial strength to raise more debt if necessary.
PRB has over $22.6 billion in total debt right now, but its current operating
cash flow (ttm) is over $24 billion, and it looks like that number is likely to
increase in the years ahead.
Yes, there are some possibilities that the government might try to create a
new, wholly state-owned oil company to maximize its profits from the new fields.
But the leadership of both Petrbras and Brazil know that state-owned energy
companies often time are big on bureaucracy and small on business
acumen.
As The Economist magazine recently wrote, "Though Petrobras, subject to
market discipline, is relatively lean, any new state company might quickly
become puffed up by political appointees."
Thus, if they hope to compete in the marketplace with the likes of PetroChina
(NYSE:PTR) and Total S.A. (NYSE:TOT), they had better back away from mixing
politics with the activities of big energy business
