Friday, July 30, 2010: Issue #1313
Oil.
A touchy subject these days, I know – even with cleanup crews in the Gulf successfully removing much of the spilled oil from the water.
But I don't want to talk about U.S. oil in today's article. Instead, we're going to head south to check in on a company that has gained increasing international attention over the past several years, having made some of the world's largest oil discoveries in recent decades.
We're heading to Brazil and the offices of oil and gas conglomerate, Petroleo Brasileiro (NYSE: PBR) – or Petrobras, as it's more commonly known…
Right off the bat, the company faces a problem: most of Brazil's offshore oil is located between layers of salt nearly seven miles below sea level. As you can imagine, extracting and producing this oil in an economical way is a daunting task.
But Petrobras engineers and geologists think outside the box. The company has invented and perfected both seismic and drilling techniques along the way. And the initial risks now look like they're going to pay off in a big way.
Or are they? Let's take a look at the potential hazards and rewards for Petrobras…
Petrobras' Underground Oil Bonanza
Four years… $224 billion.
That's how much money Petrobras plans to spend on development of its offshore oil fields and onshore refining facilities between now and 2014.
This massive sum alone should be an indication of how much oil is down there and the level of Petrobras' optimism. The current figure puts the "official proven reserves" at six billion barrels of oil, but some believe there could be 10 times more than that.
Frankly, I think even that number could be on the low side. I believe Petrobras has enough potential reserves (whether undiscovered or unannounced) to become the next Saudi Arabia of oil. Time will tell.
For now, though, the company's other offshore fields are already churning out oil to the tune of nearly two million barrels a day. And there are many offshore areas that it hasn't even explored yet.
That's the good news. Now for the bad…
Hello, Government… Goodbye, Common Sense
While history is littered with examples of failures from nationalized oil and gas investments (Venezuela, Russia, and Nigeria to name a few), Petrobras isn't one of them.
Brazil formed Petrobras back in 1953, under the leadership of then-President Getulio Vargas. It remained a legal oil monopolist in the country until 1997.
Today, it's the largest company in Latin America by market capitalization ($158 billion) and in revenue ($92 billion in 2009). It's also the fourth-largest energy company in the world.
