Petróleo Brasileiro S.A., or Petrobras (ticker: PBR), is the state-run oil company of Brazil and has operations in 24 countries across five continents. It is the largest producer in South America and participates in E&P, refining, trade, transportation, petrochemicals, oil distribution, electricity, biofuels, and sources of renewable energy. PBR celebrated its 60th anniversary on October 3, 2013.
On October 21, 2013, Petrobras announced a 35-year production sharing contract to develop the Libra pre-salt oil discovery offshore Brazil. Partners in the contract include Royal Dutch Shell (ticker: RDS.B), Total (ticker: TOT), CNPC and CNOOC (ticker: CEO). Petrobras, per government regulations, is the operator and holds 40% of the consortium, ahead of the minimum 30% ownership initially required by the government. Shell and Total each holds 20%, and CNPC and CNOOC own 10%, respectively.
The Brazilian regulator, Agência Nacional do Petróleo (ANP), estimates Libra’s recoverable resources between 8 to 12 billion BOE, with 1.4 billion BOE of peak recovery. The consortium will integrate its far-ranging expertise of deep water drilling, technology, and work force to support Petrobras, the most experienced operator in the Brazilian pre-salt, to develop the Basin.
Each company is required to pay a $6.9 billion signing fee for the agreement, and pledge 41.65% of their profit oil to the Brazilian government. The signing is expected to occur in November 2013, and the exploration of the block is expected to take four years.
Recent Discoveries
On October 21, 2013, shortly after the partnership agreement, PBR announced the completion of a third well in the Santos Basin pre-salt block BM-S-24. The well, informally known as Bracuhy and located in the Jupiter area, has a confirmed hydrocarbon column of about 160 meters, starting at a depth of 5,322 meters, containing rocks of good porosity and permeability characteristics. In addition to the gas cap and condensate, the well found an oil column about 100 meters thick.
In addition, Reuters reported on September 26, 2013, an oil discovery off Brazil’s northeastern coast could hold more than a billion barrels of oil. The unconfirmed estimates are based on at least 10 oil and gas discoveries in seven wells since June 16, 2011. PBR controls the area, known as the SEAL-11 exploration block, under a 50-50 joint venture with India-based Bharat Petroleum Corp. (ticker: BPCL.NS). If the area proves to have 3,000 MMBO or more in place, it could ultimately produce 1,000 MMBO based on Brazilian recovery rates of 25% to 30% of oil in place, a Brazilian-based oil industry expert with direct knowledge of the drilling program said.
Recent drilling also suggests that a giant natural gas field may extend well beyond SEAL-11 with enough gas to supply all of Brazil’s current needs “for decades,” one of the sources said.
Petrobras has seen a rebound in production in recent months. On September 30, 2013, PBR announced a 1.1% month-over-month volume increase in oil production for August 2013. This represents an increase in production for two of the past three months. Previously, PBR reported production declines for 15 straight months. PBR averaged 1.9 MMBOPD in August, up from 1.88 MMBOPD in July 2013. PBR’s total energy equivalent output from Brazil was 2.29 MMBOEPD.
Brazil’s Economic Situation
Brazil’s delicate economy has improved since 2000, and the nation is expecting more than $70 billion in revenue from hosting the 2014 World Cup. Ricardo Gomyde, special advisor to Brazil’s Ministry of Sports, said he expects 332,000 permanent jobs and 381,000 temporary jobs to be created through 2014 as an extension of the event. The construction of new hotels, an airport and the remodeling at 18 football stadiums will fuel the work force increase. Total expenditures are seen coming in at $14.6 billion for total infrastructure (at least $1.8 billion for arena reform), and $6.3 billion for the travel and tourism services sector.
Since 2000, strides in the Brazil economy are evidenced by the steady climb of GDP and the decline of poverty rates. Brazil’s notoriously high disparity in income has dropped for 14 straight years, and the consensus unemployment rate at 5.3% has never been lower. The country also has very high interest rates, making it appealing to foreign investors. The rapid growth, particularly after a brief recession in 2010, has led the government to slow inflation. Despite the promising signs, Brazil’s economy remains under immense pressure due to the strong U.S. dollar, and has been labeled as one of the world’s five most vulnerable currencies by Morgan Stanley.
The currency issue will remain a focal point of Brazil’s development for the foreseeable future, considering the government firmly controls healthcare and the private sector. The Unified Health System provides public health care to everybody in Brazilian territory, including foreigners. In addition, the government is extremely selective in allowing privately-run companies to conduct business on its soil.
PBR’s 2013 third quarter earnings conference call is scheduled for October 28, 2013, at 8:00 am ET.
Analyst Commentary
Pavel Molchanov, analyst for Raymond James Equity Research, reviewed PBR’s contract agreement in a note on October 21, 2013. “Recall that this was the first auction in the context of Brazil’s tougher policy framework for new production-sharing licenses in the Santos Basin. While the lead role of Petrobras is formally retained, the arrangement seems to resemble a ‘de facto’ joint operatorship, with Total and Shell bringing their expertise to the table.”
“The consortium was granted a 35-year production sharing contract. The signing bonus was essentially in line with the government-set minimum of $6.88 billion. The profit oil share, 43%, also came in at the low end of the government’s mandated floor. The cost stop, 50%, should allow favorable cost recovery under the terms of the contract.”
“(Estimated field recovery) equates to roughly half the current oil production of Canada, and is on par with what OPEC member Libya produced prior to its recent disruptions. Of course, it will take a very lengthy period of time to develop a project of this scale. The final investment decision for the initial production phase (most likely involving FPSOs) could come in late 2015, with first production tentatively targeted for 2019/2020. The bulk of the capital outlays, however, will come beyond 2020, and full production is not likely until 2028 or so. In other words, don’t hold your breath.”
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