Another Discovery for Financially Moribund Petrobras

Bottom Line: A new discovery for Petrobras offshore in the northeast of Brazil is good news in theory, but bad news in terms of investment for development that the state-run giant doesn’t have.

Analysis: Petrobras has made another oil discovery off the northeast coast of Brazil, on the SEAL-11 offshore exploration block, with unconfirmed reports estimating more than 1 billion barrels of oil, and the state-run oil giant saying the new find would be producing 100,000 barrels a day as of 2018. Petrobras is the operator of the block, with a 60% share, while India’s Bharat Petroleum Corp (BPCL) holds a 40% stake in a JV with Videocon Industries Ltd. Exploration in the block began in 2008. In India, shares in Bharat and Videocon both jumped on the news.

And there is more good news for cash-strapped Petrobras this week, as the Brazilian government considers ways to help the state-run giant finance the massive investment it will need to make after the auction later this month for the giant offshore Libra field. While Petrobras has the technical capacity to develop Libra, it lacks the financial resources. Eleven companies have signed up for to participate in the Libra auction, and once a winner is announced, Petrobras will have to come up with a minimum 30% of the nearly $6.7 billion up-front fee the winning bidders have to pay to the government of Brazil. Petrobras will hold a minimum 30% stake in any Libra deal, and will serve as the operator.  On top of that, Petrobras has to come up with 30% of the estimated $180 billion it will cost to develop the field over 35 years. The government is considering measures such as raising Brazilian fuel prices, reducing dividends on the government’s share in Petrobras, and modifying the terms of an oil-for-stock swap that were set down in 2010.

Recommendation: Libra is estimated to hold between 8 billion and 12 billion barrels of oil. So if the new find in the SEAL-11 block in the northeast ends up holding the 1 billion barrels that is currently being thrown around as an estimate, it will not replace Libra as the country’s new oil frontier, as mainstream media have been headlining. And this 1-billion estimate has not been supported, even by Petrobras, which is keeping mum on the estimates for now. This new find could either help Petrobras, or dig it into another financial hole. Petrobras is in deep debt largely because of government policy that has forced the company to continue borrowing to cover investments while it cannot recoup costs due to the fact that it is not allowed to charge its own consumers world prices. Brazil desperately needs new oil finds to come online, and the first step will be the Libra auction—providing that the government indeed introduces measures that would help Petrobras actually finance its side of the deal. As for the new discovery, it means new investment that Petrobras simply doesn’t have.