Brazil Deepwater Oil Investing

BP (NYSE: BP) Sells Oil Field Stake


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By Joseph Carducci
Tuesday, May 7th, 2013

BP (NYSE: BP) has agreed to a deal to sell its 60 percent interest in the shallow-water Brazilian Polvo heavy oil field.

The sale, for $135 million in cash, is to Brazilian oil start-up company HRT Participacoes em Petroleo SA (TSX-V: HRP). Denmark oil company Maersk Oil owns the remaining 40 percent stake in this field.

oil drillingThe Polvo offshore oil field is currently producing 13,000 barrels a day of heavy crude. BP's stake was originally acquired as part of a larger deal in 2011, which included ten exploration and production blocks back, Boston.com reports. But the company has not had much interest in Polvo since the original purchase and is looking to focus more on its deepwater Brazilian assets.

Some of the other blocks acquired in this original deal, located in deepwater regions, are beginning to show better long term potential for BP. The company currently operates or holds interests in thirteen additional oil areas, and it is seeking to develop these further.

BP also announced a successful flow test in one of its blocks located in the Campos basin, one of the areas experts believe has strong long-term potential. 

Ultimately, BP still remains deeply committed to Brazil. This sale does not mean the company will be exiting the country—only that it is shifting focus. BP is simply looking more long-term towards the huge potential of Brazilian deepwater assets.

Brazil Deepwater Oil Potential

Brazil is the ninth largest energy consumer in the entire world and the third largest in the Western Hemisphere. It is certainly no secret that due to the huge amount of energy consumption demand, one of its goals is to increase domestic oil production. The country already has 14 billion barrels of proven oil reserves (2012).

Almost 90 percent of these reserves (and actual oil production) are located offshore in deepwater locations. The majority of these are currently in the Campos and Santos basins, which are off the southeast coast.

The resulting production consists mainly of heavy grades of crude oil trapped beneath a thick layer of subsalt, as much as 7 kilometers (4.3 miles) below the ocean’s surface.

Experts have estimated the country has huge potential as exploration efforts continue to move forward. Some predict these deepwater oil finds could lead to as much as 50 billion barrels of oil.

Continued finds and the start of actual drilling operations are expected to make Brazil one of the world’s largest oil exporters in the near future, despite an ever-growing domestic demand curve.

This huge potential will help BP as it continues to be involved in Brazilian deepwater oil exploration and production. Even after the recent sale of its interests in the Polvo field, the company continues to hold interests in 13 license blocks, some of which are situated in water as deep as 2,780 meters.

Most of the company's oil finds in the region have been focused off the southeastern coast, which is where BP plans to concentrate most of its continued efforts. Company officials have indicated that they intend for BP to be a major player in Brazilian exploration and production, investing as much as 75 percent of capital expenditures in the coming decade.

All of this appears to be good news for the U.S. as well, as it hopes to find a more friendly oil exporter than traditional foreign sources. Brazil may indeed fit the bill, with its domestic oil production almost tripling between the years 1995 and 2010.

Brazilian leaders are working towards doubling production once again (from 2010 levels) by the year 2020. This would place the nation at a level among the global energy superpowers. 

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Investing in Brazilian Oil

There are a number of foreign oil companies already in Brazil, most of which partner in some fashion with Petrobras (NYSE: PBR), the Brazilian national oil company. This includes Chevron (NYSE: CVX) and Shell (NYSE: RDS-A) in direct oil exploration and production, along with IBM (NYSE: IBM), General Electric (NYSE: GE), and Schlumberger Ltd (NYSE: SLB) to help assist in the development of new and more cost-effective drilling methods.

There are also a number of other companies active in the area including Sinopec (NYSE: SNP), Statoil (NYSE: STO), Anadarko (NYSE: APC), and TNK-BP (MCX: TNBP).

All of this activity and interest focused on Brazil leads to the question of how best to profit from what looks to be a huge boom in Brazil. One way would indeed be to buy shares of Petrobras directly. Since it is a largely state-owned and controlled oil company, it is clearly in the best position to profit from this new activity, discovery, and production boom.

With average drilling and production costs around $40 per barrel, Petrobras is looking at about a $1 trillion profit potential. And this is even assuming the price of oil stays around the $80 level.

Investors might also be interested in the stocks of U.S. (and foreign) companies that are currently active in Brazil, although this would not really be a direct play, since most of them are very large and well-diversified conglomerates.

Another way to play the boom in the overall Brazilian economy, and not just the oil boom, is to pick up an ETF. There are a number of these readily available on the U.S. stock markets, including:

  • iShares MSCI Brazil Capped Index ETF (NYSE: EWZ)
  • Market Vectors Brazil Small-Cap Index ETF (NYSE: BRF)
  • Global X Brazil Consumer ETF (NYSE: BRAQ)
  • Global X Brazil Financials ETF (NYSE: BRAF) 

The main risk with any such investment is that the price of the underlying assets could drop. Yet, even with conservative estimates of the price of oil, these could produce excellent returns for investors.

 

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