Petrobras Making Enemies

Jim Brown
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Petrobras was once a great oil company with a promising future. That future is becoming cloudier as each day passes.

You may recall that Petrobras recently issued the largest secondary offering in history and raising $70 billion in the process. Prior to the offer the price of Petrobras stock had declined -31% in anticipation of the highly political share offering. Investors became hostile but in the end they held their nose and bought more shares even though the government ownership was going to rise from 37% to 48%. They rationalized buying more shares because of the recent oil discoveries offshore Brazil.

Last week only a few days after the completion of the share offering the CEO of Petrobras said the company will be going to the capital markets to raise another $60 billion in debt. The share price imploded on the news as shareholders felt like they were sucker punched. Taking on that much debt so soon after the $70 billion share offering should be criminal. I don't recall the company mentioning the need to sell debt before the share offering. It would seem to me that not disclosing that should be a criminal offense.

Lastly, Petrobras disclosed on Wednesday that 2010 production would be -3% below their announced targets. The production warning coming so soon after the share offering with no mention of it before hand is just another way the company scammed investors to make sure the shares were sold.

Had they mentioned the $60 billion in debt and lower production the value of the share sale would likely have been much lower. I completely understand why they did it that way but in the U.S. the class action lawyers would be all over them like white on rice.

On the positive side Petrobras reported that the first FPSO vessel had arrived at the Tupi field and was undergoing anchorage work and being connected to the wells. The FPSO, short for Floating Production, Storage and Offloading vessel, will be capable of processing 180,000 barrels per day and two million cubic meters of gas per day. It will eventually be connected to 22 wells of which 15 are oil and 7 are water injectors. It will be the most complex unit to operate off the Espirito Santo coast.

This is currently a pilot project while they work the bugs out of the design and implementation. Initially the FPSO will only process 10,000 bpd but that is expected to rise to 100,000 bpd by early 2012. Production is expected to peak in early 2012. The oil it processes will be offloaded to shuttle tankers for transport to the coast but the gas will flow by undersea pipeline to a gas treatment unit on the coast.

The FPSO will have a permanently installed 4D seismic data system with components permanently installed on the seafloor. This will allow them to monitor the reservoir and optimize production. It will also have a subsea submersible pump installed on the seafloor to pump oil from the wells to the surface. By locating it on the ocean floor it simplifies the linkage to the wells and allows for easier maintenance.

The FPSO has been designed to allow easy replication once the pilot project is completed. There will be up to 24 FPSOs when the fields have been fully developed.

I am continually asked why we should be worried about peak oil with the recent discovery of 20+ billion barrels of oil off the coast of Brazil? It all boils down to flows. The oil may be under the ocean floor but the rate it can be produced is the key. Brazil expects to ramp up to full production of roughly 2 mbpd by 2020. That is nine years away and a long time in the oil production industry. In that nine years, assuming production around the world remained flat we would produce and consume 31.7 billion barrels per year or 285.8 billion barrels by 2020. We consume one billion barrels every 12 days.

Most people have not yet grasped the magnitude of global oil consumption. We consume one billion barrels every 12 days. Once the Brazilian fields are fully developed they will produce one billion barrels every 500 days. The 20 billion barrels of "possibly recoverable" oil will be a windfall for Brazil and Petrobras but it will be far too little, too late to prevent peak oil. Over that same nine year period depletion will reduce existing production flows by 4.5% PER YEAR or roughly four million barrels per year. That means we have to find two other fields like Brazil every year and immediately bring them to full production just to remain at current levels. Those Brazilian fields are the largest find in the Americas since the 1970s. Odds are very slim we are suddenly going to start finding two per year.

Peak oil is a geologic reality. Oil is a finite resource where we cannot continue to expand production just because we want to. Once the global economy ramps back up to full speed the production shortfalls will return along with high prices. Today, there is "supposedly" 4 mbpd of excess production but crude prices are nearing $85 per barrel. Analysts believe that oil over $85 will derail the recovery and cause another recession. We are very close to seeing if they are right.

Jim Brown

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