BP Spill Raises Questions For Petrobras

Bloomberg carries this story about Petrobras (PBR) possibly delaying their huge $25B share sale (17% of current market cap) to fund exploitation of some promising deepwater prospects off the shore of Brazil. Unfortunately for them, the recent global market slide has dropped PBR 15% and is endangering the transaction.

Comparing PBR’s one-month chart to the broad Brazilian stock market (via the ETF, EWZ), Petrobras has fallen further than the market but not by much, suggesting the market has yet to adequately discount the implications of the BP Gulf spill for PBR’s far more challenging Tupi prospect.  Estimates put the cost of exploiting Brazil’s offshore prospects at $220B – $240B (yes, billion) by 2014. Some industry analysts also see a chance of Petrobras attempting to shoulder as much of the burden as possible and cut out some of the western oil companies, who common wisdom holds have the most expertise in these endeavors.

The Gulf spill well was operated by one of the Big Oil companies, BP, using a rig leased from the top deepwater oil service company in the world, Transocean (RIG) and employing the services of Halliburton (HAL), one of the top well-servicing companies. And yet this combination could not prevent the oil spill.

Keep in mind, deepwater drilling is still nascent technology and some of the equipment needed to drill the Tupi prospect does not exist yet. Estimated cost to explore Tupi is nearly double the world’s current most expensive E&P project, Kazakhstan’s Kashagan (AKA Cash-All-Gone) field. The disastrous experience of lead operator Eni (E) in Kazakhstan (a small taste here) should serve as a model for investors anticipating what obstacles Petrobras may encounter.

Caveat emptor.

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