Brazil's Petrobras (NYSE: PBR, Stock Forum) is rewriting the book for state-owned oil companies, and in the process is rewriting the book on how oil majors function.
Chart Courtesy of StockCharts.com
On May 1, Brazil's Tupi field, a very deep offshore field off of the Rio de Janeiro coast started the test phase of its production cycle, moving toward recovery of 30,000 barrels of oil per day during this period. When fully operational, by 2010, the field will net 100,000 barrels per day. The net effect, though, is that if all goes on schedule, Tupi is the prototype for how Brazil will transition to a major global oil exporter.
Tupi is estimated to hold anywhere from five to eight billion barrels of recoverable medium grade crude, and natural gas.
In order to recover oil from Tupi, Brazil has used landmark technology, as it has to drill through 7,000 feet of water and 17,000 feet of rock, mud, and ocean floor sediment, a very difficult and time consuming project. What makes it more important is the fact that Brazil has been working on this technology, basically from scratch, for years.
In contrast, other state-owned oil companies, such as Venezuela's PDVSA, and Iran's state-owned oil companies, are in disarray, depending more on rocky joint ventures with international majors, and using politics as a guide to doing business. As a result, production has been steadily falling in Iran, Venezuela, and other countries that use the political model as a way to produce oil.
Petrobras is in a unique situation, as it has grown the business organically, and learned the ropes. At the same time, Brazil is the world leader in ethanol production, which means that once its oil production picks up it will have surpluses for export.
According to Stratfor.com: "Although Brazil is not much of a net exporter of oil — with net exports totaling only 176,000 bpd — the country’s major new energy deposits enable it to project a 111% increase in domestic oil production by 2020," a fact that the intelligence service predicts "could this put Brazil on the map as a major crude exporter for the global market, it would also give Brazil a major leg up on regional competition," as "the two major oil producers in Latin America are Mexico and Venezuela. Both countries rely on increasingly decrepit national oil companies, and both are experiencing serious problems in their oil industries."
Mexico's internal political problems, and the effects of a lingering drug war, have hampered its ability to increase exploration and production as its Cantoral field, which is expected to dry up within a decade. Venezuela's neglect of its infrastructure and the nationalization of joint ventures with international majors has hampered its once vital oil industry.
Stratfor added: "For the Mexicans, the prospects do not look too bright, either. The Mexican government has loosened restrictions that prevented international investment in the Mexican energy industry, but not by much, and Mexican oil champion Petroleos Mexicanos (Pemex) is reporting steadily dropping production. Although investor interest is picking up, they are allowed to operate in Mexico only on a contract basis (meaning that cash-strapped Pemex must pay them as contractors instead of letting the oil pay for itself), and the prospects for Mexican oil exports do not look bright."
Still, if you compare the chart of Petrobras to that of Exxon Mobil (NYSE: XOM, below), you can see that investors are voting with their money flows in favor of Petrobras, which is an interesting development in and of its own.
Chart Courtesy of StockCharts.com
Conclusion
The world is a textured and layered place these days, a sign of transition. As the focus has been placed on the problems faced by the first-tier economies, some in the not quite first tier, such as Brazil, are taking the opportunity to improve their position.
And as with anything that seems to have come out of nowhere, Brazil's relative success, has come after decades of work, and clearly at a price, as the success of Petrobras is not guaranteed by any means, and the country still faces a major mal-distribution of wealth.
Still, with regard to the latter, it's no different in Brazil than in any other successful economy, where there will always be those that don't fully participate.
What's important here, from an investment standpoint, is that Brazil refuses to go away, and that Petrobras is clearly an interesting company at an interesting time in history.