Why Bet on Brazil?
Over the past couple of years, companies have been reluctant to work in Brazil, in part because the country has what is known as a local content clause, requiring that any oil and gas work being done in the country needs to contain a certain percentage of Brazilian-made equipment and personnel. That requirement is especially pertinent to oil services companies. Seadrill Ltd (NYSE:SDRL) has said in previous earnings statements that cost levels in Brazil are higher than most other regions in the world, and the company has been contemplating a spinoff of its Brazilian assets into its own company for well over a year.
With a massive upswing in exploration and production activity expected to happen in the next couple of months, Petroleo Brasileiro Petrobras SA (NYSE:PBR) has requested that the government ease these regulations. The company has stated that the anticipated growth in oil production will overwhelm the country’s ability to produce equipment.
Another reason some companies have shied away from operating in Brazil was the political fervor caused by Chevron Corporation (NYSE:CVX)’s spill back in November 2011. Estimates for the spill were about 2,600 barrels spilled, and civil lawsuits in the case were asking for as much as $20 billion between Chevron and rig operator Transocean LTD (NYSE:RIG) . Just to put these numbers in perspective, the Macondo incident in 2010 spilled about 4.9 million barrels, and the maximum penalty is $17 billion. The Brazilian government also threatened to expel both Chevron Corporation (NYSE:CVX) and Transocean LTD (NYSE:RIG) from operating in the country. Since then, the criminal charges have been dropped and Chevron has resumed drilling after paying a fine.
Despite these issues, though, it appears the juice is worth the squeeze. Brazil’s pre-salt formation is estimated to contain as much as 50 billion barrels of technically recoverable oil, and the country’s shale deposits represent about 6.4% of the world’s shale reserves. With so much oil and gas out there for the taking in the South American giant, Petroleo Brasileiro Petrobras SA (NYSE:PBR) has stated it wants to triple Brazil offshore production by 2017.
What a Fool believes
Brazil may be one of the hot spots for offshore exploration right now, but there are several challenges that face operating in Brazil. If local equipment production can’t keep up with exploration plans, the country should seriously reconsider its local-content mandates. Brazil also needs to prove that it is more worthy of investment than some of the other lucrative offshore plays right now, such as Ghana’s Jubilee field and Mozambique’s gas fields.
The article Is the Oil Business in Brazil About to Blow Up? originally appeared on Fool.com.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.The Motley Fool recommends Chevron Corporation (NYSE:CVX), Petrobras, Seadrill, and Total and owns shares of Seadrill and Transocean LTD (NYSE:RIG).
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
