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Tony Daltorio, Investment U Research
Back on Wednesday, September 9, I wrote on how to profit from British Petroleum ADR (NYSE: BP)’s huge discovery in the Gulf of Mexico, and how to profit from peak oil.
And while I stand by the profitability of both that find and stock, I think I should clarify that “peak oil” really doesn’t exist anymore. So instead, let’s call it peak-cheap-and-easily-recoverable-oil instead, since that seems much more appropriate.
The days of cheap and accessible oil are long gone, but that very fact opens up rich opportunities for investors who face up to the realities of today’s oil market.
Possibly the biggest reality comes down to this: Giant oil fields are the industry’s lifeblood. Out of the world’s 70,000 oil fields, the largest twenty account for a quarter of global production.
That’s all well and good, but those giants have operated for decades. Saudi Arabia’s Ghawar, the largest of the lot, began production in 1948 and has since gone through half of its 140 billion barrels of recoverable reserves.
In addition, the rate of discovery keeps falling, at least for the significant fields. They used to make 56 billion barrels worth of oil per year in the 1960s. By the 1990s, that rate had dropped to 13 billion barrels and today, it continues to decline. Annual discoveries now equate to only half the oil the world consumes each year.
Furthermore, most newly discovered fields are either small or located offshore. A decade ago, deep-water finds accounted for only a quarter of all discoveries. Today, they account for half… a significant change since these types of fields have had a history of declining faster than onshore oil fields.
Yet intrepid companies such as BP, continue to strike black gold under deep ocean floors. Among that number, is an emerging oil giant that’s more than ready and willing to play with the big boys…
A Formidable Force In The Energy Sector
We heard a lot about Brazil as one of the four fastest emerging countries before the recession. But then as Russian stocks, currency, hopes and dreams tanked horrifically last year, and even China GDP faltered, enthusiasm in the BRIC countries took a nasty tumble.
Panicky investors got out way too soon though, because Brazil’s prospects of becoming a leading oil producer keep getting better. The country just recently announced the discovery of a giant offshore oil field that could amount to twice as much as BP’s Tiber field in the Gulf of Mexico.
Petrobras ADR (NYSE: PBR), the national oil company of Brazil and the world’s 4th largest oil producer, recently reported that the new Guara field contains 1.1 billion to 2 billion barrels of recoverable oil and gas.
Sure, to reach that oil, developers must drill about 1.25 miles under the sea, and then through another couple more miles of rock and semi-liquid salt. And yes, the find highlights the technological complexities and high costs in exploiting this century’s new oil bonanza.
But it also comes on top of other massive discoveries that Petrobas and its partners have made in Brazilian waters, including:
In its entirety, experts believe the region holds no less than 50 billion barrels of recoverable oil and gas equivalent… and possibly more than 100 billion. That amounts to more than enough to make Brazil a major player in the energy game, right along with its neighbor, Venezuela.
Say What You Want, But Petrobras Has What It Takes
Many investors still doubt that Petrobras can actually make the large capital investments necessary to bring these massive fields on stream.
Petrobras knows it can.
With a capital spending plan of nearly $175 billion for the next five years, the oil company has stated that it will be able to fulfill its planned investments for the next five years with no need for additional capital, just as long as the price of oil stays at $65 per barrel or higher.
And even if that cost drops, the company could still easily raise money from its “friends” like the Chinese, who want very much to become long-term partners with Brazil. China has already loaned Petrobras $10 billion to help finance its deepwater exploration efforts.
Brazil has also recently adopted new rules concerning development of its vast offshore reserves: Rules that will shift future projects from concessions where oil companies own their yields – and pay taxes and fees accordingly – to production-sharing agreements where the government owns the oil and gives the companies a share of its output.
Investors have concerns that these new rules might scare off foreign oil companies, leaving Petrobras struggling to develop the offshore fields alone.
Let me be clear: This is utter nonsense.
First of all, such agreements are commonplace in other areas of the globe, such as West Africa. In the offshore fields of West Africa, both the foreign oil companies and countries like Angola have profited mightily from such an arrangement.
Secondly, Brazil has agreed to honor all existing contracts, which isn’t surprising considering the country’s long history of treating foreign investors fairly and honoring contracts.
So despite the myriad challenges that Petrobras will face in developing this offshore oil bonanza, the company stands to reap the rewards of these massive oil finds… as will the investors who have faith in Petrobras.
Good investing,
Tony Daltorio
P.S. Don’t let anybody tell you that the recession has destroyed the power of emerging markets, because it just simply isn’t true. Just ask Alexander Green, who runs The New Frontier Trader, a specialized service that deliberately searches out profit-making opportunities around the globe. As Investment U’s Investment Director and with over 15 years experience as an international portfolio manager, Alex knows where the money is.
