NEW YORK (Dow Jones Newswires), November 6, 2008

The credit crunch is complicating Brazil's plan to use the discovery of massive new offshore oilfields to jumpstart its domestic oilfield services industry.

Brazil, a net oil importer until 2006, is primed to become one of the world's biggest producers over the next decade as it develops several fields in a portion of the Atlantic Ocean known as the Santos Basin thought to contain billions of barrels of crude. In addition to boosting production, Brazil hopes to follow in the path of Norway, which in the 1970s used the discovery of oil in the North Sea to create world-class drilling and technology sectors. Over the past two years, state-run energy giant Petroleo Brasileiro SA, known as Petrobras, has awarded 20 out of 30 contracts to construct drilling rigs to Brazilian-based firms with little experience in deepwater drilling.

But the fledgling Brazilian deepwater rig industry is running up against the realities of the tight credit market. Several of the contract winners haven't been able to borrow money needed to finish construction on the rigs they promised, which can cost more than $600 million each. Should their struggles continue, Petrobras will be forced into a difficult choice. The rising energy giant would need to add billions of dollars to a long-term budget already in jeopardy over concerns about the future availability of credit to ensure the rigs get built on time, or risk delaying Santos Basin production for lack of equipment. With Brazil hoping to increase production by 2 million barrels of oil equivalent a day by 2015, Petrobras' options may be limited.

"They're not going to delay development; that is the top order," said Brian Uhlmer, an oilfield services analyst with Pritchard Capital Partners in Houston.

Uhlmer is one of several U.S.-based analysts who have said recently that they see up to 10 of the 30 rigs as likely candidates for delays or cancellations due to a lack of financing. Brazilian companies are particularly vulnerable because they agreed to contracts that stipulate the completed rigs will work for Petrobras at well below the going world market rate.

The world's largest drillers, which operate out of the U.S. and Norway, are betting that Petrobras will soon become desperate enough to give up on its below-market contracts and hire established companies - on the drillers' terms. Rigs that can drill in waters as deep as the Santos Basin's can cost more than $600,000 a day to hire, a rate that has not dropped even as oil prices have plunged by more than 50% since July.

"While we don't believe it's likely that we or other major contractors would be interested in stepping into those agreements due to low day rates ... it has opened up some dialogue with Petrobras about additional opportunities," said Kurt Hoffman, director of marketing at Noble Corp., an offshore driller that operates out of the U.S., in a conference call. Day rates are the price rig operators charge producers per day, and provide the vast majority of drillers' revenue.

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