Petrobras New Rig, Ship Deals to Hit Global Capacity

NEW YORK, June 10, 2008 (Dow Jones Newswires)

Brazilian state-run oil giant Petroleo Brasileiro SA (PBR) is planning a major expansion in its fleet of oil rigs, tankers and support vessels, a program that will have a major impact on worldwide capacity for such equipment, the company's president said Tuesday.

"We know this will affect capacity worldwide," the firm's president, Jose Sergio Gabrielli, told a meeting of the Brazilian-American Chamber of Commerce.

Petrobras, as the company is known, is planning to lease 28 new oil rigs capable of operating offshore in waters more than 2,000 meters deep, which will be brought online between 2013 and 2017, Gabrielli said. It also plans to add an additional 175 vessels to its fleet, including 122 supply ships and 44 very large crude-oil carriers, among others.

Last week, Petrobras said it has leased 12 drilling units for use in ultra-deep waters of between 2,400 to 3,000 meters, all of which will be built abroad and delivered to begin operating by no later than mid-2012. Because of the long-term approach, those were contracted at prices below the $600,000 to $800,000 daily rate which an oil rig can charge on the spot market, he said.

In a conversation with reporters that followed, Gabrielli said there are "less than 20" oil rigs in the world capable of drilling wells in the extraordinarily deep waters where Petrobras operates.

For the next round of leasings, the company wants the units to be built in Brazil, to try to avoid some of the impact on the global rig market, which is under pressure due to strong demand. Petrobras also wants to help develop the local Brazilian shipbuilding industry, and is giving companies a five-year warning period to set up local units, he said. Petrobras has often been criticized for operating long-term leasing contracts for its oil rigs, but Gabrielli said this choice has been vindicated because it has locked in lower prices over longer periods.

Petrobras Aims For New Discoveries, Not Bigger Reserves

Because of the way licensing laws work in Brazil, Petrobras is "more interested" in drilling for new oil discoveries than in determining how much oil it may have in new discoveries. Petrobras announced a series of important offshore discoveries starting last November but has failed to put any reserve figures on most of them.

By announcing oil discoveries, Petrobras gets to keep more of the acreage from the oil blocks it has won in recent oil concessions. That means it must use its limited availability of drilling rigs to concentrate on new blocks, rather than evaluating the volumes of oil at each discovery, Gabrielli said.

Much of the company's exploration efforts are focused on the so-called pre-salt area, located off Brazil's south-east coast. The firm has quantified reserves made at one large discovery there, Tupi, at between 5 billion and 8 billion barrels of oil equivalent. The firm has said subsequent wells drilled in the pre-salt area suggest there are many more large reserves.

Gabrielli said that, as a result, exploratory risk in this area is now "practically zero," which justifies changing the terms of the exploration block auctions to increase the government's share of revenues.

The official stressed that he doesn't support changes in existing oil concessions held by domestic and multinational companies, because investors deserve to be rewarded for the risks they took when Brazil's oil potential was far less certain.

"The existing law in Brazil was made to attract investment and reward exploratory risk and investors have the right to benefit. We want to change the future auctions," Gabrielli said.

The first oil field in Tupi is scheduled to begin an extended testing program in the first quarter of 2009 which will produce between 20,000 and 30,000 barrels per day at a cost that's above the firm's average lifting cost of $8.20 per barrel, Gabrielli said. However, a pilot program which will take over in 2010 at 100,000 b/d should see a below- average cost "because we'll learn," Gabrielli said. The first Tupi well cost $240 million to drill and took 14 months; nowadays, wells cost around $60 million to $80 million and take three months, he said. Petrobras Focuses On Domestic Refining

The oil firm is placing far more emphasis on increasing its domestic refining capacity, because it wants to be able to export higher-value oil products rather than simply exporting lower-value crude oil, Gabrielli said.

Two new oil refineries capable of processing some 900,000 barrels per day in the northeast of the country are nearing a decision point, he said. The firm is already building one new plant processing 200,000 barrels per day, as well as a new petrochemicals plant that will process 150,000 barrels per day.

The executive seemed to suggest that the firm's interest may be shifting away from buying refineries overseas. He declined to comment on the firm's negotiations to buy an oil refinery in Aruba, which hit a sticking point after a large fire there earlier this year. Instead, he said, "what I am saying is that we're increasing domestic refining capacity."

Petrobras is planning to invest some 54.9 billion Brazilian reals in 2008, up from BRL45.3 billion in 2007. This will be financed from the firm's own cash resources, although Petrobras has the ability to increase its debt levels without affecting its investment-grade credit rating, Gabrielli said. He said Petrobras was likely to be "more active in raising money (in debt markets) than before."

The higher international crude oil prices will also help boost Petrobras' spending power, and the firm can also turn to its partners in various ventures to help finance projects as well, Gabrielli said.

Oil Prices Unlikely To Fall

Gabrielli said he expects world crude-oil prices to remain high and volatile for the next four to five years. For the short term, he added, "We can't see why prices would fall."

Among a list of well-versed reasons for higher prices, Gabrielli highlighted the difference between the cost of heavy and light crude oil. The latter is far easier - and hence cost effective - to refine. Moreover, heavier crude, which Brazil predominantly produces, sells at a much lower price than light crude because there are fewer refineries capable of handling it.

The official refused to give any actual indication of price levels for oil, saying there's too much volatility and uncertainty.

"It's worthless to give a number because it's going to be wrong," Gabrielli said.

NEW YORK, June 10, 2008 (Dow Jones Newswires)