Bring in the reinforcements
The numbers from these offshore finds to date may be promising, but it’s not enough for the country to keep up with its demand. So the country has taken a couple of steps to make the country more industry-friendly. The National Petroleum Agency will auction off exploration licenses in May for the first time in five years; the country was rather lenient with Chevron Corporation (NYSE:CVX) and Transocean LTD (NYSE:RIG) after its spill last year despite threats of $20 billion in fines and expulsion from the country, and the country’s regulatory board is considering an easing of the local-content mandate.
With Petrobras struggling to increase production and keep afloat financially, bringing in outside help could be just what Brazil’s oil industry needs. The licenses may be production-sharing agreements, but it’s the first time the country will sell rights in the pre-salt formation as well as in its shale gas plays. It appears that there is plenty of demand, too. So far, more than 70 companies have stated their intent to bid in the upcoming auction. Not only can several majors such as Chevron Corporation (NYSE:CVX) and BP plc (ADR) (NYSE:BP) bring in lots of capital for investment (the two companies have $20.5 and $19.5 billion in cash on their books, respectively), but they also have experience in accessing deep formations like the pre-salt. Last month, Chevron announced a big find in the Gulf of Mexico, and BP’s most recent discovery in Trinidad and Tobago nearly doubled its initial estimates of reserves in the field.
The easing of local content rules could be a promising sign for oil-services companies and exploration and production companies. Not only will this make Brazil’s oil industry more competitive, but it will also allow for other companies to get in the action. Seadrill Ltd (NYSE:SDRL) has three drillships under construction that will all have the capability to drill in 10,000 feet of water and reach depths of 40,000 feet. The addition of these three ships will double the company’s presence in Brazil. With eased local content regulations, expect other offshore drillers to increase their activity in the region as well.
What a Fool believes
Brazil still has a long road ahead of it before it becomes the major oil exporter it hopes to be. Certainly the prospects in the pre-salt formation could be a key to unlocking that potential, but majors such as BP and Chevron Corporation (NYSE:CVX) will have to be relied upon to get the required capital for the projects. These recent moves to be more industry-friendly will help, but mandates such as the local-content rule will continue to hamper production and growth. If Brazil wants to realize its full potential, then it needs to re-evaluate the implications of these regulations.
The article Who Can Help Brazil’s Oil Industry Stop the Bleeding? 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, Petrobras, and Seadrill and owns shares of Seadrill and Transocean.
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