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Petroleo Brasileiro Petrobras SA (ADR) (PBR): Brazil To Auction Off Massive Offshore Oil Field

With tensions and violence escalating in Syria, crude oil has once again come into the spotlight, as investors weigh the potential of a U.S.-led intervention on the commodity. And though Syria  is not a major oil producer, its close geographic proximity to key sea routes and pipelines has investors understandably concerned over the potential of violence spilling into other countries in the region where roughly one-third of the world’s crude is produced. Though no major decision has been made by the U.S. government, or other major world leaders, support for a U.S. strike on Syria continues to build, which will undeniably affect the crude market [for more oil news and analysis subscribe to our free newsletter].

This week, however, crude oil traders learned of a new potential opportunity in the space after Brazil’s government confirmed that it will sell one of its massive oil-fields in late October of this year.

Can Libra’s Potential Be Tapped?

On Tuesday, Brazil’s government announced it will hold an auction to sell a massive offshore oil field this fall. The site, named Libra, is located roughly 140 miles off the coast of Rio De Janeiro and is estimated to hold roughly 8 billion to 12 billion barrels of recoverable crude oil – making it the largest deepwater oil field ever discovered if the commodity is actually found to be recoverable [see A Deeper Look At Brazil’s Commodity Industry].

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)Libra, however, is considered to be a pre-salt oil deposit, meaning the oil reserves themselves are buried beneath 6,600 feet of water and a further 16,500 feet of sand, rocks, and a thick layer of salt. Brazil’s oil regulator, the ANP, estimates that it will take an investment of approximately $174 billion to develop the field over the 35-year length of the contact.

These estimates, though quite high, could potentially become even greater since pre-salt oil exploration has proven to be a costly business. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) also owns several major pre-salt offshore oil fields, and in its 2011-2015 business plan, the company stated it will invest $224.7 billion to develop the fields – a $33 billion increase from the previous year’s plan [see Mexico Takes Steps To End Oil Monopoly].

A Costly Risk or a Valuable Investment?

In addition to the massive costs that will be associated with developing Libra, offshore drilling in these types of fields are also extremely dangerous. Many analysts believe several companies may place joint bids for the field in an effort to mitigate risk. The winning bidder, however, will only have four years to confirm Libra’s actual size and to determine whether or not the field is commercially viable. If the field is deemed viable, production will still take several years.

For Brazil, the development of Libra could add as much as 1 million barrels of oil per day, increasing Brazil’s current oil production to about 2 million barrels per day [see also 5 Of The Biggest Oil Finds In History].

Though the potential profits of this kind of investment will likely not be realized for several years–and only if the field can be developed–investors should certainly pay close attention to October’s auction.

Don’t forget to subscribe to our free daily commodity investing newsletter and follow us on Twitter @CommodityHQ.

Disclosure: No positions at time of writing

This entry was posted in Asset AllocationCommodity ProducersEnergyNatural GasWTI and tagged PBR. Bookmark the permalink.

Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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