Can Petrobras Prop Up Deepwater Drilling Industry?

Life’s not too rosy for the oil and gas drilling industry these days. The plummeting price of oil and gas as well as the credit crunch has idled onshore and shallow water drilling rigs as oil explorers and producers postpone projects, or cancel them altogether.

In the U.S. alone, the number of rigs actively exploring for oil and natural gas is down nearly 50 percent since the end of August to 1,043. Although, I should mention the rig count did rise by four this week, the first time this year the weekly count, conducted by Baker-Hughes, has increased.

There is a bright spot among all the doom and gloom: the deepwater and ultra-deepwater drilling industry. 

According to data from RigLogix, 88 deepwater floaters - that’s means they’re rated for more than 6,500 feet of water - are being constructed for delivery after January 2009. Of those, 63 have been contracted before their completion. With ultra-deepwater rig rates ranging between $500,000 to $650,000 a day, that’s a lot of moolah in an otherwise depressed market.

Deepwater drilling is fairly insulated from the volatility of oil prices because the long lead time in obtaining a rig that can reach miles under water and rock. Of course, deepwater drilling is still expensive and complicated, and explorers and producers are constantly looking at the spread between the cost of developing a field and the price of oil.

There does seem to be one exception: Brazil’s state-run oil giant Petroleo Brasileiro, known as Petrobras. Regardless of the price of oil in recent months, Petrobras has increased its production and announced in January it would invest $174.4 billion over the next five years to develop offshore oil fields. That’s 55 percent higher than its previous 2008 to 2012 capital spending plan.

Petrobras’ massive investment commitment has been driven by its deepwater finds off the coast of Brazil in the Campos and Santos basins. The company’s Tupi field discovery in 2007 is estimated to hold up between five and eight billion of barrels of oil and gas, making it the world’s largest strike in the Americas since Mexico’s state oil monopoly found the Cantarell Field in 1976. 

Petrobras will contract, on average, between 39 rigs in 2009 to 47 rigs in 2010, 48 rigs in 2011, 53 rigs in 2012 and 52 in 2013. Meanwhile, other oil giants including BP, Chevron, ExxonMobil and Shell have contracted substantially fewer floaters, according to the folks at Rigzone.  BP, for example, contracted 11 deepwater and ultra-deepwater rigs in 2009, but then that number drops to a low of five rigs by 2013.

Deepwater drillers not completely loaded with debt or those who can somehow secure financing can make a lot of money off of Petrobras. That’s easier said than done. Several companies contracted to build rigs for Petrobras have run into problems. Rig builder MPF, which was in the midst of building a rig for Petrobras, filed for bankruptcy. Scorpion had to scrap plans to build a semisub because it could not get financing and Sevan Drilling also is having trouble securing funds.

Bigger companies, namely Houston-based Diamond, Pride International and TransOcean are in a better position. Last year, when oil prices were skyrocketing, Petrobras leased about 80 percent of the world’s deepest-drilling offshore rigs- leaving other producers to fight over the scraps. As a result, rental rates spiked and deepwater rig companies made bank.

Petrobras still faces a number of financial, political and logistical issues in retrieving all that oil. International financing has dried up, although China pledged back in February it would lend Petrobras $10 billion. That leaves about $18 billion in funding for this year alone. Brazil’s national development bank, Banco Nacional de Desenvolvimento Economico e Social, will lend Petrobras $11.9 billion. Of course, if international capital markets continue to suffer, those plans could be ruined, The Economist notes.

Petrobras’ success also is very much tied to the people of Brazil. The government — which holds almost 60 percent voting shares of Petrobras and has a number of its officials on its board – uses its oil revenue to fund the country’s numerous social needs. This creates all sorts of complications and could keep foreign oil producers from tapping into Brazil’s fields for awhile.

The government has blocked issuing new licenses to foreign companies like Chevron and other super-majors since 2007. The government also is considering changing its concession laws, which would give Petrobras the upper hand in developing Tupi.

If the government backs off and access is renewed, super-majors could benefit. For now, Petrobras is only showing deepwater rig companies the money.