Brazil, with 2.719 million b/d (barrels per day, as of 2010) oil production, is one of the larger non-OPEC oil sources, and ranked No. 9 in the world based on 2010 oil production data, according to the U.S Energy Dept.
To exploit the huge offshore oil discoveries in recent years, Petrobras (NYSE:PBR) -- Brazil's state oil company--unveiled an ambitious investment plan last year--$225 billion for the years 2011 to 2015. In this world's largest corporate investment program, about 57% or $128 billion will be invested in upstream exploration and production aiming at developing its large 'pre-salt' discoveries in deep and ultra-deep water south of Rio de Janeiro (See Graph Below from the U.S. Energy Dept.)
The region, including areas in the Santos and Campos basins, may contain as much as 100 billion barrels, according to the Brazilian Petroleum and Gas Institute at the State University of Rio de Janeiro. Petrobras plans to more than double its output to 6.42 million barrels of oil and natural gas equivalent a day (boed) by 2020, 98% of it in Brazil.
If all goes well, Brazil could be on the path to becoming the fourth largest oil producer after Saudi, Russia, and the United States by 2020, and Petrobras dethroning Exxon Mobil (NYSE:XOM) as the world's largest publicly-traded oil company.
Since then, Brazil has become one of the world's hottest oil regions along with U.S. Gulf of Mexico, and West Africa. Nevertheless, Petrobras production increase has consistently come in below expectation, and most recently the company reported lower yoy Q1 2012 earnings citing rising operating costs.
Q1 lifting cost per barrel (or cost to produce each barrel of oil) in Brazil was $12.98, compared with overseas lifting cost of $7.63/bbl. Meanwhile Petrobras stocks have dropped 47% in the past two years, while Exxon Mobil was up more than 30% (See Chart Below).
Chart Source: Yahoo Finance, June 8, 2012
Petrobras last month indicated that "in an effort to speed up and boost output," it may increase exploration and production budget with its revised five-year plan in August this year.
Separately, there's a good chance that the Brazilian government may lower interest rates to shore up growth as the inflation rate fell below 5% for the first time since September 2010.
These actions most likely will get positive reactions from Wall Street, but could only add to the existing cost and production problems that are plaguing Petrobras as well as Brazil.
Petrobras' investment plan would require a projected 50 new rigs, 50 new platforms, and 281 additional offshore supply vessels (OSVs) by2020 (see table below). Furthermore, according to the Rio Times, the federal government estimates that the new Brazilian oil fields will require 250,000 new professionals through 2016.
Chart Source: Epmag.com, April 1, 2012, courtesy of Brazilian Development Bank (BNDES)
So needless to say, the sheer size of the planned investment would take a considerable pool of domestic as well as foreign resources such as human capital, and infrastructure to meet that demand.
The country does have some financial incentive programs including "Prorefam III" to promote domestic shipbuilding industry to construct 146 OSVs before year-end 2014 (see table above). However, so far, Prorefam III and local shipyards do not have the capacity to meet the expected demand.
However, the Brazilian government has implemented heavy local content requirements mostly out of the desire to stimulate domestic economy and business, without realizing it is almost impossible to source everything from rigs, vessels to workers, domestically for the targeted investment and oil production increase.
For example, the current talent shortage problem is directly related to the country's education capacity as well as government regulation--NR72 or NORMATIVE RESOLUTION 72, which stipulates a mandatory 2/3 Brazilian crew content requirement for offshore vessels within one year of operation. If the oil industry as a whole already has problem recruiting qualified and skilled oilfield workers, imagine the difficulty recruiting enough Brazilian workers to meet the NR 72 requirement.
On top of that, the complex tax and legal systems, heavy import taxes (e.g., popular imported products like iPad and iPhone cost three or four times higher in Brazil than in the U.S.), poor infrastructure, and government bureaucracy are among the biggest obstacles for foreign investments.
These factors are driving up Brazil's regional operating costs for oil producers and service companies alike. As a result, some service companies are exiting Brazil seeking greener pastures elsewhere, and Petrobras performance has been negatively impacted as well.
The issues discussed herein are long-term in nature and unlikely to be resolved any time soon even with some fast and furious government actions.
The $225 billion program was based on oil price assumption of $80-$95/bbl (Petrobras has said that it can produce pre-salt oil for $45 a barrel.) The recent retreat of crude oil price has caught some producers by surprise, and definitely does not bode well for Petrobras' plan either.
So, despite the tremendous new oil finds, it would be the flawed government policy, and inadequate planning underestimating the limitation of country's own human and infrastructure resource that could further delay or even jeopardize their own oil potential, while making one already scarce energy source even more expensive for the rest of the world.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.