Alan von Altendorf

http://www.cwsx.org
Total Rating:
+22 / -20

256 Comments

    • Mon Oct 27th 01:33 AM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      There are several issues I need to address for clarification, especially in light of new commercial and geological data recently received.

      On June 2, 2008, we issued a sell rating on PBR which at the time was trading at $72 a share. Its P/E was double that of Exxon and return on equity was half. "There is absolutely no sense in PBR's premium valuation," I wrote, "except a momentum trade on announcement of big Tupi reserves, bigger Carioca reserves, and big profits in the future." In a report to subscribers, we estimated pre-salt lifting costs would be $40 per boe. I said Tupi was tight sour gas. Not light sweet oil. Those remarks were highly contentious.

      Recent estimates of Tupi lifting costs range from $10 a barrel (Deloitte & Touche) to $35 (Jose Antonio Figueiredo, executive manager for engineering at Petrobras). My best guess now is $50, based on complexity of subsea installations, horizontal drilling, corrosion resistant risers, gas separators, injection wells, support vessels and FPSOs. Maybe more than $50. Ultra-deepwater drilling needs oil at $70 a barrel to be viable, according to OPEC President Chakib Khelil.

      There's equal confusion about the long term cost of producing and transporting Tupi's 5 billion barrel reportedly recoverable reserves. It could be $50 billion (Deloitte & Touche) or $115 billion (Brazilian energy minister Edison Lobao) or perhaps $200-300 billion (Petrobras CEO Jose Sergio Gabrielli). In any case, I'm told that Petrobras is only committed so far to a $5 billion pilot project that will run two years before a decision is taken how to develop Tupi. And that brings us to the geology.

      At the mid-September Rio Oil & Gas Expo, PBR's director of pre-salt exploration Jose Formigli presented a well core photo from the "sag phase" at 4920m which is immediately below the salt trap and is apparently their best reservoir. How they managed to recover a core, I don't know, but it has always been my policy to take Petrobras at their word. It's a beautiful photograph, identified as stromatolite -- a carbonate formed by bluegreen algae that's as vuggy and porous as a sponge, a world class reservoir. Very remarkable, very exciting. Except that it's only 5 inches tall and was squashed by compaction under a couple thousand feet of salt. Formigli also showed a photo of recently-formed stromatolites on a beach in Australia. Very nice. Two feet tall. He would have been better off showing the stromatolite trend in the Bahamas, which are four or five feet tall, or maybe the giant Precambian example in China, which is 15 feet. Bottom line: Tupi's buried algae fossils are ball-shaped, disconnected and meaningless. A three- or four-foot section, however wonderfully porous and permeable, does not justify $100 million ultradeepwater horizontal production wells.

      Anadarko recently reported a 195-ft hydrocarbon pay in the adjacent pre-salt Carioca trend, which is probably the same sag carbonate sequence, mostly dolomitized limestone with a thin stromatolite layer on top. I'm speculating now because Anadarko was particularly coy about what kind of "pay" they found on wireline logs. Could be gas, might be oil. Drilling will continue to deeper horizons in the rift phase, undoubtedly tighter and higher pressure rocks.

      What's driving all this exploration activity is oil-prone Type I algal kerogen in Tupi-Carioca and good evidence of peak or slightly postpeak maturation. Enormous areal extent of thick salt covering an organically rich paleo lake looks good. Unfortunately, we've been here before -- in deepwater salt offshore Angola 30 years ago. Arthur Berman of World Oil takes up the cautionary tale: "Horizontal drilling and hydraulic fracturing are being considered by Petrobras. Tupi reservoir rocks may be similar to the Toca carbonates of the Lower Cretaceous (Barremian-Aptian) Bucomazi Formation in West Africa. At the Kambala Field in Cabinda, Angola, Toca reservoirs are 75 to 300 ft thick and consist of partially to fully dolomitized carbonates that have matrix porosities of 2-10% and very low permeability. At Kambala, production is controlled by faulting and fracturing and, while the field contains more than 1 billion bbl of oil in place, cumulative production after 30 years is less than 50 million bbl." That's a recovery factor of 5% including recent horizontal infill drilling.

      It's important and pertinent because 175 million years ago in the Jurrasic era, Tupi and Kambala were two halfs of a single paleo lake in the center of supercontinent Gondwana. The eastern half rifted and became Brazil's Santos-Campos platform ringed with upthrown blocks and volcanic seamounts. See www.geoexpro.com/geosc.../

      No one is denying that there is rich potential in Brazil's pre-salt. "The most important source rocks in the South Atlantic and in the greater Campos basin are the lacustrine black shales and marls of the Neocomian to Aptian Rift and Sag sequences. They reach up to 300 m (984 ft) thickness with total organic carbon (TOC) up to 9%, composed of dominant Type I, amorphous organic matter, mainly derived from algal and bacterial remains." See www.offshore-mag.com/a...

      All of Brazil's current offshore oil production, 2 million barrels per day from shallow sandstones, originally came from pre-salt source rocks. Oil migrated through salt welds and fractures caused by magmatic dikes and lava flows. See www.mantleplumes.org/B...

      The thing at issue is money, not geology. Undoubtedly there are big oil and gas reserves subsalt, all of it under tremendous pressure that implies gas coning, asphaltenes, sulphur and CO2. Rocks are probably dolomitized and have to be fractured, which Petrobras has openly acknowledged. I don't think it makes any sense financially.

      "Your whole sell rating is based on the supposed difficulties of the pre-salt. At our current stock price the market is valuing Petrobras at about 50% of our PV 10 calculations. Since the pre-salt is not in our reserve position, they are valuing only existing proved reserves using SEC criteria at a long term oil price of around $50. PV-10 includes no value for our probable and possible reserves in our traditional reservoirs, much less our pre-salt. You are doing a disservice to your readers to not at least mention this." (Theodore Helms, executive manager Petrobras investor relations)

      To which, I say P-36. If it makes anyone feel better, I'll change my sell rating to speculative. But please don't buy any oil company based on "probable and possible reserves." Buy production. Actual oil and gas delivered to a refinery. Petrobras is a net importer. They make money from exploration & production. They lose money downstream. Each quarter PBR has slightly less cash, although I accept they can borrow more from the Brazilian government, from China and Japan.

      Remember Ben Franklin? Neither a borrower nor lender be.
      View article »
    • Fri Oct 24th 12:16 PM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      I received another email from PBR's investor relations, which was cordial and informative. It will take a few days to consider. Apparently, I have misjudged the timeline of Brazil's presalt development.
      View article »
    • Fri Oct 24th 01:36 AM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      There are three news items that I wanted to comment on. President Lula made a big deal of celebrating first production of subsalt oil at Jubarte six weeks ago. Press statements said 10,000 bpd extended well test, rising to 18,000 bpd of light crude, but no estimate of reserves until they drill two more subsalt wells. I question whether Jubarte has produced anything except a quart jar that Lula held up for the cameras. 25km to the south, separated by a syncline, Anadarko reported logging 195 feet of unspecified subsalt pay, probably gas. They are drilling deeper, still looking for oil. And yesterday, CNOOC announced their willingness to rescue PBR's underfinanced subsalt program by investing $ billions as farm-in joint venture partners. The Chinese are ideal chumps, ready to believe whatever reserve story they're told, so I expect the deal to close in the next few months.

      If Petrobras wants me to back down, they need to publish Jubarte daily subsalt production, GOR, API, sulphur and water cut.
      View article »
    • Thu Oct 23rd 09:03 AM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      Oct. 22 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, may extend investments in the pre- salt oil area over a longer period of time because of the financial crisis, Folha de Sao Paulo reported, citing Chief Executive Officer Jose Sergio Gabrielli.

      Investments planned for between 2009 and 2013 may now be extended to a date closer to 2020, Gabrielli said, the Brazilian newspaper reported today.

      View article »
    • Thu Oct 23rd 08:32 AM | Rating: 0 0
      Commented on:
      Three Possible Explanations for the Dollar's Strength
      Thank you. Adding you to my author Watchlist.
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    • Wed Oct 22nd 11:09 AM | Rating: 0 0
      Commented on:
      Bigger is Not Better in Banking
      Thanks. Adding you to my author watchlist.
      View article »
    • Wed Oct 22nd 10:15 AM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      No financing (for FPSO) required
      CAPEX risk (EPCI) is taken by contractor
      Obtain “life of contract” warranty on FPSO
      Payment of lease coincides with income from field
      Minimize expenditure (pay only for what is needed, during time needed)
      Residual value risk is taken by contractor
      Redeployment risk is taken by contractor
      View article »
    • Wed Oct 22nd 10:13 AM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      For the record, here is an except from SBM's sales pitch:

      Option to Lease FPSO:
      View article »
    • Tue Oct 21st 18:26 PM | Rating: 0 0
      Commented on:
      Petrobras: Dead In The Water
      Email received today:

      "I am the head of investor relations at Petrobras. I read with bemused
      interest your article on Petrobras. It was sent to me by someone who read Seeking Alpha. Your article was full of gross factual errors with no
      apparent understanding of how our company works. I am not sure publishing this helps the reputation of your firm. It is one thing to be independent, it is another to be accurate.

      "If in the future, if you would like to speak with Petrobras to confirm the
      accuracy of your statements/opinions, feel free to contact me.

      "Sincerely, Theodore M. Helms"
      View article »
    • Fri Oct 17th 10:13 AM | Rating: 0 0
      Commented on:
      Gold, Silver and Deflation
      Good idea. I'd like to buy at 650, please.
      View article »
    • Wed Oct 15th 23:29 PM | Rating: 0 0
      Commented on:
      Survival of the Longest
      Great article, Thomas. Thank you.

      "The only businesses that will survive are likely the cashflow positive energy firms and mining producers" - yep - and farmers who own their equipment, land, savings to self-finance seasonal expense.
      View article »
    • Wed Oct 15th 14:31 PM | Rating: 0 0
      Commented on:
      Oil: Remember Iran?
      Good article. Timely. The next few days will tell.
      View article »
    • Mon Oct 13th 13:12 PM | Rating: 0 0
      Commented on:
      Of Guarantees and Printing Presses
      Good morning, Mish. You're quite right. I think what your critics want, aside from macro reality, is more trading ideas: how to make a buck or two while the Empire sinks itself. Just a thought.
      View article »
    • Mon Oct 13th 03:37 AM | Rating: 0 0
      Commented on:
      All Eyes on the U.S. Dollar
      "Investors can rationally expect that the American government will not let its banking system dissolve and that it has the power to accomplish that task."

      Interesting thesis. What 'banking system' are we talking about? Opaque OTC shadow banking? Bundled MBS priced by Monte Carlo quant risk?
      View article »
    • Sun Oct 12th 08:54 AM | Rating: 0 0
      Commented on:
      How Does Deflation Actually Happen?
      If Johnny has 5 apples and lends 15 apples to the Russians, how many apples will magically appear when they rot?
      View article »
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