Events in the Gulf of Mexico and Washington are being closely watched around the world. As a country set to test the technological frontier of deepwater drilling, Brazil is paying particular attention. Pre-salt reserves are found at a water depth of 5-7,000 meters, under a 2,000-meter layer of salt and 300 kilometers from the coastline. Although Brazil stands to benefit from the unexpected availability of deepwater rigs and related equipment following the Deepwater Horizon explosion, and an influx of companies with cash on hand looking for prospects, the disaster is likely to create more challenges than benefits:
--The disaster took place a few weeks before the Brazilian Senate approved legislation allowing the government to relinquish 5 billion barrels in exchange for stock in state-controlled oil company Petrobras. In parallel, Petrobras planned to conduct a mega capitalization to enable it to implement its 2010-14 business plan, demanding upward of $200 billion. The capitalization, planned for July, was recently postponed until September, because legislation required that the National Petroleum Agency (ANP) conduct an independent evaluation of reserves' value. The appraisal, by a recognized expert international consultancy contracted by the ANP, is expected by late August.
--Although this makes Petrobras's financial management even more challenging, it increases transparency on the value of reserves the government ceded, and allows time for Petrobras, the government and ANP to ease investor concerns.
Crushing costs. Petrobras has a state-of-the-art safety, environment and health program that includes 10 24-hour marine environment centers. It keeps three vessels on call permanently to deal with possible emergencies and has invested heavily to train its workforce in safety and environmental preservation. However, the spill contention technologies it employs are the same as counterparts in the Gulf of Mexico; like its peers, Petrobras will have to invest heavily in development of new contention technologies and methods, in addition to development and testing of an improved blow out preventer. Operating costs will escalate to unknown levels.
It is unclear whether companies with heavy concentration of deepwater assets--other than in the Gulf of Mexico--will also see market valuations adjusted downward as a result of an increase in risk and other premiums. Of particular concern is the potential for a sharp increase in insurance premiums. Early reports indicate a 15-25% rise for rigs operating in shallow waters; and up to 50% for deepwater rigs.
The experience of Anadarko and Mitsui as BP's minority partners in the Macondo may also affect other companies' appetites to hold minority stakes in deepwater projects. A high or undefined environmental liability cap in Brazil, combined with partnership conditions imposed by new pre-salt legislation--where Petrobras is the sole operator and controls project operations together with the newly created Petrosal--would make it challenging to secure partners willing (and/or able) to invest in ultra deepwater.
Outlook. A robust offshore sector requires responsible corporate behavior combined with an equally responsible and firm regulator. Although the fact that the Brazilian government is Petrobras's majority shareholder means stewardship of Brazil's environment is in the company's and government's interest, asymmetry between the ANP and Petrobras is a weakness that must be addressed.
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