Deepwater Drillers About to Explode

According to Bill Herbert, an analyst with the investment banking firm Simmons & Co Intl, Petrobras (NYSE:PBR) is close to issuing letters of intent for as many as 17 new offshore deepwater drilling rigs. These will be for new build drillships and semisubmersibles. This should happen before the end of next week. The total bill for these new rigs could be huge. Last week UBS said Petrobras would need to spend about $600 billion to develop their two new finds of Tupi and Carioca.

In the last month Noble (NYSE:NE) and SeaDrill (OL:SDRL) both won contracts for over $4 billion each for deepwater rig contracts. These contracts cover several of their top line deepwater drilling ships over the next ten years.

These new fields lay under 27,000 to 31,000 feet of water, rock, sand and salt. They will be very expensive to drill and require new technology to complete and produce. This is going to be a major windfall for offshore oil drillers and service companies. Anybody that deals in deepwater exploration will probably get a major contract from Petrobras. That includes companies like Transocean (NYSE:RIG) and Diamond Offshore (NYSE:DO).

The total current reserves for Brazil are estimated to be 12 billion barrels not including the two new finds. The Tupi field has been estimated to contain between 5-8 billion barrels. A recent announcement by Petrobras suggests production could begin a year earlier from Tupi than previously expected. The down temperatures are said to be in the 180-200 degree range compared to temperatures in the ultra deep Gulf of Mexico at 500 degrees. This cooler temperature range means it can be drilled with current technology and not require the massively expensive upgrade to metals that can withstand the higher range.

The Carioca field has only seen one test well completed. The shows were good but it would be extremely impractical to try and estimate reserves for a hundred square miles of ocean based solely on the results from one well. Petrobras said it could be quite some time before any qualified results and estimates are known. The head of Brazil's National Petroleum Agency said last month that estimates are 33 billion barrels for Carioca. He nearly lost his job and is still being considered for criminal charges for making such rash statements with no backup. Petrobras quickly denied the claim and suggested they would know more in 18 months or so.

With Petrobras expected to put out bids for 17 extremely expensive drill ships later this week this suggests Petrobras knows more than they are admitting publicly. With a price tag of $20-$30 billion that would be an enormous bet if they did not have more information than they are releasing to the public.

You can expect a major pop in the drillers and service companies whenever that Petrobras bid announcement hits the wires.

Jim Brown

OptionInvestor.com