Brazil’s Petroleo Brasileiro (NYSE: PBR), better known as Petrobras, has agreed to pay the Brazilian government $42.5 billion for the rights to produce 5 billion barrels of oil from government-owned fields offshore off Brazil. The nominal cost to Petrobras is $8.51/barrel; however, the company will not be required to pay the special participation tax of 40%, bringing the final royalty payment to the government to $5.20/barrel. This figure is in line with analysts estimates of a reasonable cost for the oil that lies under more than 6,000 feet of water and another 6,000 feet or more of ocean floor. The following graphic provides an idea of the scale.

In addition to Petrobras, Britain’s BG Group plc, Royal Dutch Shell plc (NYSE: RDS-A), Repsol YPF SA (NYSE: REP), Exxon Mobil Corp. (NYSE: XOM), Hess Corp. (NYSE: HES) and a few others have stakes in the development of the pre-salt deposits. The government estimates that 27 of 31 exploratory wells have produced oil, a phenomenal rate.

As shown in the illustration, most of the oil is trapped in a rock formation, called the pre-salt layer, underneath a thick layer of salt deposits. There is also some oil in the post-salt layer, on top of the salt deposits, but that is not the area of current interest.

The size of the pre-salt deposits is estimated as high as 30 billion barrels of original oil in place. Recoverable oil estimates are around 15 billion barrels, but that’s on the optimistic side.

Petrobras’ agreement with the government allows the company to issue up to $85 billion in new shares to fund the development of six pre-salt fields. Petrobras aims to spend about $224 billion in the next five years to develop the fields.

Petrobras is expected to proceed with a share offering worth $60-$65 billion by the end of September. The government will receive $42.5 billion in Petrobras shares, and the rest of the funds will be used to fund the company’s development plans.

In an effort to avoid shareholder resistance to such a heavy dilution in their stakes, minority shareholders will have the right of first refusal to purchase shares, either directly with cash or indirectly by purchasing new-issue government bonds.

Petrobras has said it will offer 1.59 billion new preferred shares and 2.17 billion new common shares, according to Reuters. That brings the value of the offering to about $64.5 billion.

Petrobras shares are trading up 2,5% at $36.91 with a strong market and on news of the agreement.

Paul Ausick

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