The Best “Energy Intel” From Rio de Janeiro
If this is Thursday, it must be…Brazil.
I returned home late last night from Baltimore where we were putting the final touches on a huge new precedent-setting energy investment play we’ll be releasing very shortly.
But Marina and I are now into a very hectic travel schedule.
As you read this, we are on the first flight leg down to Rio de Janeiro. We are returning on Thanksgiving, only to turn around the next day and be off to Moscow. (Otherwise we would have had to pack for two very different climates!)
There are more trips in December. And I am not even thinking about what’s happening in January and February yet.
The reason behind this travel frenzy is the rapidly changing global energy balance. It’s one that will require a revision in our overall energy outlook.
All of which, will allow us to bring you a series of profitable new investment moves.
However, back to Brazil and the reason behind my meetings this weekend…
Brazilian Energy is About to Get Hot
Brazil is a major oil producer, with new prospects in its offshore pre-salt formations and exciting new discoveries in Amazonia (yes, the region way upriver in the jungle). Expectations now are that these discoveries will allow Brazil to leapfrog other countries on the global production list.
Then there are also the major developments on the downstream fuel side. Brazil has been the world leader in the application of ethanol. In fact, more vehicles run on ethanol there than anywhere else in the world.
Cars in Brazil have options and their engines are fitted to allow for a range of mixtures. This is ethanol processed from sugar cane not corn (as is the case in the bulk of U.S. production). It is also hydrous, meaning it has water.
That is not a problem in Brazil, but would be in much of the U.S. market. It is never a good idea to have water moving through a fuel line during cold spells or winter months. Ice doesn’t make a very good power source!
Nonetheless, it would appear that what is happening in Brazil might be a signaling what can be expected elsewhere in the energy sector. At least, that is what most of the pundits (who have never been there) tout in what they pass off as analysis.
Personally, I believe there are some real opportunities developing. However, there are also some significant balancing difficulties emerging right along with it. And for those of you who have been reading OEI for awhile know, people usually call me in when there are problems.
Brazil is no different, although the interruptions there are likely to have a more pronounced effect on world markets. With major gas finds in Argentina and Columbia, a slow return of Venezuelan heavy crude production, and prospects for some of the longest pipeline networks in the world, Brazil sits right in the center as a major new cross-border energy player.
The interconnection coming among major continental producers is creating the advent of a new cartel, an OPEC of sorts for South America. The impact that is likely to have on pricing internationally is only now being estimated.
And that is the reason for my trip.
Working Out the Kinks in South America
Unlike most other regional equivalents, Brazil does not have a concern with its primary state oil and gas company. I have found Petrobas (NYSE:PBR) to be among the best run outfits in the world.
In this case, the current problems are elsewhere, and there are three overarching concerns.
First, while the extractable reserves figures keep rising for the pre-salt formations off the coast, a good deal of this is going to come in as much heavier oil than first anticipated. It will be difficult and expensive to move the volume lifted from deep beneath the seabed.
The most cost effective way of overcoming this shortcoming is to mix the flow with lighter oil.
But there is little excess light crude available in Brazil. Neighboring Venezuela and Argentina may have some production available. Unfortunately, most of it is even heavier or would require the setting up of cross-border joint ventures not particularly favored by Petrobras.
Of course, I have been working on this matter as well.
Nigeria produces light sweet crude (low weight, low sulfur content) and the export distance from West Africa to Brazil is very short. But Nigerian production is declining, making this option more difficult.
Still, you better believe this issue came up in my Vegas meetings with the Nigerian National Petroleum Corp.
Second, discoveries of both oil and natural gas in northwestern Brazil – the jungle district of Amazonia – have been spectacular. The prospect for a major new production basin stretching into adjoining regions of Ecuador and Peru is exciting.
But there is no way to move this production out at the moment, save for the multi-year construction of pipelines through the most hostile terrain ever attempted anywhere. It will certainly rival the most expensive pipelines ever built.
Here Petrobras and a coterie of smaller companies will require a new way to fund and bring in outside technical expertise and equipment.
And I’m working on that too.
Developing a “First Read” in Rio
Finally, the major unconventional shale gas/tight oil discoveries in Argentina and Brazil are dramatically changing the energy outlook in South America.
There be a parallel here to the direction taken in North American – domestic self-sufficiency and the opening up of liquefied natural gas (LNG) exports to the rest of the region and the world.
Once again, two issues are pressing here: finance and access to outside technology. In addition, there will be infrastructure revisions necessary inside Brazil as a result of the new sourcing balances emerging.
All three of these concerns are on the agenda for my meetings.
As a result, by the time I leave Brazil, I ought to have a “first read” on some exciting new investment opportunities.
I hope to be rolling them out in the near future.
PS. As you know, we’ve been using every opportunity we can to make you aware of the developing situation surrounding one of the biggest oil discoveries of all time. Now the small Western company that everything hinges on is about to go ballistic. I have all the details right here.