The exploration and production of Brazil's massive offshore oil reserves is the driving force behind the globe's biggest share offering ever, as the South American nation's state-run energy company raised $70 billion.
Getting to the reserves — some of the largest finds in decades — will require Petroleo Brasileiro SA, or Petrobras, to "go back to the well" with future stock offerings and will see the company taking on debt to meet its five-year, $224 billion investment plan, said Christopher Garman, the Eurasia Group's Latin America director.
"Raising capital through a share offering is a necessary but not sufficient condition to meet those ambitious investment targets. There are huge operational and financial challenges for Petrobras" to get to the oil lying far beneath the ocean floor, he said.
While some analysts are concerned about the government taking a larger stake in the company — before the sale it already controlled 40 percent of Petrobras and more than 50 percent of its voting stock — there was heavy investor appetite in Thursday's offer.
The share-pricing information was released on the website of Brazil's Securities and Exchange Commission.
The money will be used to develop finds Petrobras made in the last three years that hold more than 50 billion barrels of recoverable oil.
Brazil's government will receive $43 billion in shares in exchange for allowing Petrobras to drill for 5 billion barrels in reserves.
Petrobras' plans call for it to invest $224 billion over five years to develop offshore oil fields in the so-called "pre-salt" region. Analysts have said it will still need to raise more than $50 billion through additional stock offerings or loans to meet its goals.
Most of the pre-salt fields lie at least 115 miles (185 kilometers) off the southeast coast of Brazil, more than a mile below the ocean's surface and under another 2.5 miles (4 kilometers) of earth and salt.
Brazilian President Luiz Inacio Lula da Silva hailed the finds as the nation's future, a second declaration of independence and an economic savior for 57 million Brazilians living in poverty — 30 percent of the population. The military wants new submarines and jets to protect the crude. Leftist groups want it all nationalized.
"Brazil's oil sector is already 10 percent of the country's GDP," said Garman. "When you look at what will be the engines of growth going forward, it will be increasingly from the oil industry."
Brazil state development bank forecasts that money poured into the oil and gas industry will make up 20 percent of all investments in Brazil during the next four years.
The possibilities the oil fields hold for both Petrobras and the country are sure to tempt many investors. Others, however, aren't ready to jump in just yet.
The price of the 5 billion barrels of oil Petrobras will be allowed to develop in return for the government's new shares in this week's offering was set at $8.51 earlier this month.
But the company and the government will revisit that price after Petrobras spends four years exploring six offshore oil fields. If the oil is cheaper to access than originally estimated, or if oil prices have risen and therefore increased the value of the oil, Petrobras may have to pay the government a higher price.
"Petrobras is a big, important company and it's going to produce a lot of oil in the next seven to ten years," says George Shiau, a partner and energy specialist at the utility and energy hedge fund Copia Capital. But he's concerned that Petrobras' full costs won't be clear for a number of years.
Such concerns weren't evident in a speech Silva delivered Thursday.
"Never before in the history of capitalism has happened what will take place tomorrow in the Sao Paulo stock exchange," he said. "We're going to capitalize Petrobras on behalf of the pre-salt, and it's going to be the biggest capitalization ever done in the history of humanity."
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