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Washington Examiner


Drilling Moratorium Hurts U.S., Helps Brazil

August 25, 2010

By Robert Bryce

As long as the Obama administration continues its moratorium on drilling in the deepwater in the Gulf of Mexico, Petrobras, the Brazilian national oil company, will continue to thrive.

Not that Petrobras needs any help. Over the past decade, the Brazilian energy giant has nearly doubled its oil production and now produces about 2.4 million barrels per day, nearly as much as Venezuela. And the company’s explosive growth will continue in the years ahead thanks to its aggressive drilling campaign in extreme ocean depths. (Full disclosure: I have owned Petrobras stock in my 401k account for about two years. My 130 shares are worth about $4,500.)

Petrobras’ ascendance becomes yet more apparent given a July 10 memo from Michael Bromwich, the director of the Bureau of Ocean Energy Management, to Interior Secretary Kenneth Salazar which said that a six-month freeze on deepwater drilling would cost the US more than 23,000 jobs.

Bromwich also predicted that the drilling moratorium would cut offshore oil and gas spending by $10.2 billion in 2011 and cut royalty and tax payments to state and federal governments by a total of nearly $700 million. And that lost revenue is occurring at the very time that governments at the local, state, and federal levels are in fiscal chaos.

Now, it would be callous — or perhaps downright stupid — to ignore the ecological impacts of the Macondo well blowout in the Gulf of Mexico. BP’s bone-headed bungling resulted in the largest oil spill in US history, some 5 million barrels. But as bad as the spill may be, it does not, cannot, change this essential truth: if oil didn’t exist, we would have to invent it.

No other substance can match petroleum when it comes to energy density, cost, convenience, flexibility, or ease of handling. Those characteristics help explain why oil has become the dominant source of global energy, accounting for about 35 percent of the world’s total energy needs and about 95 percent of its transportation fuels.

That’s why Petrobras — arguably the world’s best deepwater oil driller and the world’s most important non-OPEC producer -- is sitting pretty. Add in the fact that the company will invest $224 billion on new projects over the next five years, and it becomes clear why the Brazilians are the rulers of the offshore oil business.

Here’s the punch line: thanks to the moratorium in the Gulf, Petrobras will likely be able to get its hands on yet more deepwater offshore drilling rigs, at cheaper rates, than it could have prior to the Macondo blowout.

The Brazilians are eager for rigs because their drilling programs have uncovered enormous reserves. In 2007, the company announced that its new offshore Tupi field may hold up to 8 billion barrels of oil equivalent. The field is the world’s second-largest oil discovery in the last 20 years.

Since then, Petrobras has been announcing new offshore discoveries on a regular basis. Within five years, the company hopes to double its oil production, to some 4 million barrels per day, an astounding amount of growth for a company that is already among the world’s biggest oil producers.

Art Smith, president of Triple Double Advisors, a Houston-based energy investment firm, says that Petrobras �will be the single fastest-growing source of incremental oil production in the world over the next few years.�

Petrobras’ drilling programs aren’t limited to Brazilian waters. The company also has major drilling projects in the Gulf of Mexico, where the Obama administration will likely continue its drilling moratorium for months to come.

As it does so, the more US jobs will be lost. But in addition to losing jobs, the US is only strengthening the hands of companies like Petrobras, companies that fully understand the essentiality of offshore drilling.

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