Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

We're gonna need a bigger wrench.

Closing off the spigot of capital to the oil industry is proving tougher than expected. QEP Resources on Monday became the latest U.S. exploration and production company to issue a sack of new shares to shore up its finances. Despite the miserable oil price and worries about looming bankruptcies, this could end up being the best quarter for U.S. E&P stock sales on record.

Still, QEP's $330 million pales in comparison to the $10 billion that China Development Bank is lending to Petrobras, Brazil's struggling, scandal-plagued national oil company. And besides the bigger check, there is something else about this deal with big implications for the central question in the oil market: When will prices spike again?

Petrobras needs the money. Having scotched the development of the biggest oil bonanza outside of shale -- namely, Brazil's offshore "pre-salt" resources -- Petrobras has incurred huge debts just in time for the price crash.

Over a Barrel
Petrobras has almost $54 billion of bonds and loans maturing over the next decade, with $14.5 billion falling due in the next three years
Source: Bloomberg

That squeeze has forced Petrobras to cut its growth plans repeatedly in recent years. In 2012, the International Energy Agency forecast that Brazil would produce 2.95 million barrels a day in 2017. In the latest medium-term outlook, published last week, the IEA cut its projections for Brazil (again), pushing that target back by almost 2 years.

Keeping Brazil's oil industry on track matters because, even now, it is still expected to account for 41 percent of the net growth in oil output from non-OPEC countries through 2021, based on the IEA's forecasts. That is less than the extra oil expected to come from the U.S. over that period. But there is an important, qualitative difference.

As the IEA and some OPEC officials have been saying, the U.S. shale industry is defined by its speed. With wells drilled and completed in a matter of weeks rather than years, shale output will, it is believed, recover relatively quickly once oil prices rise again (although how quickly that happens after a likely spate of bankruptcies and thousands of workers being shed remains to be seen). This is important because that rebound will tend to cap any increase in prices once excess oil supply has been worked off.

Brazil's offshore fields are very different. They follow the conventional model of requiring huge upfront investment and years of work before a drop of oil gets produced. That's part of the reason why Petrobras is suffering. But it also means that, once oil starts flowing, it would require something like an asteroid strike to persuade the Brazilians to shut it off again.

The success or failure of these huge, conventional oil projects holds the key to what happens with oil prices toward the end of this decade. Projects holding some 27 billion barrels of oil equivalent -- 63 percent of which is oil -- have been delayed worldwide, according to a report published by Wood Mackenzie last month. Roughly 20 billion of that relates to deepwater prospects or oil sands, another reserve type that tends to keep producing whatever the price once the initial investment is sunk. Onshore prospects, which would include shale, account for less than 10 percent of the total.

Giving Petrobras a $10 billion shot in the arm helps to prevent that giant pool of untapped oil expanding even further. How much this motivates Beijing to lend the money is guesswork. Michael Levi of the Council on Foreign Relations suspects this is motivated more by a desire to cement bilateral political relations than securing oil per se. Despite its problems, Brazil remains the biggest economy in South America and, importantly for China, may soon overtake the U.S. as the world's largest exporter of soybeans.

In comparison, China's reliance on Brazil for oil is minimal. While it takes almost a fifth of Brazil's oil exports, that equates to just 2 percent of what China imports.

Still, it can hardly have escaped Beijing's attention that more than half its oil imports still come from that bad neighborhood known as the Middle East and that China's thirst for foreign oil, having already surpassed that of the U.S. in this dubious contest, is only getting more intense:

Send It Over
China's projected crude oil imports
Source: International Energy Agency

Based on the IEA's projections, by 2021, China's import needs will have risen by 2.6 million barrels a day -- roughly the same as Brazil's entire output today.

So even if it isn't the primary factor here, floating a loan to Petrobras does help support a source of competing oil supply that will likely be crucial in mitigating OPEC's market share and the risk of price spikes in the next few years as other projects remain on the drawing board. Certainly, it is of a piece with China's willingness to lend to other dubious debtors in the oil world, such as Russia and Venezuela.

And like the optimists buying freshly printed stock in U.S. E&P companies, China's check helps delay the reckoning for oil producers that little bit more.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net