As reported at Bloomberg.com, George Soros purchased an $811 million stake in Petroleo Brasileiro SA (better known as Petrobras) in Q2. The Brazilian oil company is now the largest holding in his fund, amounting to 22 percent of the total $3.68 billion of stocks and American depositary receipts held by Soros Fund Management LLC. Of course, crude oil has taken a dive in the last month, helping to push Petrobras down 28 percent since his purchase and costing Soros's $235 million. I guess we would all like to be in a position to lose nearly a quarter billion dollars and still be "OK". Then again, if Soros holds tight, he could end up doing well.

While the timing for Soros may not be perfect for this trade, a number of other people are also betting on Petrobras. As quoted by Ricardo Kobayashi from UBS Pactual SA: "Petrobras has something that other oil companies don't have: oil - lots of it and they're going to find more. If you can buy now and hang on, if you have the staying power, it's great.'' As written in a previous post , estimates have the Tupi-area fields in Brazil costing between $200-$240 billion to develop, in part due to deepwater rigs causing $600,000 a day to rent, forcing Petrobras to look for capital. Yet the cost might eventually be worth it given that the offshore fields are expected to hold up to 50 billion barrels. Petrobras has already leased approximately 80% of the deepest-drilling offshore rigs (see post). They are also buying new rigs and production platforms. If oil prices stabilize, companies to consider would be Transocean (RIG), Nobel (NE), and Nabors (NBR), each of which have sold off with lower crude prices, but each of which are also near some key support levels. For longer-term investment, some capital-intensive E&P oil companies such as Exxon Mobil (XOM) should do well, even without direct investment. Of course, this all requires crude oil to stabilize, probably stay over $100 a barrel, and potentially continue its march higher. If not, you may be experiencing the short-term returns of Soro, and not necessarily the longer-term ones.

Cambridge Energy Research Associates is estimating that the Tupi-area fields in Brazil will cost between $200-$240 billion to develop. As reported in Bloomberg, labor and equipment costs are rising as oil prices increase. Recently, deepwater rigs have received rents of $600,000 a day. As a result of the huge project, Brazil and Petroleo Brasileiro SA will need international partners with lots of capital. Nonetheless, the effort and cost might be worth it given that the offshore fields are expected to hold up to 50 billion barrels, or $6 trillion of petroleum at today's prices. If estimates are correct, the wells could help to make Brazil a top 10 oil producer.

As discussed before, Petrobras has already leased approximately 80% of the deepest-drilling offshore rigs. Astonishingly, the company also plans to hire 14,000 engineers, geologist, and drillers to help with the project. They are also buying new rigs and production platforms. As periphery plays in the short-term, this is certainly good news for the drilling contractors, such as Transocean (RIG), Nobel (NE), and Nabors (NBR). For longer-term investment, some capital-intensive E&P oil companies such as Exxon Mobil (XOM) should do well, although these companies may require direct involvement to see any benefit.

UBS is projecting that crude oil will have a yearly average of $156 a barrel by the year 2012, with the price rising steadily over the next four years, even though they see oil averaging $115 a barrel this year, about $10 less than the recent highs. This is a reversal from earlier coverage which predicted a pullback in oil prices as demand fell in the face of a potential U.S. recession. UBS has also stressed that it believes the increase in prices are mainly due to demand growth (not met by equal supply growth), rather than speculation.

Who does UBS see as benefiting from this increase in oil prices over the next four years? As to the major oil companies, UBS believes Chevron (CVX) will benefit, in addition to Occidental Petroleum (OXY), Apache (APA), ConocoPhillips (COP), and Exxon Mobil (XOM), all of which have buy recommendations. In addition to the major oil companies, UBS has also initiated coverage of oil service, drilling, and equipment firms. Current buy recommendations include Transocean (RIG), Diamond Offshore Drilling (DO), Noble (NE), Ensco International (ESV), Atwood Oceanics (ATW), and Rowan (RDC).

Of the group, the oil services and equipment analyst at UBS prefers Transocean, a recommendation that is due in part to the recent news of Petrobras locking up 80% of the deep water rigs, while also attempting to extend contracts with Transocean for over three more years (see earlier post). Current daily rates are topping over $600,000 a day for leasing deep water rigs, almost three times the average rate of $219,700 just a little over 6 months ago. A number of analysts are also picking up on this story.

Bloomberg is reporting how Petrobras (PBR), the state-owned Brazilian oil company, has leased around 80% of the world's deep water offshore drilling oil rigs. The rigs can drill in water approaching 10,000 feet in depth. Currently, the world has a supply of 21 such rigs that are capable of such depths.

Given the need for increased supply to meet current demand (which is slightly outstripping supply), producers are moving to more deep water exploration. While placing rigs under contract can be expensive, it can also give Petrobras a strategic advantage. Not only will they have more ability to tap resources that may end up being extensive, the company is also forcing competitors to pay higher rents for available rigs, in some cases as much as $50,000 more per day. The contract rates Petrobras currently has in place range from $410,000 to $580,000 per day. Truly amazing. Who is the big winner? Possibly Transocean (RIG), the world's largest offshore driller. Petrobras is attempting to extend its leases with Transocean 3 years beyond current expiration dates.