Can Brazil’s national oil company handle the country’s oil boom?

In 2007, Brazil discovered massive oil reserves in the deep waters off its coast, and ever since Brazilians have been giddy over what this windfall could mean for the country — not least the country’s president, Luiz Inácio Lula da Silva. Lula has used Brazil’s burgeoning oil wealth to assert a greater role for the country on the world stage, establishing an ambitious foreign aid and development fund and playing diplomatic confidant to Iran.

But a growing mountain of debt at Petrobras, the country’s national oil company, and the BP oil spill are leading investors, economists, and other commentators to have second thoughts about the country’s oil rush. A couple weeks ago, John Gall, the executive director at the São Paulo-based Fernand Braudel Institute of World Economics, wrote an op-ed in the Financial Times arguing that the ambitions of Petrobras and the Brazilian government are pushing the state-controlled company’s oil development “too fast, on too great a scale, and with too high a profile.”

At the heart of his argument is the Rio de Janeiro-based company’s fast-rising debt, the result of the heaps of capital required to develop Brazil’s recent oil finds. The fields are massive, estimated to contain some 50 billion barrels of oil. But they are located over 200 miles from Brazil’s southeast coast, and under a thick layer of salt below the seafloor, placing them at an average of 18,000 feet beneath the surface, according to the U.S. Energy Information Administration. They are some of the most technically challenging reserves ever developed, and enormous sums are needed to extract oil from them.

The Brazilian government and market pressures have added to these funding difficulties. Legislation under consideration in Brasilia would require Petrobras to hold a 30 percent minimum stake in all future drilling leases and to be the lone operator in all of the remaining oil blocks. Such an expansion could overwhelm the company’s financial and technical capacity, a concern that has already been spotted by market observers. As expenditures rose, so did Petrobras’s debt, while its stock price declined by 27 percent this year and Standard and Poor’s downgraded the company’s rating to BBB-, one notch above junk status. Petrobras is trying to remedy its debt problems with a high-profile $25 billion share offering, but the offering was postponed from June to September, and may even be postponed again as Petrobras and Brazil’s government continue to wrangle over how to price the oil in terms of company stock. According to Amy Stillman at the FT, investors and analysts are worried that Brasilia has “overloaded” Petrobras.

And, of course, the BP spill in the Gulf of Mexico has cast a pall over offshore drilling elsewhere as well. The reserves in Brazil’s Santos Basin are over twice as far from land as the Macondo well, and far deeper below the seabed. A blown-out well in such conditions would demand a spill response even more challenging than the one organized in the Gulf, and it’s uncertain whether Petrobras or the Brazilian government could mount such an effort, particularly if Petrobras already has its hands full operating the vast majority of the region’s rigs.