LOS ANGELES (MarketWatch) -- Brazilian oil giant Petroleo Brasileiro SA is on the verge of pricing what would be the largest share offering on record, though the massive sale may still fall short of funding its ambitious oil production plans.

The state-run company, better known as Petrobras PBR, +1.86% , is expected to price an initial offering of 3.75 billion common stock and preferred shares in Sao Paulo as early as Thursday evening. With the company recently bumping up the number of additional shares that it may sell to meet strong demand, the share sale could raise as much as $78 billion based on recent trading prices.

That amount would outstrip the $36.8 billion offering by Japanese telecommunications firm Nippon Telegraph and Telephone Corp. NTT, +2.39% in 1987. It would also dwarf the initial public offering by Agricultural Bank of China (1288)(601288), which raised $22.1 billion earlier this year, according to data from Dealogic.

Exploration funding

The share sale will be the fruit of a lengthy process undertaken by Petrobras to fund its five-year, $224 billion investment plan, which is centered largely on oil exploration and development in what appears to be petroleum-laden deep waters off the coast of Brazil. Petrobras aims to double oil output by 2014 to 3.9 million barrels a day.

The offering will also greatly expand the Brazilian government’s stake in future oil production gains. The share-sale process includes the issuance by Petrobras of $42.5 billion in stock to the Brazilian government in exchange for rights to explore and develop 4.999 billion barrels of oil- equivalent reserves in six oil fields, including the Franco field off the coast of Rio de Janeiro. The price-per-barrel of $8.51 was higher than analyst estimates of $5 to $7.

But the sale is expected to severely dilute existing shareholders, a factor that has weighed on Petrobras’ stock this year. And some analysts say even the large offering may fall short of its investment plans, which may prompt Petrobras to tap the bond market as well.

Expanded offering

Petrobras earlier this month filed to sell 1.59 billion preferred shares and 2.17 billion common shares. Based on those plans, the company would raise about 41.3 billion reals ($24 billion) in preferred stock and 64.4 billion reals ($37.5 billion) in common shares.

Then late last week, the oil company said it was increasing its plans to sell even more shares if demand is strong, boosting the possible total share sale nearer to $78 billion. It’s planning to sell an additional 940 million shares if investors clamor for the stock, up from plans to sell an additional 564 million shares, potentially bringing in another 27.9 billion reals ($16.2 billion) based on Wednesday’s closing prices.

Petrobras’ board of directors is expected to meet Thursday to approve the final share price, wrote the emerging markets team at RBC Capital Markets on Wednesday, which also cautioned that may result in a delay in the public announcement of the pricing.

The potential increase in additional shares indicates higher demand, but “from whom and at which prices?” wrote UBS in a clients’ note this week.

“We think demand from [minority investors] and federally-owned entities could reach the desired amount,” to secure $20 billion to $25 billion in cash from minority investors, “but below current market prices,” wrote UBS analyst Lilyanna Yang. “Foreign [sovereign wealth funds’] behaviour remains unclear.”

The moves by Petrobras have taken a toll on the company’s preferred and common shares in Sao Paulo, where each have slid 29% this year. U.S.-listed shares of Petrobras have fallen 27%.

If fully subscribed, UBS is expecting more pressure on the shares. It expects its original 2011 per-share earnings dilution estimate will increase to 30% from 26%. The broker has a sell rating on Petrobras’ common shares, and has said it prefers “the cheaper” preferred shares.

The share sale may not satiate the company’s capital-raising needs.

Daniel Yergin on Future Energy Demand

“Given its investment plans, many observers expect the oil company to have to tap the bond market too,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a note to clients Tuesday. “This is appears to be weighing on [Petrobras’] bonds more so than share prices.”

Real rallies in advance

Anticipation of the share sale has in part fueled a nearly 5% appreciation in Brazil’s currency USDBRL, +0.02% since the end of June because of hefty dollar inflows by investors preparing to taking part in the offering.

The central bank about two weeks ago started twice-daily dollar auctions in a bid to curb the increase. The central bank said Tuesday that it purchased about $5.9 billion in U.S. dollars during the first 12 days of this month. The central bank usually purchases no more than $2 billion to $2.5 billion each month, according to RBC Capital Markets.

This week, the Brazilian government also said they will be “no limits” on its sovereign wealth fund to make dollar purchases.

Previously, the share sale had been expected to launch in July.