So which would you rather own, Petrobras (PBR) or StatoilHydro (STO)?

On the surface that’s a no brainer.

Petrobras is sitting on new deep sea finds in the South Atlantic that will, probably, double the company’s oil reserves.

StatoilHydro’s production is concentrated in the huge but declining fields of the Norwegian continental shelf.

Why would you even consider putting money anywhere other than Petrobras?

Because as any geologist will tell you, a promising surface formation can be deceptive. And you really can’t tell what you’ve got until you drill down deep.

Let’s get out the drill bits on these two stocks, okay?

You probably know the basic Petrobras story. The company is one of the fastest growing oil companies in the world. Production hit a record 2,059,000 barrels a day on May 5, 2009. In the first quarter of 2009 production climbed 6% from the first quarter of 2008.

But that’s nothing compared to what might be coming. The company has discovered what may be huge reserves of oil and gas—in the South Atlantic. The fields could eventually rank among the largest in the world. The Tupi field alone, discovered in 2007, could hold 5 billion to 8 billion barrels of oil. With that one field, Brazil would move ahead of Canada and Mexico in the ranks of the world’s oil powers.

And even if the early reports are inflated with understandable hyperbole, they make Petrobras one of the few oil companies in the world with the potential to increase production every year for the next ten years.

And you probably know about the geological and business risks to this story. The three mega fields that Petrobras may have discovered—Tupi in 2007, Jupiter in 2008, and Iguacu in 2009—are all covered by 15,000 to 20,000 feet of sea water. And a layer of sediment. And a layer of salt. That geology will push current drilling technology to its limits and makes it extremely difficult to tell how much oil is actually down there and recoverable. It also pushes real production volumes from these fields off to 2015 or 2017. And because this drilling will be so challenging this will be expensive oil to produce.

Petrobras’s long term business plan calls for investing $174 billion over the next five years in developing its resources. So far the company says it has $30 billion in hand, including $10 billion from China’s Sinopec in exchange for 200,000 barrels of oil a day for 10 years.

But you may not have focused on the political risks: The politicians in Brasilia may yet take a good part of the rewards away from Petrobras. Petrobras was a totally state-owned oil company until 1997 and the government still owns about 56% of the company’s stock.

That means politicians have considerable say over the direction of the company. And they’re become more willing to exercise that authority as the company has grown richer and more powerful.

The danger comes from two directions.

First, there is simple political disruption from the opposition to President Luiz Lula da Silva’s government. This takes the form currently of charges that the company evaded taxes and overpaid on contracts as a way to reward the president’s political allies.

An 11-member Senate committee, led by one of the president’s political allies, is investigating.

I don’t think the charges are a serious long-term threat to Petrobras of the value of investors’ holding in the company.

Second, there are efforts to limit Petrobras’s ability to profit from those deep sea discoveries. I take these much more seriously.

A government committee is now putting together a legal framework to govern who owns the so-far unassigned rights in what is called the sub-salt area where the oil lies. This isn’t exactly a minor issue. Those unassigned rights make up 62% of the total.

One plan, and one with substantial support, would vest control of all these unassigned rights in a new company—totally owned by the government—that would partner with any oil company, including Petrobras, in the exploration and production of oil from the sub-salt deposits.

The creation of a new company that controlled 62% of the sub-salt rights would be a huge deal or no big deal depending on how the government decides to split up the revenue. Too big a share to the new company and Petrobras would not only be much less profitable than currently projected but might not have enough cash flow to finance the development of these deposits.

It’s enough to make me nervous. Brazil is still a very poor country. Cash from this oil would b e very useful in improving education or healthcare or the country’s infrastructure. It will be tempting to raid these projected cash flows even before they materialize.

We know what a mess a national oil company can become if politicians milk the cash cow dry. In Mexico, where Petroleos Mexicanos, Pemex, is the source of the majority of the national budget, oil production is in collapse because Pemex has underinvested in its own fields for decades. Production is projected to fall to 2.6 million barrels of oil a day this year, according to energy minister Georgina Kessell. On July 30, the company cut its forecast to 2.65 million barrels a day from an earlier estimate of 2.8 million.

The risk/reward profile is very different at Norway’s StatoilHydro.

Yes, this is also an oil company that is majority owned by its national government. The government’s stake is set to increase to 67% as a result of the company’s merger with Norsk Hydro.

But the legal framework for that ownership is significantly different. The government has no operational control over StatoilHydro. And the government has decided to bank its share of the revenue it collects from Statoil into a national “when the oil runs out” fund. Norway is a relatively rich country with a small population so its politicians face much less pressure to milk the cow dry.

Although I’d say that the political risk from owning StatoilHydro is less than from owning Petrobras, the production risk is higher. The company’s existing fields are aging. That requires the company to spend big bucks on advanced recovery techniques that keep the oil flowing from older wells—at a price. There’s still plenty of oil and natural gas to be found on the Norwegian continental shelf but it’s likely to be found in smaller pools that are more expensive to exploit.

That’s forced the company to move in three directions to increase production.

First, it has been buying reserves in other countries. For example, StatoilHydro was one of the companies that bailed Chesapeake Energy (CHK) out of its cash flow squeeze by buying natural gas assets in the   United States. (See my August 21 post, “Natural gas pains” for how to invest in U.S. natural gas companies. ADD LINK). In its deal with Chesapeake Energy StatoilHydro bought into the Marcellus gas shale region.

Second, the company is increasingly shifting its production mix toward natural gas—production is still climbing in its offshore fields—and away from oil. That plays to one of the company’s strengths—it owns the largest off-shore natural gas pipeline system in the world—and to increasing worries in Europe about over-reliance for natural gas supplies on Russia’s Gazprom. StatoilHydro is the No. 2 supplier of natural gas in Europe.

Third, StatoilHydro is pushing north into the Arctic waters if shares with Russia. (So far at least Russia regards StatoilHydro as a useful partner because the company can provide the extreme-weather drilling technology Russia needs to explore its shares of these waters.)

Because of its extreme weather, the area is relatively under-explored even though many guess-timates say this sector of the continental shelf is rich in oil and gas. (The gradual disappearance of the Arctic ice pack is an environmental disaster but it will make life easier for oil companies exploring these seas.) StatoilHydro has already found oil at the Obesum well in the Barents Sea.

How do I add up these risks and rewards?

I think it’s worth owning Petrobras for its roll-the-dice upside. If the company can dodge political disaster, it will come out a huge winner.

I think shares of StatoilHydro are less risky and a bargain because investors in general are under-valuing the company’s natural gas pipeline infrastructure and the prospects for new discoveries in the Arctic.

Which you buy depends on the risk you want to take in your portfolio and what else you own in your portfolio.

I own them both but I own about three times as much StatoilHydro as I do Petrobras.

(Full disclosure: I own shares of Petrobras and StatoilHydro in my personal portfolio.)