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Petrobras' pre-salt plans under threat

The financial crisis is threatening Petrobras' plans to fast-track pre-salt reserves development, offering opportunities for foreign firms. China's CNOOC is among the interested investors, writes Robert Cauclanis

BRAZIL'S Petrobras is set to become increasingly dependent on partnerships with foreign investors to develop its high-cost pre-salt resources. With the oil price having fallen by nearly two-thirds from its mid-year peaks and with credit scarce, discussions with potential investors appear to be under way already. China National Offshore Oil Corporation (CNOOC), is hoping to make a multi-billion dollar investment in partnership with Petrobras in the pre-salt, according to CNOOC's chief executive, Fu Chengyu.

Since November 2007, Petrobras and various partners have discovered 8bn-12bn recoverable barrels of oil equivalent (boe) in the ultra-deep waters of the Santos basin – beneath a large salt layer, which, in places, is up to 2,000 metres thick.

Brazilian officials and industry analysts expect further drilling to expand Brazil's pre-salt reserves to 30bn-80bn recoverable boe. But the country's finance minister, Guido Mantega, says this may require investment of $400m-0.6bn.

High-cost ventures

Costs are certainly among the highest in the world. Petrobras' first well at Brazil's offshore Tupi field – drilled last year in water depths of 2,100 metres – cost $240m. Although costs were substantially reduced for the drilling of the second well, it still cost $60m.

The drop in oil prices since July and the scarcity of credit for funding new projects have threatened Petrobras' plans to fast-track the development of these newly discovered resources. They have also put the economic case for rapid commercial development into question: Petrobras claims its pre-salt oil reserves would be profitable even if Brent crude prices were to fall as far as $50 a barrel. But the International Energy Agency says prices of $60/b would be needed.

Given the instability of financial markets and the lower oil price, Petrobras has delayed the release of an updated long-term spending plan – from September until this month at the earliest.

Analysts, meanwhile, have been attempting to assess the effect of the financial crisis on Brazil's oil industry. According to a recent UBS report, Petrobras' portfolio of projects, including pre-salt oil exploration and production, require $32.6bn a year of investment until 2013. If Brent averaged $100/b over that period, Petrobras, which produces nearly 2m barrels a day (b/d) of oil, can count largely on its own cash flow to fund the investments, says UBS. But the bank estimates that should Brent average $80/b, Petrobras would need $43bn in new debt – quadrupling its present debt portfolio, which amounts to $14.2bn.

Petrobras' pre-salt plans involve the installation of 10 offshore production systems by 2017, with the aim of producing more than 1.26m b/d from several fields. The company plans to place $115bn in orders for offshore equipment and services by 2017, according to energy minister Edison Lobao.

Petrobras already has some foreign partners in pre-salt prospects. They include the UK's BG Group and Portugal's Galp Energia – at Tupi – and ExxonMobil, Shell and Repsol YPF elsewhere. CNOOC believes it can join that group. "We will take advantage of the problems that exist in other markets right now," Fu Chengyu told a local newspaper in October. His company, he said, "can finance a project worth many billions of dollars in Brazil. That is certain."

Petrobras, which has been in talks with CNOOC on possible offshore ventures in China since 2004, was planning to send a high-level delegation to Beijing in November to discuss potential joint ventures.

But even if Petrobras and its partners have the financial resources, they may not be able to acquire enough rigs to do the job. Petrobras wants to acquire 60 deep-water rigs for its Brazilian operations by 2018, which would put more rigs capable of drilling in 2,000 metres of water under its control than any other company.

However, some of the contractors that are supposed to be supplying the units are facing their own financial problems. Petrobras wants to order at least 28 deep-water rigs from shipyards in Brazil; many of its potential suppliers are newly established – and may struggle in the prevailing economic climate. Its order book also includes rigs from relatively inexperienced overseas suppliers, some of which do not have strong cash positions and could be stretched to complete rigs that typically cost $0.6bn or more to build. One of the contractors, Norway's MPF, recently filed for bankruptcy.

Indeed, up to one-fifth of the deep-water rigs already on order worldwide may face delays or cancellation because of the credit crunch, according to a recent report from Pritchard Capital Partners.

The Chávez challenge: staying powerful as oil price plunges

CAN Venezuela's big-spending socialist leader, Hugo Chávez, stay in power if oil prices remain at $60 a barrel? The coming year may tell, writes Robert Cauclanis.

Between Chávez' assumption of power, in early 1999, and mid-2008, the price of crude oil – which accounts for 90% of Venezuela's exports – rose by a factor of 14. This enabled Chávez – whose administration depends on oil sales for more than half of its revenue – to channel billions of dollars into his discretionary social spending programmes at home, protect the Bolivar with currency controls, renationalise various industries, including energy, steel and telecommunications, and impose harsh new operating terms on foreign upstream investors – eventually forcing ExxonMobil and ConocoPhillips to leave the country. In addition, the country was able to ship around 300,000 barrels a day (b/d) of crude, at deep discounts, to political allies in countries such as Cuba, Nicaragua, Argentina and Bolivia – despite domestic production falling to around 2.4m b/d, from more than 3m b/d as recently as 2002.

But following the 60% fall in oil prices since July, he has little choice but to rein in the spending that has helped him maintain his popularity. Central Bank data show the government spent as much as 50% more in the first half of 2008 than it had in the year-earlier period. Next year's budget, in which spending is expected to rise again, is calculated on the assumption that Venezuela's heavy crude will achieve a price of $60 a barrel. But its market value has recently dipped below that level. Chávez said recently that his spending programmes could be under threat if oil stays under $80/b. The government has already approved salary raises of more than 30% for state workers, in a bid to keep up with inflation that has been running at 36%.

Chávez claims foreign reserves of $40bn can help it weather the storm, although Venezuela also has around $44bn in external debt. In a late-October report, Moody's Investors Service said Chávez could burn through Venezuela's savings in less than six months even if oil prices were at $70/b.

According to local analysts, each $10/b drop in prices means a $5bn revenue shortfall for the government over a year. To keep up the frenzied pace of spending, Venezuela would require oil prices of more than $100/b, they say. n



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