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Anti-austerity protests hit Petrobras

Brazil's oil sector is in the grip of the worst strike in decades, threatening plans to reform the sector and ease the dreaded local content law - as well as hitting output

Brazil's state Petrobras has faced a revolt from the country's oil workers over plans to slash spending, shelve oil projects and sell assets. Strikes over the first three weeks of November shut down dozens of offshore platforms and disrupted downstream operations. Around 100,000 barrels a day (b/d) of output - 5% of Brazil's total - has been shut in, according to Petrobras, though the striking union workers put the figure much higher. It has disrupted Brazil's oil sector more than any strike in the last two decades.

The strikers are demanding Petrobras' new management rip up its austerity plans. In response to the plunging oil price, a crippling corruption scandal, mounting debt and the falling value of the Brazilian real, Petrobras has outlined a series of deep spending cuts and reduced its production targets to restore the company's financial health.

Petrobras plans to invest $19bn in 2016, about half what it spent in 2014. The five-year spending plan has been slashed by more than 40%  steep, even by today's standards. The company also plans to sell off $15.1bn in assets by the end of 2016.

Oil industry employees worry, rightly, that all of this will mean less work for them. At the heights of Brazil's oil boom, the country was promised that hundreds of billions of dollars in new oil investment would create tens of thousands of jobs and fuel an economic boom. Those hopes have evaporated over the past year as Petrobras has been forced to rein in its ambitions.

As part of a deal to get striking workers back on the job, Petrobras has pledged to carry out a review of alternative measures to the planned spending.

But Petrobras has little choice. Its total debt has topped $130bn, by far the largest among publicly-traded oil companies. The gross debt to market capitalization ratio stands at around 65%, up sharply from 37.4% in 2012. Debt repayments rose to $16.5bn in the first nine months of the year, up more than a third from a year earlier. Earnings from January to September were just $971mn, down 60% from last year, and fourth quarter profits will likely be hit by the strikes. Concerns about the company's deteriorating finances led ratings agency Standard & Poor's to downgrade its credit from investment-grade in September.

The fallout from the strikes could extend beyond Petrobras. Lawmakers are looking for ways to get the ailing oil sector back on its feet. And one of the rules they are looking to change are the country's notoriously strict local content requirements, which require companies to hire Brazilians for most of the work they do in the country. The aim was to foster a domestic oil supply chain and keep as much of the country's oil bounty in the country as possible but it has driven up costs and hurt Brazil's competitiveness at a time when oil companies are being much choosier about where they invest.

Foreign companies are calling more loudly to ease the rule and many in Petrobras and Brazil's congress agree. But lawmakers will find it difficult take unpopular steps towards reform, given the mood on the streets.

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