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Petrobras keeps its options open

Brazil's state-controlled oil company is not cutting investment yet, but may have to if oil prices continue to fall or its financing options look too unappealing

PETROBRAS is determined to avoid scaling back its spending plans because of adverse market conditions. The company will accelerate investment in its highly prospective pre-salt areas chief executive José Gabrielli assured investors last month and – at present – intends to proceed with all the 500 or so projects in its rolling five-year business plan, at a total cost of $174.4bn.

The firm will spend heavily in the downstream, particularly refining, which will absorb 73% of its $47.8bn downstream budget, boosting capacity from 1.791m b/d in 2009 to 2.270m b/d in 2013 in order to meet rapidly rising domestic products demand. Further expansions to 3.012m b/d are envisaged by 2020, through revamps of existing plants and the addition of three large new refineries.

It is also planning substantial investments in the gas and power sectors -- $11.8bn over five years – which is to include two liquefied natural gas import facilities, in addition to two regasification terminals that it is bringing on stream this year. It will also invest $5.6bn in the petrochemicals industry and, with a budget of $2.8bn, will maintain its interest in biofuels, working on new biodiesel technology, and "participating in Brazil's ethanol chain and developing global markets for Brazilian ethanol".

But most – $104.6bn – of its five-year budget is to be spent on exploration and production, a 60% increase from the 2008-2012 plan's $65.1bn upstream spending forecast. That is, unless market conditions deteriorate further, which Gabrielli acknowledges could force the state-controlled oil company into a rethink.

A good 18 months

The last 18 months have been good for Petrobras. Proved reserves, as measured by US Securities and Exchange Commission (SEC) criteria, were down by 5% at end-2008 compared with end-2007, to 10.274bn barrels of oil equivalent (boe). But that figure does not include any of the firm's recent discoveries in its promising pre-salt acreage. Since August 2007, when it released its last strategic plan, Petrobras has made discoveries that could yield 10bn barrels of oil equivalent (boe) in pre-salt areas such as Tupi and Iara.

As a result, reserves should grow robustly over the next few years, as developments are declared commercial, starting – probably – with the 5bn-8bn boe Tupi field at the end of 2010. The company's pre-salt prospects could, eventually, lead to a doubling in the company's recoverable reserves – as measured by Society of Petroleum Engineers criteria – to 28bn boe.

Production has also risen since August 2007 – by 7%, to 2.436m boe/d. And Petrobras' growth plans are ambitious: it is aiming to increase production from 2.4m boe/d last year to 3.655m boe/d by 2013 and 5.429m boe/d by 2020.

But achieving its targets is far from straightforward, because of the relatively low oil price, stubbornly high costs and the shortage of credit. Gabrielli says Petrobras is "fully financed" for 2009, assuming an average oil price of at least $37/b. He is also hopeful that financing arrangements for 2010 will be achievable, partly because of cost-cutting measures the company intends to implement over the next three years.
Its performance certainly puts it on a par with the majors by most measures: it ranks among the top-10 private-sector firms for reserves, output, refining capacity, market capitalisation and investment, based on 2007 data. It is the world's largest deep-water operator, accounting, it says, for 23% of total deep-water production. And its overseas presence is becoming stronger: it hopes to boost output from international operations from 224,000 boe/d in 2008 to 0.632m boe/d by 2020.

However, the company accepts that it may have to raise funds from sources it previously considered unattractive. Having already secured $10bn in funding from Brazil's state-owned development bank, BNDES, Petrobras needs $8.9bn to meet next year's capital expenditure (capex) plans, Gabrielli said at a briefing in London on 2 February. The firm must also refinance a $5bn bridging loan in the next two years.

In late January, Gabrielli said Petrobras – which is rated BBB by Standard and Poor's and Fitch – had no plans to sell bonds in 2009 because of high borrowing costs. But on 4 February, the company sold $1.5bn in 10-year dollar-denominated bonds; encouragingly for Petrobras, the 8.125% yield was below the initial guidance of 8.25% because of robust demand.

Petrobras, which seems prepared to adapt to changing market circumstances, has a few other financing tricks up its sleeve. Gabrielli says it could securitise future oil sales to raise cash – guaranteeing future sales of oil and products to countries that assist with financing. Last month it closed a deal with China Development Bank, under which it will receive funding of up to $10bn in exchange for future oil supplies.

As a last resort, it might even consider selling shares in some of its oilfields, chief financial officer Almir Barbassa said during last month's meeting with investors in London. But this option is not favoured by Gabrielli and would be considered only if no other financing is available. The company would be more likely to cut back on investment: according to Gabrielli, Petrobras could put 35% of its proposed projects on hold – those in the early planning stages – without affecting projects already in development. And, just by cutting 15% of its investment plans for 2010, it could reduce its capital requirements for that year by $4bn, it says.

However, Petrobras' problems do not just relate to its own finances, but to those of its suppliers. The company is set to receive 33 new oil rigs by 2012, Erardo Barbosa, head of exploration services, said at a press conference in Rio de Janeiro last month, adding to the 40 rigs it operates or leases at present. There may be "some construction issues" for rigs due for delivery in the 2010-2012 period, Gabrielli admits. Indeed, financing difficulties in the supply chain have already started to emerge: some suppliers of drilling rigs – such as Bermuda-based Scorpion Offshore, which cancelled the construction of a $0.7bn rig in Singapore because of a lack of financing – and other equipment have struggled or failed to meet Petrobras' contracts.

A further 28 rigs – to be built in Brazil – are due for delivery after 2013, according to Gabrielli, who told the London press conference that Petrobras may even consider buying rigs outright instead of leasing them or taking stakes in drilling companies if suppliers struggle to finance construction. "We may consider the possibility to have some of these rigs for us – we are hiring them, but may consider having some of our own rigs," he said. However, this seems unlikely; the following day, Petrobras released a press release clarifying Gabrielli's comments: "If a manufacturer were in financial trouble, Petrobras could study the matter," it said. "But it would only do so under a very special set of circumstances. Petrobras is not presently considering this possibility."

Moody's Investors Service did not change Petrobras' credit ratings as a result of its new spending projections, which are 55% higher than those set out in the previous five-year plan. In a research note, analysts Steven Wood and Thomas Coleman said they were encouraged by sizeable production that is due to come on stream in the next few years, in addition to continued strong government support, partly through long-term financing provided by BNDES. But they also said Petrobras "faces sizeable challenges both in arranging financing and relating to geology, technology, access to materials, rigs and services, staging of development, and the political environment". Despite its combativeness and determination to be resourceful and inventive in difficult circumstances, Petrobras faces an uncertain few months, at the least.

Pre-salt to yield sweet output growth

PETROBRAS plans to spend $28bn by 2013 on pre-salt projects and to boost production from pre-salt fields to 1.815m barrels a day (b/d) of oil and 40m cubic metres a day (cm/d) of gas by 2020. Between 2009 and 2010, it expects spending on pre-salt projects, mostly on the Santos basin, to amount to $111.5bn.

By 2013, the company says, pre-salt oil production should reach 219,000 b/d and gas production should amount to 7m cm/d and 0.582m b/d by 2015. Between 2015 and 2020, that figure should more than triple, it says.

Production from an extended well test at Tupi, which Petrobras thinks holds 5bn-8bn barrels of oil equivalent (boe) of recoverable reserves, should start in the second quarter, with production reaching up to 14,000 b/d. That is expected to rise to 100,000 b/d as the pilot development scheme comes on stream in late 2010. A further expansion is envisaged in 2013. An extended well test at Iara, which Petrobras claims contains 3bn-4bn boe of oil and gas, could commence in 2010 or 2011, with production flowing through a floating production, storage and offloading vessel by 2014.

Other significant discoveries in the Santos basin's pre-salt cluster include Carioca, Guara, Jupiter, Parati, Bem-te-vi and Caramba.

Petrobras dashes for LNG

THE 7m cubic metres a day (cm/d) Golar Spirit has become the first vessel to store and regasify liquefied natural gas (LNG) aboard, says Petrobras. And the company has plans – subject to market conditions – to expand its LNG-import capacity with the addition of two new regasification terminals.

Anchored at Pecém, in northeastern Ceará state, Golar Spirit made deliveries in late January to two power plants. It is designed to provide flexible gas supplies to thermoelectric power stations in the northeast of the country.

Brazil's LNG-import capacity will rise to 21m cm/d, when a 14m cm/d unit in Rio de Janeiro state's Guanabara Bay comes on stream around the middle of the year, following the completion of construction in January – five months ahead of schedule. The plant will provide flexible gas supplies to power plants in the southeast.

Petrobras is planning two further LNG-import units, with the aim of bringing LNG-import capacity to 34m cm/d by 2013. That gas would be supplemented by 30m cm/d of piped-in imports from Bolivia, leaving Brazil to supply 71m cm/d from domestic resources – working on the assumption set out in the 2009-13 strategic plan that gas consumption in 2013 will amount to 135m cm/d.



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