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The deepening crisis at Sete Brasil

The Brazilian rig builder once had a bright future. Now the Carwash scandal and mounting debts have left it on the brink of bankruptcy

Sete Brasil's fortunes were tied to Petrobras's from the start. While the government saw the state firm as a national champion for developing the pre-salt oilfields, Sete Brasil was to be the domestic coordinator for construction, delivery and operation of the deep-water rigs Petrobras and others would need. Strict local-content rules would shield the new firm from international competition.

As Petrobras's plans grew more ambitious, Sete Brasil's portfolio swelled. The company secured deals to build an armada of 29 deep-water rigs at five shipyards along Brazil's coast through the end of the decade, which it said would create 150,000 jobs. That would have made it the world's largest ultra-deep-water rig operator, surpassing international mainstays Transocean, Noble and Seadrill. That backlog of contracts was once worth $89bn, more than its next seven largest international competitors combined.

But as Petrobras has been forced to rein in its ambitions, Sete Brasil's business model has crumbled. In its most recent business plan, Petrobras cut the number of new offshore production vessels it plans to deploy through the end of the decade by half, from 22 to 11. Even that reduced workload looks increasingly optimistic the longer crude prices languish below the $45 a barrel Petrobras says is needed for the pre-salt projects.

For Sete Brasil, that means it has started building rigs that may never be needed, or at least not anytime soon. Understandably, its financial backers and international partners are skittish. The company hasn't been able to secure financing and its partners have been withdrawing from projects. In January, Mitsubishipulled out of a key but troubled shipyard that was to supply Sete Brasil. At the start of 2015, the company appeared to have a lifeline in the form of almost $4bn in loans from the state development bank. But when Sete Brasil was accused of accepting bribes from its shipyards as part of the Carwash corruption scheme in February, this triggered an anti-corruption clause in the agreement and effectively quashed the deal.

Since then, Sete Brasil has sought to win over investors with a restructuring plan that would see it slash spending and build just 14 to 15 rigs. It needs to convince Petrobras, but the state oil company hasn't been eager to reach a deal. The firm has demanded Sete Brasil bring in more international operators to improve efficiency and performance, and proposed strong penalties for local content non-compliance. Some analysts see these moves as Petrobras trying to block Sete Brasil's recovery, which could ultimately lead to bankruptcy. While politically problematic for Brasilia, Sete Brasil's collapse could free up Petrobras to use cheaper and more reliable international rig suppliers.

A fragile state

Meanwhile, Sete Brasil's financial situation has grown more perilous. In December, S&P, the credit rating agency, downgraded Sete Brasil's debt again and warned of an "imminent risk of default". The company then announced another round of layoffs that local press has reported will leave the company with just 20 employees. Bloomberg reported that Sete Brasil's largest investors could meet in January to discuss a bankruptcy filing. The company told Petroleum Economist it was still in talks with Petrobras to find a viable restructuring plan. Jefferies, an investment bank, says it now expects only the five of the originally planned 29 rigs that are furthest along in construction will be built.

The collapse of Sete Brasil would be another embarrassment for embattled president Dilma Rousseff and lead to billions of dollars of writedowns at Petrobras and some of Brazil's largest financial institutions. Sete Brasil also has contracts throughout the domestic supply chain, and these too may be under threat. The ripples would be felt well beyond Brazil. American driller National Oilwell Varco (NOV), for instance, has $3bn in contracts with Sete Brasil, a third of its backlog, which may never come to fruition. Jefferies argues that the loss of those contracts could make NOV a takeover target. Singapore's two largest shipbuilders, Keppel Corporation and Sembcorp Marine, hold major construction contracts with Sete Brasil that make up more than half of their order books.

Sete Brasil was to be a symbol of Brazil's newfound oil-fuelled industrial might. Now it stands as a just another reminder of the many missteps that have put that goal out of reach.

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