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Petrobras set for divestment hit

Economic reality is likely to stall the breakneck speed of the Brazilian firm’s asset sales plan

Brazil’s response to the Covid-19 pandemic has often lurched towards the chaotic. Months of political backbiting between state governors and President Jair Bolsonaro over the gravity of the outbreak have contributed to cases exploding across the country, the loss of two health ministers in as many months and fears that Brazil’s mortality rate could eventually eclipse that of the US.

And the scale of the outbreak, combined with dire economic projections for the rest of the year, could have significant implications for the planned divestments of Brazilian state-controlled oil company Petrobras.  

The downturn may push sales back another year and substantially delay efforts to pay down the company’s hefty debt burden. “Due to the oil price volatility and uncertainties regarding demand, our view is that ongoing deals will only be concluded in 2021,” says Marcelo de Assis, head of Latin American upstream research at consultancy Wood Mackenzie.

“Due to the oil price volatility and uncertainties regarding demand, our view is that ongoing deals will only be concluded in 2021” de Assis, Wood Mackenzie

Need for a rethink

Petrobras had sought to overhaul its portfolio this year, announcing in December that the firm would offload 50pc of its refining capacity and its remaining stakes in several domestic natural gas pipelines. Last year, Brazilian anti-trust regulator Cade ruled that Petrobras must end its domestic refining and natural gas monopolies, the probe resulting in a commitment to sell eight refineries and key pipeline infrastructure including TAG, NTS and gas distribution subsidiary Gaspetro.

But progress has stalled this year, and the only notable divestment in Q1 was a 50pc stake in the company’s Nigerian assets. Petrobras announced just $277mn of assets sold during the quarter, a huge disparity from the $16bn sold across 2019.

And any chance of making up the shortfall in what is left of the year looks decidedly slim. “Asset sales will be limited as M&A typically requires stability in asset prices and the availability of credit, both of which are in short supply in the oil and gas industry these days,” says Muhammed Ghulam, senior associate at US bank Raymond James.

One benefit of the pandemic, though, is that it could help fast-track regulatory processes for the liberalisation of the natural gas sector, with the government eager to unlock further investment in infrastructure. A new gas law is currently being debated in the Brazilian Congress.

$277mn – Q1 divestments

And a financial crunch hitting budgets at sub-national level may also play a role. “The pandemic has deteriorated even further the financial situation of several states, which may expedite the privatisation of local distribution companies, as well as the implementation of state level regulatory frameworks more aligned with the liberalisation of the gas industry,” says Felipe Boechem, partner at Brazilian law firm Lefosse Advogados.

But, on the other hand, the economic downturn may devalue Petrobras’ pipeline assets and impact both on buyers’ appetite and Petrobras’ enthusiasm to sell—with the resulting stasis offsetting any progress achieved in the regulatory arena.  

Putting on the brakes

Lower prices, both for commodities and hence for assets, may also play a role in delays or rescheduling of other midstream and petrochemical divestments. The company has until September to begin the bid process for its Bahia LNG regasification terminal and, at the start of the year, planned to offload its stake in petchems firm Braskem. Petrobras CEO Roberto Castello Branco said in late May that he expected the latter sale to be confirmed before the end of the year or, at the latest, early 2021. 

But Petrobras may have to rethink its offshore divestment strategy given challenges around its planned sales of shallow-water oilfields. “The company may need to seek the sale of interest in larger fields, and in deeper waters, such as Roncador and Marlim, since many of the assets placed on the market by the company today are in shallow waters and on land, with high extraction costs,” says Fernanda Delgado, professor at Brazilian thinktank FGV Energia.

The second phase of the Permanent Offer bidding round, the only licensing round not cancelled in 2020, is likely to be more attractive to potential investors in the Brazilian upstream. Over 700 exploratory blocks will be made available in 12 basins, including the prolific, low-cost pre-salt Campos and Santos basins. Petrobras itself is, of course, registered, alongside 56 other firms including Shell, Total and BP—a level of interest that may far outstrip suitors interested in the shallow-water assets Petrobras hopes to get away.

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