Petrobras pulls back spending
Spotlight falls on pre-salt production as Latin American NOC dials down capex
Brazilian state-owned oil company Petrobras has downgraded its five-year upstream spending programme. The firm in September cut $14-24bn from an earlier capex budget of $64bn after reviewing the economic impact of the downturn on its portfolio.
Lowering gross debt has been a key priority for Petrobras since it peaked at over $100bn in 2015. Over the past four years, austerity measures and an aggressive divestment strategy have slashed $39bn from the company’s debt obligations. And it plans to reach an ambitious gross debt target of $60bn by 2022—a 34pc reduction from last year.
But debt has again started to rise this year. Petrobras added another $4bn to gross debt over the first two quarters as low oil prices and falling global demand sunk company profits. Only the quick recovery in Chinese oil demand prevented Petrobras from adding even more to its debt pile.
To optimise upstream performance, Petrobras plans to assign capex to projects with a maximum Brent breakeven of $35/bl. The reduced overall capex spend puts even more focus on the company’s deep and ultra-deepwater pre-salt assets. Petrobras will allocate 71pc of its E&P budget towards driving production growth in the region compared with 59pc in the earlier plan.
$60bn – Gross debt target
Investment will be focused on the giant Buzios pre-salt field. Petrobras has four operational floating production storage and offloading (FPSO) vessels at the field, another under construction and has begun the hiring process for a sixth. Production from the sixth, which will have an oil and gas production capacity of 225,000bl/d and 12mn m3 respectively, is scheduled to start during the second half of 2024.
The NOC is in the process of contracting a further two FPSOs, with first oil planned by 2025. The company anticipates 12 units will be stationed at the field by the end of the decade and has apportioned 35pc of its 2021-25 budget to the project.
Pre-salt production has already started to ramp up this year ahead of more planned FPSOs. Petrobras hit record monthly output figures in Q2 and slashed lifting costs by 37pc year-on-year.
Cost reductions have also been made further afield, in the more accessible post-salt layer. Outlay on completing the first well at the Golfinho field, in the Espirito Santo basin, fell by 50pc in early July compared with the historical average. Completion took less than half the normal time and should save Petrobras $20-35mn/yr for each well at mature post-salt fields.
Shedding non-core assets
Beyond pre-salt growth and efficiency gains, Petrobras has a wide-ranging plan for divestments to further improve its balance sheet. In August, the Brazilian company announced the initial binding stage to offload four thermal power stations—three in the state of Bahia and a fourth in the state of Rio Grande do Sul.
“Petrobras management has, for some time, laid out a plan to focus on its core activities, with particular attention [paid] to deepwater upstream” Szyfman, Machado Meyer Advogados
Brazilian bank XP Investimentos estimates that Petrobras’ 19 thermal power plants combined are worth roughly BRL8.4-8.8bn ($1.6-1.7bn). Others could potentially be put up for auction, depending on the initial sales.
“Activities such as thermal power plants are being revisited from an economic and investment perspective,” says Daniel Szyfman, partner at Brazilian law firm Machado Meyer Advogados. “Petrobras management has, for some time, laid out a plan to focus on its core activities, with particular attention [paid] to deepwater upstream.”
In late August, the Brazilian company announced the sale of 27 onshore oil fields in the state of Espirito Santo. Petrobras offloaded its entire stake in the fields to special purpose entity Karavan SPE Cricare for $155mn. The firm also has further onshore and shallow-water fields it hopes to offload before the end of the year.
While some divestments have stalled, Szyfman remains confident there are still deals to be done in 2020. “While certain oil and gas M&A processes slowed down, they have in most cases resumed,” he says. “Of course, there could always be discussions regarding pricing and risk allocation in relation to the effects of Covid-19, but in general we are seeing that buyers are still interested in Brazilian assets and deals are going through.”