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Petrobras undeterred by tumbling profits

Hefty financial losses and a depressed oil market fail to sway Brazilian NOC from pursuing ambitious upstream strategy

The first half of the year was dire for Brazilian state oil firm Petrobras. The producer posted a combined $10.1bn loss, driven mainly by the oil price shock of Covid-19, currency devaluation and $13bn in impairment charges. But things could have been much worse.

The rapid return of Chinese oil demand in Q2 proved a godsend for the company. Despite the price of Brent falling 42pc and oil exports tumbling by 118,000bl/d in Q2 compared with Q1, shipments bound for China almost doubled to 87pc of total exports, offsetting much of the decline from other regions.

With the gradual reopening of the global economy and a robust Chinese market, Petrobras is forecasting a much better second half of the year. Despite hacking $3.5bn off its original $12bn capex budget, the Brazilian company is maintaining its original upstream target of 2.7mn bl/d for 2020, level with last year’s annual average.

Stepping up production

Growth in the pre-salt remains the core upstream priority for Petrobras. Over the past year, production in the region has grown by 31pc, reaching 1.84mn bl/d oe by Q2. The share of total company output from the Campos and Santos basins alone has almost doubled since Q2 2019, to 33pc.

“The expectation is that we will have a lower lifting cost in the future” Pereira de Oliveira, Petrobras

The world-class Buzios oil field in the Santos basin is Petrobras’ most important asset. In July, the Brazilian company achieved record daily output of 674,000bl/d at the field and is targeting over 2mn bl/d over the next decade. Four floating production, storage and offloading vessels (FPSOs) operate at the field and a fifth, Almirante Barroso, is expected to achieve first oil by 2022. The platform will add another 150,000bl/d in crude capacity.

In Q2, Petrobras approved a tender for a further three FPSOs at the field. The Almirante Tamandare will be the largest FPSO operating in Brazil, capable of producing 225,000bl/d of oil and 12mn m3/d of gas—making it one of the largest in the world. The other two platforms will have a combined capacity of 180,000bl/d and 7.2mn m3/d. It aims to reach 12 by the end of the decade.

Other pre-salt fields will also help drive the company’s production growth strategy and lower lifting costs. In June, an FPSO at the Atapu field in the Santos basin achieved first oil with 150,000bl/d of oil capacity and up to 6mn m3/d for gas.

In 2021, a further two FPSOs at the Sepia and Mero oilfields are scheduled to begin production, adding another 360,000bl/d in capacity. In 2022, the FPSO Anita Garibaldi at Marlim will reach startup with 80,000bl/d capacity, and in 2023 a further two FPSOs will come online at Marlim and Mero with a combined capacity of 250,000bl/d.

More bang for the buck

The result of so much oil coming online will be a substantial reduction in average costs. Already, eight production systems across four pre-salt fields have lowered Petrobras’ lifting costings from $3.8/bl oe in Q2 2019 to $2.4/bl oe in Q2 2020.

The company’s divestment of non-core shallow-water and onshore assets has also dramatically lowered average costs. Over the same period, shallow-water costs have dropped from $29.5/bl oe to $15.9/bl oe and onshore from $19.5/bl oe to $13.4/bl oe.

2.7mn bl/d – 2020 upstream target

“The expectation is that we will have a lower lifting cost in the future,” says Carlos Pereira de Oliveira, Petrobras’ chief E&P executive officer. “We are going to see that, not only in the pre-salt lifting costs, but also when we divest the fields that we have in the shallow waters, and also offshore.”

Petrobras has also cut operating expenses this year to offset the severe economic downturn. On top of capex, it announced plans to reduce the size of its workforce by 22pc by the end of 2021, saving another $800mn/yr.

Petrobras also managed to lower its net debt by $8bn, to $71bn, during the first half of the year, despite the economic conditions. By comparison, in 2015 its debt had ballooned to $126bn. The firm’s cash position similarly improved, adding another $12.1bn this year.

The combined effect is that Petrobras is in a strong financial position to weather the downturn and wait for an oil price recovery.

In addition, “Petrobras has an important advantage compared to many of its peers,” says Muhammed Ghulam, senior associate, equity research, at US bank Raymond James. “Its status as an NOC means that it can withstand a downturn for a longer time than a comparable private sector company could.”

Petrobras predicts that crude will rise $5/bl annually until 2025, when it will peak at $50/bl compared with an average price in 2020 of $25/bl. The pre-salt region is already profitable so an oil price recovery would feed straight through to the company’s bottom line.

Spring cleaning

Petrobras is also pushing ahead with its divestment plan to offload a swathe of non-core assets, streamline its portfolio and pay down company debt. Last year, the producer completed $16bn in asset sales as part of the government’s plan to open up the gas and refining markets to more private investment.

“Petrobras has an important advantage compared to many of its peers” Ghulam, Raymond James

In 2020, asset sales have proven more difficult to come by. Low oil prices and sharply reduced global energy demand have made potential buyers wary of spending. The Brazilian company completed just $277mn in divestments during Q1 and $997mn in Q2, mostly of onshore and shallow-water oil fields and the firm’s remaining 10pc stake in Brazil’s TAG pipeline system.

The offloading of eight refineries has also made little progress this year, but Petrobras remains confident. “We did not see any lack of interest in our refineries,” says Petrobras CEO Roberto Castello Branco. “It is not running at the original pace that we planned, due to the global recession, but we expect to conclude the sales and are confident that, by the end of 2021, we will have closed on all refineries for sale.”

But with Covid-19 infections in Brazil yet to peak, the possibility of further global lockdowns and volatile economic conditions, there is significant doubt surrounding further sales. Lack of domestic demand for oil products hurt Petrobras’ downstream segment in Q2, with sales falling by 14.2pc year-on-year, so it may make sense for it to wait to achieve higher prices after the economic gloom has subsided.

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