Brazil & Southern Cone - March 2009 (ISSN 1741-4431)

Contrary to other oil majors, which have postponed investment due to weak oil prices, Petrobras is moving forward with a sizeable US$174.4bn investment plan in 2009-2013, in an effort to develop Brazil's vast new offshore hydrocarbons reserves. The plan dovetails with the current policy of the government of President Lula da Silva, which is determined to maintain public capital spending as a means of propping up economic growth in the final two years of Lula's term to 2010. 

Petrobras's chief executive, José Sergio Gabrielli, finally green lighted the plan in late January, following several delays in its publication in late 2008 as global oil prices tumbled. The US$174.4bn 2009-2013 plan is up 55% on the previous 2008-2012 plan (US$112.2.bn). It will be financed largely through projected cash revenues of US$120bn, based on an average crude oil price of US$47/barrel, with the rest financed by debt.

Gabrielli noted that while he expects lower oil prices in 2009 (he suggested prices could average a low US$37/b), investment costs will be contained as capital outlays on machinery and equipment will be lower than expected, due to falling world prices for these inputs. According to the plan, the company will invest US$28.6bn in 2009 alone. It plans to raise US$18.1bn this year - it has already secured US$11.9bn from the state development bank, Bndes, as well as US$5bn from international banks, leaving only US$1.2bn to be raised from other sources. In early February, Petrobras issued US$1.5bn in 10-year dollar-denominated bonds, at a pricey 8.12% annual interest rate, well above the 5.6% it paid at the time of its last issue in 2008.

On 19 February, upon the visit of the Chinese vice premier, Xi Jinping, to Brazil, the company clinched a vital deal with China worth US$10bn. Under the plan, Petrobras will supply the Chinese firms Unipec (a subsidiary of China Petroleum and Chemical Corporation, Sinopec) and PetroChina with a total of between 100,000 and 160,000 barrels of oil a day, in return for US$10bn in financing from the China Development Bank and Sinopec. The agreement also covers the development of joint oil industry projects and potential Chinese supply contracts for Petrobras. 

The deal reflects China's ongoing efforts to secure supplies of key raw materials, like oil, metals, minerals and agricultural commodities. Despite the current economic downturn, the emerging superpower is moving to secure important medium and long term access to these inputs, prompting strong interest in forging strategic partnerships with key Latin American suppliers. The vast bulk of Petrobras investment in the next four years - US$$157.3bn - will be in Brazil, with US$16.8bn destined for projects abroad. Of the total investments, Petrobras will allocate a thumping US$104.6bn for exploration and production, up from US$65bn in the 2008-2012 plan. Much of this new investment will be focused on the giant offshore sub-salt oil fields recently discovered off the Brazilian coast, which by some estimates could contain upwards of 50bn barrels of oil equivalent. The large Tupi field, discovered in November 2007, alone holds an estimated 5bn to 8bn barrels. 

Ahead of the China deal, the head of Exploration Services, Erardo Barbosa, announced that Petrobras would take delivery of 33 new oil rigs by 2012, 11 of which are due in 2009. The company currently owns or operates 40 rigs. Barbosa didn't say how much the rigs would cost, but industry analysts suggest that this type of equipment, which will be located in waters of over 2,000 metres deep, could range in the order of US$1.0bn each. The company was likely well placed to drive a hard bargain in the current environment - it is probably one of the only oil firms putting in such big orders this year. Most of the new wells are destined for the offshore fields in the Santos Basin, in and around the Tupi field. 

Some analysts have estimated the development costs of the Tupi field alone at around US$600bn, and question whether the Santos Basin can be viable at today's low oil prices - these analysts calculate that the investment costs require a minimum price of US$60-US$80/b. However, Gabrielli stresses that Petrobras is focused on the long term and the general consensus is that oil prices will rebound to high levels within two to three years, amid an ongoing mismatch between global demand and supply levels, exacerbated by decisions taken in other oil-producing countries to halt investment in the current economic climate.

The Lula government, which last year signaled it might move to increase state control over the sector, appears to have abandoned this plan in the current climate, probably for fear of limiting Petrobras's access to private investment financing. The plan had caused tensions with Petrobras, which is a mixed capital ownership company. The state has a slight majority of voting stock, some 60% of its capital is held by private shareholders, mostly foreign. 

Snubbing Chávez (and Morales)

Brazil is close to being self sufficient in energy and under the latest Petrobras plan, it is set to become second only to Canada in among oil producers in the Western Hemisphere, with implications for the balance of power in the region.

The latest evidence of this was the government's quiet announcement in late February that it was no longer intending to go ahead with the Gasoducto del Sur, a giant pipeline project designed to transport natural gas from the Caribbean to Argentina, via Venezuela and Northern Brazil. The decision was a slap in the face for President Hugo Chávez , who has been a strong advocate of the plan, with Chávez intending to export Venezuela's gas reserves all over the Southern Cone through the new pipeline.

Government sources quoted in the Spanish daily El Paí­s on 20 February said that Brazil could not justify the plan, which had been initially estimated at around US$25bn, unless there was a major shortage of gas in the region. Brazil is fast developing its own gas supplies, and before too long it hopes to be in a position to export surplus requirements to neighbouring countries like Argentina (and potentially also Chile).

This will also allow Brazil to wean itself off its natural gas supplies from Bolivia. Brazil is Bolivia's main customer for Bolivian natural gas, which provides the government of President Evo Morales with an estimated 41% of its fiscal income. This would of course deal a massive economic blow to Bolivia, which has struggled to find alternative customers for its vast gas reserves. 

In January this year, Morales sent an emergency mission to Brasilia to lobby against a decision by Brazil to temporarily reduce its natural gas imports from Bolivia. Lula has previously committed personally to helping Bolivia's economic development - Brazil has long sought to maintain stability in its neighbour.

Output - Petrobras oil and gas output in Brazil is projected to rise from 2.18m barrels/day in 2008 to 3.13m b/d by 2013 and to 5.1b/d by 2020. An estimated US$28bn of the firm's total investment will be destined for the sub-salt fields (including the Tupi field). Petrobras is aiming to bring on stream 219,000 b/d from the sub-salt fields by 2013, rising to 5582,000 b/d by 2015 and 1.8m b/d by 2020.

Petrobras and Pdvsa - While Brazil has lost interest in the Gasoducto de Sur, Petrobras is still committed to building a new oil refinery with Venezuela's state oil firm Pdvsa in Pernambuco in northeastern Brazil, just inside the shared border with Venezuela. The US$4bn Abreu e Lima refinery, which would process 50% of its oil from Venezuela's Orinoco belt, is scheduled for completion next year. There have been problems, with Pdvsa, which has a 40% stake in the refinery, dragging its heels on the financial side.  Petrobras has long threatened to go ahead without Pdvsa, but it is likely Lula will fix up a political deal with Chávez to keep him happy.