Petrobras Scandal Could Force Dramatic Policy Changes in Brazil

July 2015, Vol.242, No. 7

Nick Cunningham,

Brazil’s Petrobras is staggering under the weight of its debt, the corruption scandal is not yet over, and it was recently forced to slash spending and dramatically lower its production target for 2020.

The Brazilian oil giant is in a dark period, failing to live up to the hype that surrounded its major oil discoveries in the Atlantic Ocean over the past decade. The oil, known as presalt because it is trapped underneath a thick layer of salt in deepwater, is still there. Petrobras has struggled to tap the reserves due to the engineering complexity, as well as ballooning costs and local content requirements.

The firm is overstretched, having racked up $132 billion in debt by the end up 2014. After over-promising and under-delivering for years, Petrobras, in a nod to reality, finally slashed its production outlook from 4.2 MMbpd by 2020 down to just 2.8 MMbpd.

The more modest goal could yet prove to be too optimistic as well, as a high pace of drilling will be needed to offset natural decline. Each year, Brazil loses about 200,000 bpd as fields mature. To meet the 2020 target, Petrobras may have to drill around 300 deepwater wells, according to consulting service Douglas-Westwood. That could make the company’s 2020 goal hard to meet, despite the downward revision of 40%.

As Douglas-Westwood noted, “Petrobras has a history of setting ambitious targets, with a poor record of meeting them.”

The challenge is daunting not least because the corruption scandal that engulfed the company may not be over. On July 2, Brazilian prosecutors said that Petrobras’ $1.9 billion estimate of losses stemming from the corruption scandal could be too low. “We have no doubt that the losses are significantly larger,” said prosecutor Carlos Fernando dos Santos Lima, according to the Financial Times.

The statement came as prosecutors arrested Jorge Zelada, another Petrobras executive, amid charges that he received bribes from more than a dozen international companies, including Vantage Drilling from the United States and Ensco from the United Kingdom. The arrest is merely the latest twist in the widening probe into the state-owned Petrobras, and a sign that the company’s troubles are far from over.

The declining financial position may even force Petrobras to spin off its distribution arm to raise cash. In fact, there could be a series of divestitures in order to reduce debt, including selling its 36.1% stake in Braskem, a Brazilian petrochemical firm. It also plans on selling off $15 billion worth of offshore presalt blocks over the next two years.

Petrobras could put up several fields for sale, including Sagitario, Jupiter, Pao de Acucar, and Carcara. There is reported interest from Sinopec, Cnooc, Royal Dutch Shell and Statoil, and bids could begin this month.

Petrobras’ dire financial situation may even force changes in Brazil’s energy laws. Brazil is considering reform legislation that would open up the presalt to international oil companies for the first time in nearly a decade. After the major discoveries of presalt oil in 2007, Brazil mandated that Petrobras be the sole operator on all oil development projects and required the state-owned firm to take at least a 30% stake as well.

Brazil’s Congress now sees that as a contributing factor to the company’s debt problems, and recognizing Petrobras’ failure to produce, the government may swing open the doors to private companies.

Companies like Shell are eager to jump in. “Shell always likes to…have options, and one of these options is the possibility of being the operator,” said Shell’s top executive in Brazil, Andre Araujo, according to the Financial Times.

Shell clearly sees Brazil as a growing part of its portfolio. Shell’s decision to buy BG Group earlier this year for $70 billion was in no small part driven by its desire to gain access to Brazil’s presalt. The new Shell-BG company may be able to increase production from 144,000 bpd in 2015 to 557,000 bpd by 2020, according to analysts with Jeffries.

By allowing companies like Shell to become operators, Brazil believes it will be able to right the ship. After years of disappointment, the Brazilian government seems resigned, acknowledging that Petrobras, with all of its problems, may not be able to turn Brazil into one of the world’s largest oil producers. The government hopes the private sector can help.

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