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Oil price collapse is just one worry for Petrobras

Brazil’s congress is likely to pass a momentous bill that would strip oil giant Petrobras of key oil rights.
As a result, Brazil’s biggest offshore oil discoveries could be opened to foreign and private investment.

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Just when we thought we could up sticks and enjoy churrascaria followed by shots of porradinha all day, it turns out the Brazilian Petrobras dream might actually be a nightmare.

Remember the heady days of 2007? Petrobras was going to save Brazil by generating so much wealth the country would take on developed world status. It estimated in 2012 it would be producing 3.5m bpd of oil and gas and by 2015, 4.6m bpd. Sadly, the reality today is that it is turning out 2.8m bpd. And it’s engulfed in a multimillion pound corruption scandal to boot.

It’s not that ambition was let down by lack of investment. It has had an injection of $250bn investment and came across some of the world’s largest offshore oil and gas resources. But as Douglas-Westwood the energy consultants says, “Petrobras has a history of setting ambitious targets, with a poor record of meeting them.”

The expense of tapping oil from the fields in the Atlantic Ocean was underestimated. The oil, which is known as presalt because it is trapped under a thick layer of salt in deepwater, requires considerable engineering complexity. That combined with the collapse in global oil prices has prompted a more modest assessment of its future success.

Petrobras now has the undesired moniker of most indebted oil company in the world. In 2015 Q1 total debt reached $124bn. This combined with the oil price collapse and monumental scandal engulfing the country has left them reeling.

Hence the radical new vision for Petrobras. It has released its ‘2015-2019 Business and Management Plan’ which outlines drastic changes – expenditure plans have been cut by 40% from the plans announced a year ago; 84% of its budget directed to E&P compared to 70% in the previous plan and the biggest cut goes to their refining and supply sector which has seen its budget reduced by 67% compared to last year’s plan.

Then we have Operation Car Wash – the code name for the investigation into the misuse of funds in the oil company – which is just over a year in existence. It has involved billions of dollars and some of the country’s top CEOs. Federal prosecutors are inspecting a complicated scheme in which construction companies allegedly bribed Petrobras executives in return for contracts. One of the most recent people arrested was Marcelo Odebrecht who runs Brazil’s 5th largest company. The first Petrobras executive to testify got a reduced sentence as a reward. Paulo Roberto Costa confessed to having $23m in Swiss bank accounts, made from bribes from construction firms and other contractors to win bids from the oil producer.

It then creeps beyond business and deep into the heart of Brazilian government. The bribes were said to have been inflated in order for kickbacks fed back to the governing Workers’ party and other major parties for political campaigns.

Petrobras will struggle to recover from this. One solution identified is a fire sale. It has put almost $60bn of assets up for sale. There is interest from Sinopec, Cnooc, Royal Dutch Shell, and Statoil, and bids could begin this month.

The country’s energy laws may even be changed. Legislation could be enacted to open up presalt to international companies for the first time in almost ten years. When the massive oil fields were discovered the government mandated that Petrobras be the sole operator on all development projects and take at least a 30% stake. It became the proverbial poisoned chalice. Congress now sees this as contributing to the company’s debt problems and as a result private companies could squeeze through the door. Shell has long seen Brazil as a growing part of its portfolio, and this could be the way Brazil starts down the right path.