AS MOST multinationals around the world slash budgets and jobs in the face of the global downturn, one Brazilian company is bucking the trend in dramatic fashion.
Despite the plunge in the oil price which has led other oil majors to cut back spending, the Brazilian energy giant Petrobras recently announced plans to invest a massive €134 billion to boost production over the next five years.
Already ranked the world’s ninth biggest listed energy firm, Petrobras wants to crack into the top five by 2020, and is spending now so as to be in position for when recovery comes and worries over dwindling energy supplies again push up the oil price.
Developing huge, recently discovered, ultra-deep off-shore oil fields lies at the heart of the plan.
The off-shore finds are the biggest in the Americas in over three decades, with Petrobras saying one field alone, named Tupi, holds the equivalent of between five and eight billion barrels of light crude oil, making it the most significant new oil find anywhere since a 12 billion barrel find in Kazakh-stan in 2000.
The excitement at the discovery is palpable among Brazilian officials, not least because though other multinationals also have stakes in the new finds, Petrobras dominates ownership and will lead their development. The Brazilian state controls 55 per cent of Petrobras voting stock.
The country’s energy minister recently said that further exploration along the coast should confirm the existence of anywhere between 50 billion and 150 billion barrels of oil. Even the lower number would catapult Brazil into the frontline of oil producers.
Despite the excitement, the intertwined technical and financial challenges ahead are enormous. The oil lies beneath more than 4,000m of water, rock and a thick layer of salt. Recovering it is a huge technical test, even for a company with Petrobras’s widely- acknowledged reputation as the best when it comes to ultra-deep off-shore drilling.
“There is no consensus on the size of this find; the numbers are preliminary and the find is still classified as resources and not yet reserves. The cost of extracting the oil is also unknown. The technical challenge is significant. We still have to know how the equipment performs – whether we can use traditional technology, or need to experiment with new drilling solutions,” says Sophie Aldebert, associate director of southern cone energy coverage at Cambridge Energy Research Associates in Rio de Janeiro.
Getting the oil up from below the salt could prove very costly, with analysts estimating that an oil price above US$40 per barrel will be needed to make the finds commercially viable. This high extraction cost is worrying given the recent collapse in the price of oil, especially so for a company planning to fund much of the recently announced investment in the new fields using its own cash flow.
However, fears that this would force the firm to borrow heavily in today’s extremely risk-averse and high-cost capital markets have been eased by the promise of help from the Brazilian state.
BNDES, the government-controlled national development bank, has loaned Petrobras €9 billion this year, and said another €7.5 billion is there should it need it in 2010.
“An efficient firm with a high-quality frontier of investment like Petrobras has must invest now so in the future to occupy a more prominent role in the supply of oil,” says Luciano Coutinho, president of BNDES.
“The price of extraction will fall with the increase in scale of production. Meanwhile, expectations for the future oil price are for it to recover because many high-cost marginal producers will have to leave the market.”
The state has the money. Brazil built up huge reserves during the commodities boom of recent years and the government is ready to spend some of those savings now to counteract the slowdown in exports due to the impact of the financial crisis.
Brazil’s engineering and maritime construction industries are now positioning themselves to take advantage of the wave of contracts for platforms, pipelines and refineries that Petrobras will need as it develops the fields.
The state loans are also an indication of the importance the Brazilian government attaches to developing the new oil finds, regardless of current market conditions. They reduce the likelihood of Petrobras having to offer foreigners larger stakes in the finds in order to raise the cash needed to develop them.
This would be politically difficult for a government that already speaks of the newly discovered fields as a glittering addition to the national patrimony. President Luiz Inácio Lula da Silva has told Brazilians the country will become one of the world’s main oil and gas suppliers in coming decades and that the profits will be used to eradicate poverty.
