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Brazil’s Petrobras Is Hit by Oil-Price Drop, Corruption

State-Run Oil Company’s Aggressive Offshore Expansion Is Threatened

By Will Connors

Jan. 14, 2015 11:08 a.m. ET

A Petrobras platform off the Brazilian coast in November 2010, when the company reported its output of domestic crude had hit a high. European Pressphoto Agency


RIO DE JANEIRO—Reeling from a massive corruption scandal, Brazil’s state-run oil firm, Petróleo Brasileiro SA, faces another major challenge: Falling global oil prices are testing the economic viability of the company’s deep-water oil fields.

Estimated by Brazil’s oil regulator to contain as much as 50 billion barrels of recoverable oil, these so-called pre-salt fields are central to Brazil’s goal of becoming a Top 5 oil producer by 2020.

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But market prices hovering around $50 a barrel aren’t helping. Deep-water drilling is one of the most expensive undertakings in the industry, and it grows less attractive the farther prices fall. Petrobras said last week that the break-even cost of pre-salt production is between $45 and $52.

Already the world’s most deeply indebted oil major, Petrobras had been counting on robust oil profits to help it bankroll an aggressive offshore expansion, aided by foreign partners looking to tap Brazil’s massive underwater reserves.

“It’s going to be harder and harder for Petrobras to execute on this golden goose,” says Michelle Foss, an energy economist at the University of Texas. The pre-salt is “very challenging and expensive even in a high-oil-price environment.”

A Petrobras spokeswoman says the company is still moving forward on pre-salt projects “in an economically viable way.”

But cutbacks loom. While it has yet to provide details, Petrobras announced in December that it would scale back an ambitious $220 billion capital-spending plan, about half of which was earmarked for development of the pre-salt fields.

Unveiled in 2007, the deposits lie 200 miles off Brazil’s southeastern coast, deep below the seabed and covered by the thick layer of salt for which they’re named. The find was originally heralded as a bonanza that would catapult Brazil into one of the world’s top oil producers. Following the discovery, Brazil’s then president, Luiz Inácio Lula da Silva, famously declared that “God is Brazilian.”

Pre-salt already accounts for nearly a third of the company’s total production of 2.3 million barrels of oil a day. By 2020, Petrobras is looking to boost output to four million barrels a day, with the majority of that production coming from the pre-salt fields.

Where it will get the funding to do so, though, isn’t clear. Petrobras borrowed heavily to finance early exploration and development efforts, and it’s now burdened with some $170 billion in debt, according to Moody’s Investor Service.

Brazil has courted outside partners to help it develop its pre-salt riches. But few oil majors have invested, turned off by Brazilian government rules, including a mandate that Petrobras be the sole operator of pre-salt fields.

Brazilian officials are considering loosening those requirements. But even if that happens, it’s unclear how much foreign interest there would be with oil prices so depressed.

“They’re in a tough spot,” says Ms. Foss of the University of Texas. “International companies are going to stay clear of everything that’s high cost.”

Further complicating the company’s plans is a massive corruption scandal that has dominated headlines in Brazil since it first came to light in March.

Federal investigators charge that Petrobras was at the heart of an alleged kickback scheme in which construction companies overcharged for Petrobras contracts, splitting the ill-gotten gains with Petrobras executives and local politicians. Three former Petrobras executives have been arrested.



Petrobras says that it’s a victim of the alleged scam and is cooperating with investigators. The company has set up its own internal investigation, and it recently said it halted work with 23 construction companies linked to the alleged scheme while the investigation continues.

The company has twice-delayed its third-quarter earnings as it works to quantify potential corruption-related write-offs. The company says it will release its unaudited third-quarter earnings this month to meet obligations to creditors and prevent a forced early payment of certain outstanding debts.

Petrobras, whose shares are traded in New York, is also under investigation by the U.S. Securities and Exchange Commission and the U.S. Justice Department.

The steady stream of bad news has battered Petrobras shares, which have fallen 55% in the past six months. The company’s bonds are trading near record lows. Late last year, Moody’s Investor Service downgraded the company’s baseline credit to Ba1 from Baa3 and its foreign and local currency debt ratings to Baa2 from Baa1.

Petrobras debt remains investment grade. But the swoon has prompted Brazil’s government to declare it will guarantee the company’s debt if necessary.

All of these factors are weighing on Petrobras’ plans for the future.

The company “might not be able to deliver on some of their 2020 targets,” says Ricardo Bedregal, an analyst in Rio de Janeiro with consultancy IHS. “I think it will be difficult for them.”

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