Petrobras Scales Back Plans as Corruption Bites

OREANDA-NEWS. February 02, 2015. Brazil's state-controlled Petrobras is scaling back major projects this year as it gauges the extent of damage caused by corruption at the firm.

Petrobras yesterday released unaudited third quarter results without making an impairment for overvaluation related to the corruption. The decision sent the company's share price into a tailspin, from which it has yet to fully recover.

The real cost of the corruption scheme is unlikely to be known for months, if not longer, and initial estimates vary widely. Petrobras says 31 of 52 projects linked to corruption had an excessive book value of R88.6bn (\\$34bn), while the remaining had a fair market value totaling R27.2bn above the book value.

The company says it is studying various alternatives to assign value to the case. One approach used by the company puts losses as a result of corruption at around R4.04bn.

"The value of corruption is not trivial and depends on the progress of the federal police investigations," Petrobras chief executive Maria das Gracas Foster told investors yesterday, adding that the cost could potentially grow as new companies involved in the scheme are identified.

Petrobras must file its audited third quarter financials by the end of June to avoid an acceleration on bond payments, but the company says it is already negotiating an extension with creditors.

The impairment Petrobras will ultimately book is not expected to impact its cash flow, but the delayed results have thwarted its ability to tap credit markets and will hurt its ambitious expansion plans under its current USD221bn 2014-18 business plan.

The company's downstream segment was the most deeply involved in the corruption scandal and will be subjected to the deepest investment cuts this year.

Petrobras said it does not have a deadline for the start-up of the second 115,000 b/d phase of its Abreu e Lima greenfield refinery, which was originally supposed to come on stream in May 2015. The first 115,000 b/d phase started late last year, but throughput is still limited because of a pending permit.

The 230,000 b/d refinery is thought to be one of the main vehicles for the corruption, with costs for the project growing from an initial USD2.5bn to more than USD18.5bn.

Petrobras says it will also pull back on investment at the new 165,000 b/d Comperj refinery, which has also been linked to the corruption case. The greenfield project in Rio de Janeiro had been expected to come on stream in August 2016.

On 22 January, the company scrapped plans for two other new refineries, Premium 1 and 2, with a combined 600,000 b/d of capacity. The decision led to a R2.71bn write-down in the third quarter.

But in terms of sales revenue, the steep drop in international oil prices has been a boon for Petrobras. After years of absorbing a costly mismatch between international and domestic fuel prices, Petrobras is now selling some of the world's priciest fuel.

The company says it will continue to do so throughout the year, even it leads to a loss of market share as new competition, like Total and Chevron, move into the lucrative market.

The inversed situation has also temporarily relieved some of the pressure to add downstream capacity that has weighed on the company for years.

But upstream, Petrobras says it plans to reduce its exploration plans to the "minimum necessary," raising doubts about the company?s production targets.

Capital expenditures for the year has been cut by around 30pc, from USD44bn toUSD31bn-USD33bn, a move the company attributes to lower oil prices.

What upstream projects might be trimmed under this scaled back plan will not be known until Petrobras releases its 2015-19 business plan, which will not be issued until June at the earliest.

As in years past, the company says it plans to sell around USD3bn in assets this year, but is committed to its domestic upstream assets.

Analysts say Petrobras missed an opportunity to start working towards regaining credibility. Last night, in response to "continued concern about potential liquidity pressures", rating agency Moody's downgraded Petrobras debt to its lowest investment grade. More credit rating actions are likely to follow, increasing the company's borrowing costs when it can least afford it.