Scandal-hit Petrobras scales back plans

OREANDA-NEWS. April 24, 2015. Brazil's state-controlled Petrobras said corruption cost the firm \\$2.5bn last year, but substantial delays at the company's major upstream and downstream projects suggest the actual cost is much higher.

Postponed for months, Petrobras released audited third-quarter and year-end 2014 results late yesterday, posting a \\$7.3bn loss for the year following a \\$16.7bn write-down on the value of mainly downstream assets.

Domestic oil production remains a bright spot for Petrobras, but delays in key sub-salt production units have pushed back a promised surge. Oil production in Brazil averaged 2.034mn b/d in 2014, up by 5pc from 2013. Total production, including natural gas, climbed by 6pc to 2.460mn b/d of oil equivalent.

Domestic output should grow to 2.125mn b/d this year, a 4.5pc increase over 2014 flow rates. More modest growth this year is largely the result of planned production unit downtime, which should cost the firm an average of 50,000 b/d compared with 2014's 30,000 b/d, and reservoir problems at the mainstay Roncador oil field.

Domestic oil production is now expected to inch up to just 2.185mn b/d next year, down from an original target of 2.5mn b/d. The company's long-term production curve is expected to be significantly reduced under a 2015-19 business plan to be released next month.

Petrobras confirmed that the P-66, P-67, P-74, P-75 production platforms, originally due on stream in the Santos basin's Lula and Buzios sub-salt field next year, will be delayed, confirming earlier assertions by one of its partners, Portugal's' Galp.

The delays reflect problems at Petrobras suppliers, many of which were allegedly involved in a massive kickback scheme that diverted funds from inflated Petrobras contracts to the pockets of former Petrobras executives and senior politicians.

Petrobras has temporarily banned around two dozen firms from bidding on future projects. The scandal has helped push four firms into bankruptcy, and more are expected to follow.

The audited financials avoid the risk of a technical default on around \\$54bn in bonds. They are also critical to restoring the company?s access to international credit markets. Petrobras says it has already satisfied its 2015 funding needs with loans from three Brazilian banks, the UK's Standard Chartered, and China Development Bank, but will likely need to tap bond markets in 2016. Debt requirements for 2016 should be lower thanks to a \\$13.7bn 2015-16 divestment plan, which the company said will not include coveted sub-salt blocks.

Petrobras plans \\$29bn in capital expenditures this year, \\$15bn less than initially planned. Next year?s capex will be \\$25bn, of which 82pc will go toward upstream activities.

The company's downstream plans have been gutted. Plans to add 900,000 b/d of capacity at two refineries, Premium 1 and 2, have been scrapped, and Petrobras now says the 165,000 b/d Comperj refinery and the second 115,000 b/d phase of the Abreu e Lima refinery will be postponed for an extended period. The company booked an \\$11.6bn write-down on Comperj and Abreu e Lima, increasing doubts that the projects, both more than 80pc advanced, will be completed.

In 2014, Petrobras' domestic refinery utilization averaged 2.17mn b/d, up by 2pc compared with 2013. The refineries operated at 98pc of capacity, a 1pc year-on-year increase.

Although the release of the results has alleviated some pressure on Petrobras, the firm could still face a credit rating downgrade amid ongoing investigations in Brazil and the US. Critics add that the divestment plan lacks detail and the company's debt levels remain high.