Brazil in Focus

Brazil's risky energy play

by Norman Gall
Petrobras's huge investment program, the world's largest in the oil industry today, is being reevaluated to curtail the overheating of Brazil's economy and to prevent these investments from overreaching the state-controlled oil company's financial and operational capacity.

In September 2010 Petrobras completed a $70 billion (R$120 billion)  stock promotion, called the biggest capital-raising in world financial history, amid enthusiasm in the oil industry over discoveries of giant fields beneath deep waters in the South Atlantic. Nine months later, concerns over the scale and timing of its $224 billion investment program for 2010-14, compounded by charges of political interference, have kept the stock price of Petrobras not only below its September quotation, despite surging world oil prices, but also below its price before the discovery in 2006 of Tupi, the supergiant field since renamed Lula.

Growing skepticism led the Petrobras governing board, headed by Finance Minister Guido Mantega, to order a review of planned investments, which were expected to exceed $260 billion for 2011-15 as projects multiplied.

These included three new refineries, buying and leasing of deep-water drilling and production installations, gas pipelines, supertankers, petrochemicals, electricity generation and facilities for producing and transporting ethanol and biodiesel. Petrobras President José Sérgio Gabrielli said that the company will spend R$93 billion (US$58 billion) in 2011, a 23% increase over 2010, with 679 projects costing more than US$25 million each and 3,000 projects costing less than that. Moreover, capital spending is expected to rise much faster after 2015.

The Petrobras technical staff is said to be severely overstretched as it struggles to manage so many large and complex projects. "There is only so much a company can do with a finite amount of critical resources such as equipment, professionals and suppliers," the investment bank Credit Suisse observed. "Obviously there is a point beyond which the risks outweigh the benefits." Luciano Coutinho, president of the National Bank for Economic and Social Development (BNDES) and a member of the Petrobras board, said the company "should seek more realistic goals."

The scale and complexity of efforts to finance Petrobras investments have been criticized. Of the $70 billion raised on stock markets last September, $45 billion was government money. Its sovereign wealth fund and the BNDES bought $16 billion in Petrobras stock, increasing the government's voting shares from 58% to 64%.

As part of this circular transaction, the finance ministry borrowed R$30 billion [$18 billion] to lend to BNDES so BNDES could buy Petrobras stock. Petrobras returned the $45 billion to the Treasury to pay for rights to explore and produce up to 5 billion barrels of oil and gas from potential reserves discovered in seven presalt fields of the Santos Basin. The expected gains from these rights were based only on seismic surveys and on a single well drilled in Franco, seen as the largest of these fields. The R$74 billion ($45 billion) payment by Petrobras to the Treasury formed part of complex maneuvers to balance fiscal accounts.

Even so, the stock flotation still gave Petrobras a net inflow of funds of roughly $25 billion, a historical record for world capital markets. However, the investment projects are so varied and ambitious that some analysts believe that Petrobras may have to raise more capital within a few years.

Petrobras and many of its suppliers continue to depend on loans from the BNDES at subsidized rates to sustain their investment programs, absorbing a large share of the huge increase of Treasury lending to the BNDES, rising from R$8 billion outstanding in 2007 to R$296 billion in 2011, including a R$55 billion loan announced for this year.

Since 2006 loans disbursed by BNDES have grown by 38% annually. The volume of its loans in 2010 to Brazilian firms was three times greater than all World Bank lending to more than 100 countries. BNDES claims now account for 23% of all corporate debt as its lending capacity approaches saturation in a credit expansion that threatens to revive chronic inflation.