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Can Brazil’s Next President Rescue Petrobras?

Petrobras Office

Brazil’s Senate voted to approve impeachment proceedings against President Dilma Rousseff, forcing her to step down in order to stand trial. Vice President Michel Temer will now succeed her as President through the duration of the trial, which could take several months, and will hold onto the post through the end of her term should she be convicted.

The move comes as Brazil is facing a host of problems, including the worst recession in perhaps a century, the ongoing corruption probe of state-owned oil company Petrobras, inflation, the Zika virus, and public outrage.

It should be noted that the case against President Rousseff is relatively weak, and many of the politicians leading the impeachment campaign are themselves accused or charged with corruption. Her successor, Vice President Michel Temer, does not have a spotless record either and most Brazilians want him impeached as well. Nevertheless, the political establishment has made President Rousseff the scapegoat, and with the majority of the public turning against her, her political survival seems unlikely. Related: Nigerian Militants: Oil Companies Have 2 Weeks To Evacuate Or Else…

But Brazil’s problems will not disappear with the ousting of President Rousseff. Vice President Michel Temer will still have his hands full.

To see why, look no further than Petrobras, Brazil’s largest and most important company. Petrobras is the most indebted oil company in the world, and low oil prices have made the debt burden – which stands at about $130 billion – increasingly difficult to manage.

The company reported a record loss in the fourth quarter, losing more than USD$10 billion. The weakening Brazilian currency is making Petrobras’ dollar-denominated debt more expensive to service. Roughly 80 percent of its debt is priced in dollars while much of its sales are conducted in the local currency, the real. Petrobras has repeatedly failed to hit its production targets, and the financial fallout has forced it to substantially reduce its long-term output figures. The company says it will be able to produce 2.7 million barrels per day by 2020, almost half of what it had anticipated back in 2013. Related: Big Oil Pulls The Plug On Arctic Oil, Relinquishes Drilling Rights

The company is also scrambling to sell off assets in order to raise cash, the latest of which was a USD$892 million sale of a unit in Argentina and another $490 million sale of assets in Chile. But the company appears to be struggling to pull off the $15.1 billion in asset sales it is targeting over the course of 2015 and 2016. So far, it has only announced $2.1 billion in deals.

Moreover, Petrobras also has much more ambitious plans for asset disposal in the years ahead – a plan released last summer called for an additional $42.6 billion in sales through 2018. It is hard to imagine the company succeeding in such an unprecedented endeavor. As Lisa Viscidi of the Inter-American Dialogue notes, shedding assets of this magnitude is not only difficult to achieve, but it would require Petrobras to “pull out of entire market segments, such as pipelines, power generation, logistics facilities, refineries and natural gas distribution — reshaping the midstream, downstream and natural gas businesses in Brazil.” The result would amount to a major restructuring of a large part of the economy.

In a small sign of the company’s distress, it recently announced a $1 billion loan from China’s Export-Import Bank, a loan that it is tapping much sooner than expected. Related: Can Saudi Arabia Really Break Its Dependence On Oil?

With the draconian cuts the company is taking, it is no wonder it has had to dramatically cut its production targets. But government rules over who can invest and operate oil fields in Brazil mean that few companies are able to step into the gap left over from a shrinking Petrobras. The problems facing the company are opening up a once unthinkable development: the government is set to loosen rules on the prized pre-salt oilfields, the vast deepwater reserves that since 2010 have been under the control of the state-owned company. Legislation to liberalize the offshore sector still needs approval by the lower house of the Brazilian Congress, but Lisa Viscidi of the Inter-American Dialogue argues that the approval could come swiftly after the removal of President Rousseff, as the legislation is a top priority for the Chamber of Deputies.

The future for Petrobras looks pretty grim. The indebted company will need to shrink and deal with the ongoing corruption investigation. As Brazil’s Vice President Michel Temer steps into his new role, he will need to find a CEO to lead the oil company. But as Bloomberg reported, many top candidates to lead the oil giant are not interested, no doubt because few want to deal with all the headaches of steering such a leaky ship under a massive cloud of scrutiny.

By Nick Cunningham of Oilprice.com

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