Petrobras announced on March 24 that it has discovered a significant deposit of oil just of the coast of Rio de Janeiro. The company says that it encountered a 200 meter column of hydrocarbons in its Libra block, at depth of about 5,780 meters (18,963 feet).
The news was a major boost to a company that has been drowning in debt and scandal. Petrobras has now amassed $130 billion in debt, having added $22 billion in additional debt in just the last six months because of the deteriorating Brazilian currency. Petrobras, by and large, earns revenues in reals but owes debt in dollars, not a good situation to be in when the local currency plunges the way it has over the past year. Already the most indebted oil company in the world, Petrobras’ fortunes have soured due to a combination of falling oil prices, rising debt, and an extensive bribery scandal that has reached high up the food chain. Related: Three Triggers That Will Send Oil Crashing Again
Nicknamed the “Petrolão,” the corruption scandal continues to beat down the company’s share price, public image, and creditworthiness. Due to difficulty in accounting the extent of the scandal-related costs, Petrobras has not posted financial numbers since the third quarter of 2014, raising serious concerns over the possibility that it will be found in technical default. Its credit rating is now deep into junk territory.
The scandal could even bleed over into Petrobras’ day-to-day operations. The network of contractors that do a lot of the legwork and supply the oil company with equipment has been swept up in the investigation. Some contractors have been banned from working with Petrobras, others are facing cash shortages as the scrutiny has slowed business with the oil giant. As a result of the crackdown, the delivery of vessels needed to tap the vast pre-salt basin off Brazil’s southeastern coast could be delayed by at least a year. Related: Oil Prices Will Recover: Market Fundamentals Are Working
Petrobras had set a goal of doubling its oil production by 2020, but that is looking increasingly out of reach. Delays related to the scandal, coupled with lower investment as a result of low oil prices, could lead to lower production increases than once expected.
Still, headed up by its new CEO Aldemir Bendine, Petrobras hopes to turn things around. On March 25 Brazilian securities regulators have given a thumbs up to Petrobras’ approach to valuing scandal-related costs, which could pave the way to official financial reporting. The likelihood that the company may be edging closer to clearing up the bad blood with creditors provided a lift to both its share price and the price of its corporate bonds. Related: Oil Price Speed Limit Presaging An Age Of Austerity?
The March 24 news that it had discovered oil in the Libra block was also a shot in the arm. Once the scandal is dealt with, Petrobras can return to focusing all of its resources on its core mission, which is finding and producing oil.
By Charles Kennedy for Oilprice.com
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