After many years of praise, Brazil’s national oil company, Petrobras, has come under increased criticism, with its weak profits, soaring debts and flat-lining oil production viewed as signs that the company is sinking under the weight of government intervention. But while there is cause for concern in the short run, Petrobras remains a strong company with abundant assets, world-class technical capabilities, and the ability in the long term to achieve its ambitious targets. Just like the irrational excitement a few years ago about Petrobras’ rise following the discovery of the massive pre-salt oil zone, today’s pessimism is greatly exaggerated.
It’s true that Petrobras, with one of the world’s largest corporate investment plans, is also the most indebted oil company on the planet, with debts of $114 billion. Yet it maintains investment grade from all the major rating agencies and has had no difficultly funding its debt – indeed, its latest $8 billion debt issue in March was three times oversubscribed.
This year, Petrobras trimmed its 2014-2018 investment plan to a still whopping $220.6 billion – mainly to cut back on downstream spending after it completed several major refinery investments. Cutting investments in the less profitable downstream business will reduce leverage and shore up its bottom line.
Fuel price caps have also forced Petrobras to import refined products at a loss due to the government’s policy of only gradually increasing retail fuel prices in line with international market prices – a policy used in many countries to keep inflation in check.
However, this is likely a temporary anomaly. From 2008 to 2011, Petrobras benefited from price controls, selling gasoline and diesel above market prices, and its board has approved a plan whereby Brazilian fuel prices will eventually be aligned with the international market again. Moreover, the recent downstream investments will allow Petrobras to reduce fuel imports, improving margins in the long-term.
Granted, there have been delays in starting production from new offshore fields: liquid output actually fell by 2 percent year-over-year in 2013, and the company missed its production targets for last year. But tremendous progress has been made on the operational side since the first major pre-salt discovery was made less than seven years ago. Pre-salt production has now surpassed 400,000 barrels per day – that’s almost a quarter of Brazil’s total output. Although output has been flat over the last few years, Petrobras brought five new production facilities on line last year and has six more scheduled to start up by the end of this year, meaning it is on track to meet its 2014 targets and increase cash flow.
Petrobras still has access to gigantic reserves and will eventually reach its production targets, even if not as quickly as many had hoped. The company ended 2013 with 16 billion barrels of oil equivalent of proved reserves boasting a 131 percent reserve replacement rate and reserves-to-production ratio of 20 years. Between 2016 and 2018, an additional 15 offshore projects are expected to bring some 2 million barrels per day of capacity online, and the company’s long- term production target remains an impressive 4.2 million barrels per day in 2020. Petrobras remains a leader in deepwater drilling capabilities, meaning it has the technological ability to develop these complex projects.
The delays and disappointments plaguing Petrobras today could have been, and indeed were, predicted back in 2007 amid all the exuberance over the pre-salt discoveries. Today’s disappointment stems partly from excessive optimism in the past, and has been used as a political tool to criticize the Dilma Rousseff administration.
In reality, although government pressure has played a role in increasing the operational and financial burden on Petrobras, the company remains on track to become a top oil producer.
By Lisa Viscidi
Lisa Viscidi is Director of the Inter-American Dialogue’s program on Energy, Climate Change and Extractive Industries: http://www.thedialogue.org/energy