Petrobras to Limit Investments

By Sam Green, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Petrobras, the Brazilian oil giant, looks set to bow to pressure and abandon plans to increase investments by US$35 billion in its current five-year plan. The proposed increase in expenditure would have been funded by increased borrowing, or fuel price rises. The federal government is determined to avoid such increases as it battles to limit inflation, which hit 6.51 percent last month.

The Federal Government is the largest shareholder in Petrobras, directly owning 54 percent, and they want to see the company’s plan to spend US$224 billion between 2011 and 2015 remain unchanged.

Petrobras was valued at US$220 billion last September, which was celebrated as the world’s biggest ever share offer, and according to Brazilian Finance Minister Guido Mantega, gave the company the second biggest market value in the world.

Investors now say government intervention, such as directions to keep domestic fuels costs stable, have contributed to Petrobras’ share value dropping by about 10 percent this year. However, it is hoped that by reducing the company’s debt burden, share prices will be boosted.

“If the plan was really big, Petrobras would have to raise gasoline and diesel prices because that would resolve everything, but the government doesn’t want to,” said an unnamed Petrobras source quoted by Reuters.

Almir Barbassa, Petrobras’ chief financial officer, said the company’s board, which includes Finance Minister Guido Mantega, asked management to re-evaluate their investment plans for the next five years.

Petrobras aims to almost double production to 4 million barrels a day by 2020 – and it will be keen to avoid slowing such growth by limiting investment. The company wants to turn Brazil into a major oil exporter by tapping its deep-water regions.

In recent years Petrobras has made Brazil’s biggest oil discoveries in the offshore ‘pre-salt’ layer located between the states of Santa Catarina and Espírito Santo, including the Santos Basin.

Pre-salt oil and gas reservoirs are buried under great quantities of salt and rock at depths as low as 7,000 meters from the sea surface. Reaching such reserves requires huge investment.

“The concern is whether the exploration and production division will invest enough to boost production,” Nelson Rodrigues de Matos, a leading analyst with the Bank of Brazil, told Reuters.

However, De Matos believes it is the refining sector of the company which faces cuts. “The pre-salt is a priority and demands great investments. I do not believe that eventual cuts will reach projects related to this. Refinery projects would be most likely to receive cuts,” he told O Globo.

Petrobras may also be forced to limit work in other areas, such as biofuels and liquefied natural gas.

Earlier this month, Petrobras said the necessary investments in the Santos Basin pre-salt area had fallen by 45 percent compared to original estimates in 2008, because of higher well productivity and better understanding of the area.

While Petrobras is the dominant oilfield operator in Brazil, many foreign companies have managed to establish a presence in country and continue to invest, despite intimidating bureaucracy and tightening regulations on foreign participation.

The Peregrino oil field, in the Campos basin, is operated by the Norwegian oil company Statoil. The Oslo-based firm wants to become the second-largest producer of oil in Brazil within a year. That would mean overtaking British-Dutch giant Shell.