Political Analysis Serie - Pre-salt auctions and oil sector in Brazil: opportunities and risks

Photo: Repsol Agency

The Overview

Very recently, on June 7, the Brazilian National Oil, Natural Gas, and Biofuels Public Agency (ANP, in Portuguese) sold three of the four blocks offered as part of the fourth pre-salt auction. Bonuses added up to US$ 807,7 million. The deep waters pre-salt oil reserves discoveries in Brazilian coast are among the most important made in the world over the last decades.

The most coveted block and the first to be won — called “Uirapuru”, on Santos basin — was won by a consortium formed by the Brazilian State-owned Petrobras (30%), Portugal’s Petrogal (14%), Norway’s Statoil (28%), and ExxonMobil (28%). The bid surpassed the 22,18% minimum set for the auction. The premium stood at 240,3%. The signing bonus was US$ 679,5 million.

Brazilian authorities stated that with a profit oil of 75,49% for “Uirapuru” block, the Brazilian Government is likely to receive 90% of the project’s net revenues. These are values hardly ever seen, including in auctions for blocks in the Middle East. Deducting companies’ investments and costs of the projects’ net revenues, 90% will go to the Brazilian Treasury.

Also located on Santos basin, the “Três Marias” block attracted two bidders. The winning consortium is formed by Shell Brasil (40%), Chevron Brazil (30%), and Petrobras (30%). In turn, the “Dois Irmãos” block, on Campos basin, was won after a single bid by Petrobras (45%), BP Energy (30%), and Statoil Brasil O&G (25%), with a zero premium and a percentage of 16,43% of oil handed over to the government. The signing bonus stood at US$102,56 million. On the same basin, the “Itaimbezinho” block got no offers.

ANP has set the deadline for the payment of signing bonuses for September 28. The bonus is based on the market’s expectations on the production potential of the blocks on sale and the degree of competitiveness in the area auctioned. Contracts are to be signed by November 30.

In all, the Brazilian Government expects to receive US$ 5,82 billion in proceeds from licenses and concessions.

The Quorum’s view: Oil sector in Brazil - a good opportunity, with its risks involved

Despite the institutional instabilities in the Brazilian society in recent years, the future of the Brazil’s Oil sector – and, by extension, of its general economy – is positive in a long-term. Consequently, foreign investors willing to opperate in this sector should be capable to accept “ups and downs” in the short-term.

Oil and Natural Gas sector accounted for 11% Brazil’s GDP in 2017 and the perspective is the continuity of this growing. With a recovered economy in the future (and the permanence of the economic and political collapse situation in Venezuela), Brazil has a strong chance to mantain its position as the largest oil producer in Latin America. In this scenario, pre-salt will be one of the most promising oil reserves in the world. 

The Brazilian Government expects the auctions related to pre-salt basins to yield investments of about US$ 36 billion for the next 10 years, and would create about 500.000 direct and indirect jobs. This development in the oil sector would provide an optimistic outlook for many Brazilian states’ economy that depend on oil production, such as Rio de Janeiro, Espírito Santo and São Paulo states. This sector recovery could invite more economic development in Brazilian states that have suffered from the recent dire economy.

However – despite advances made by “Lava Jato” investigations –, corruption, fraud, and bribing will remain real problems in Brazil in the next few years. Nevertheless – to atract foreign investments to the sector –, the Brazilian administration is concerned to reinforce regulatory and economic laws to mitigate these risks in the oil and gas industry.

Thus, despite the positive developments in the oil sector, there are persistent political risks that investors must consider. These risks include excessive jurisprudencial changing in the Brazilian judiciary system, reputational damage related to the interaction to the high-level corruption, political intervention with the involvement of Petrobras and impositive contract changes. For instance, the effects of the Truckers’ Strike on the pricing policy of Petrobras (that become partly controlled after the Strike), two weeks ago, caused the resignation of Pedro Parente, chairman of that State-owned (who advocated for a policy of free prices fluctuating in according to international markets). These events provides a cautionary tale for investors who seeking short-run profits, as judicial and political insecurity can undermine the business environment. Along with these issues, the upcoming presidential elections on next October could reverse policies and new regulatory framework for oil sector.

All in all, it’s necessary to say that the Brazilian energy sector (in special, its oil industry) usually creates great opportunities of profitability to patient investors with capacity of short-run resilience and a strategic approach to deal with Brazilian way of doing business.  To foreign investors, a robust strategy to the Brazilian markets involves a learning process related to the political and corporate local cultures which permits the identification of opportunities with the risk mitigation. In this field, the accompaniment of a specialized team on political risk analysis (with focus on Brazil) can be a strong watershed between the success and the failure.

Quorum Political Strategy is a government relations and political risk consulting firm made up of experienced professionals who can help your organization achieve its goals. We are a result-oriented consulting firm. Do not hesitate to contact us.

Sources: Agência Brasil, Agência Nacional do Petróleo - ANP

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After losses related to Truckers' Strike, CEO of Brazil state-run oil firm Petrobras resigns

Photo: Sergio Moraes/Reuters

The Chief Executive of Brazil´s state-controlled oil giant Petrobras, Pedro Parente, decided to step down from his post Friday (June 1). The decision was made public in an urgent announcement to the market. Parente met with President Michel Temer at the Planalto presidential palace.

The statement released by Petrobras says that “the appointment of an acting CEO will be considered by the firm’s managing board later today. The remaining members of the company’s board of executives will not undergo any changes.”

At 11:20 am, after Parente’s decision to resign was made public, a plunge was observed at the São Paulo stock exchange. The firm also reported that the trading of its PETR-N2 shares was suspended from 11:22 to 11:42 am, but was subsequently resumed.

Surprise

Petrobras Chief Executive quit this Friday is a surprise move that wiped some $12 billion off the state-controlled oil producer’s market valuation, after Brazil’s government responded to a trucking strike by intervening in the company’s fuel pricing policy.

Pedro Parente, who in two years in the job had succeeded in slashing Petrobras’ debt and restoring it to profitability, said in a resignation letter to President Michel Temer it was clear after the last week’s turmoil that new talks would be needed on pricing policy.

“Given this situation, it has become clear that my remaining as CEO of Petrobras has stopped being positive and will not contribute to the alternatives that the government must consider going forward,” Parente said in the letter.

Shares in Petrobras, Latin America’s biggest oil producer, plummeted as much as 15 percent in afternoon trading, wiping some 45 billion reais ($12 billion) from the company’s capitalization and pushing Brazil’s wider Bovespa index into negative territory. The real currency weakened as much as 1 percent against the dollar. Petrobras bonds also fell.

Still, his resignation appeared to have taken Temer’s already beleaguered government by surprise. A senior presidential source told on Thursday that no such move was expected.

Truckers’ Strike Impact

A key plank of Parente’s turnaround campaign for the company and a condition for his taking the top job in 2016 was freedom to control fuel prices. He sought to align those more closely with international markets through nearly daily price adjustments.

But on Sunday Temer, governing with rock-bottom approval ratings, announced plans to placate the striking truck drivers - who were protesting the high cost of diesel - by freezing fuel prices on a monthly basis and taking other measures to bring domestic diesel prices down.

Truckers have gradually returned to work since then, after a protest that left gas stations and some airports without fuel and supermarket shelves bare.

“The policy (Parente) put in place was the scapegoat of this whole crisis,” said Roberto Castello Branco, a former Petrobras board member, arguing that Temer’s weakened government must have asked Parente for changes he could not accept. “The pressure on him was enormous.”

“Terrible Administrator”

While investors and oil industry insiders bemoaned his departure, others rejoiced.

“Parente was the most responsible for the crisis that Brazil has faced with the trucker strike,” the truckers lobby said in a statement. “Nothing justifies the abusive diesel prices put in place by the company in the last few months.”

Petrobras oil workers, who walked off the job earlier week in part to demand Parente’s dismissal, also celebrated.

“Pedro Parente, you will go down in history as a terrible administrator, who took gasoline away from Brazilians,” Jose Maria Rangel, leader of FUP, Brazil’s largest oil workers union, said in a video message. “You don’t deserve to walk through the doors of Petrobras again.”

Parente’s departure comes days before Brazil hopes to attract foreign oil companies to bid on oil fields in its coveted “presalt” exploration areas and leaves in limbo several of his key priorities, including selling major refineries.

Also unresolved is a long-running dispute with the government over an oil-rich offshore area, which could represent a windfall for Petrobras if a deal is reached.

Sources: Agência Brasil, Reuters

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Petrobras completes $4 billion bond issuance in international market

Petrobras completed a $4 billion bond issuance (known as global notes) in the international capital markets through its subsidiary Petrobras Global Finance B.V. (PGF) on Tuesday (Jan. 17). In a statement on its website, the company said the leverage consisted of $2 billion tranches due on 17th January 2022 and 17th January 2027. The order book was $19 billion, almost five times oversubscribed. The five-year-maturity tranche (2022) was issued at a 6.125% annual yield to investors. For the ten-year tranche, the yield will be 7.37% per year. According to Petrobras, these rates are “significantly lower” than last May's five-year maturity 8.62% per year and ten-year maturity 9% per year.

Considering the recent transactions of major issuers, the sale was completed with the lowest coupon levels compared to Petrobras's traded securities. Coupons are the interest rates the bond issuer pays its investors for bonds in the aftermarket.

Recognition

Petrobras's Financial and Investor Relations Director Ivan Monteiro said the offering made on Tuesday was a success and reflects market recognition for Petrobras's liability management strategy adopted in 2016. “It's also a recognition of the results obtained with the partnership and divestment policy and operational performance,” he added.

The haul will help Petrobras repurchase its bonds due on 2019-2020, prolonging its debt payment term.

Petrobras also pointed out it gained recognition from Latin Finance magazine as the company with the best liability management operation in the international capital market for two similar transactions completed in May and July 2016. Last Thursday (12), it received a Corporate Liability Management of the Year award in New York.

Pre-Salt oil production: new record in 2016

Petrobras’ average oil production in Brazil in 2016 went up 0.75% in comparison to the previous year and reached 2,144,256 barrels per day. According to the company, the result was in line with the established target of 2.145 million and represents an annual all-time high.

 In the pre-salt layer, last year’s annual average was also a record with 1.02 million daily oil barrels, which meant at the time an increase of 33% over the previous year.

Regarding natural gas, the company reached the record result of 77 million cubic meters per day. If this performance is included in the year’s balance, the total production of the company in the country reaches 2.63 million barrels of oil equivalent per day, 1% above 2015’s results, which will also set a new record.

The company’s president, Pedro Parente, also highlighted December’s performance, when other records were broken. Among them, the company’s average oil production in Brazil, which for the first time surpassed the mark of 2.3 million daily barrels, 3% above the results registered in September of the same year. On December 28, the production reached 2.4 million oil barrels.

Sources: Agência Brasil and Mercopress Agency

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Brazilian Government signs legislation that opens sub-salt oil deposits to private the sector

Brazilian president Michel Temer signed legislation on Tuesday which opens the way for oil companies other than state-controlled Petrobras to operate the coveted sub-salt acreage. The bill repeals a controversial 2010 rule that requires Petrobras to hold a minimum 30% operating stake in assets governed by production-sharing contracts, mainly sub-salt assets.

 “Fruitful dialogue is what allows us, today, to sanction this project that reactivates the oil and gas sector,” Temer said at the signing ceremony in Brasilia. Oil industry executives have long blamed the sole-operator rule for slowing down sub-salt development.

The new law still gives Petrobras the right of first refusal for areas considered strategic, without defining a reserves floor, under certain conditions. But Petrobras has signaled its reluctance to take on the operator role for new sub-salt projects, and could end up selling stakes in legacy sub-salt projects as part of a wider divestiture campaign.

Executives from major oil companies such as Shell, the country's largest private-sector producer, attended Tuesday's ceremony.

The law is one of several key industry reforms that are rekindling the interest of foreign oil companies ahead of a string of licensing rounds scheduled for next year.

Only one sub-salt project was subject to the sole-operator provision, the 8bn-12bn bl Libra field that was awarded to a Petrobras-led consortium in 2013. Petrobras holds a 40% operating stake in Libra, Shell and Total each hold 20%, and Chinese state-owned firms CNPC and CNOOC each hold 10%.

The first test of the new legal framework is a sub-salt licensing round planned for the second half of 2017.

The success of that round, covering four sub-salt unitization areas, Carcara, Gato do Mato, Tartaruga Verde and Sapinhoa, still hinges on the publication of new unitization rules which national energy council CNPE is expected to release next month.

Last week, Norway's Statoil completed its US$2.5bn acquisition from Petrobras of the BM-S-8 block, where Carcara is located. The deal positions the firm to expand its operations. Shell already operates Gato do Mato. Both areas are currently governed by concession contracts that preceded the production-sharing model.

Sources: Agência Brasil, Mercopress Agency

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