Brazil's Petrobras Turns to Write-Downs, Cost Cuts as Scandal, Prices Threaten $43 Billion in Projects

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Researched by Industrial Info Resources (Sugar Land, Texas)--The news just keeps getting worse for Petróleo Brasileiro S.A. (NYSE:PBR) (Rio de Janeiro), better known as Petrobras, Brazil's state-owned oil company that is at the heart of a rapidly growing political scandal. Earlier this week, lawmakers in the Brazilian Congress' lower house voted to impeach President Dilma Rousseff, whose administration has all but ground to a halt amid an unending stream of pay-to-play allegations related to the oil giant.

Brazil is suffering through the second year of a recession that is its worst in decades, and Rousseff is accused of hiding a massive budgetary deficit to win re-election in 2014. Rousseff also is the former chairwoman of Petrobras, which is the subject of a corruption investigation that linked it, along with several high-profile construction companies, to a long history of bribery involving dozens of politicians in the ruling Workers Party and coalition government.

Public anger toward government corruption has boiled over in Brazil, with large-scale protests now a common sight in Rio de Janeiro. Even Hollywood is getting in on the action: Netflix recently announced that it plans to create a new drama series based on the ongoing investigation, set to air next year.

But behind the jarring headlines and high-profile political battles are very heavy costs to the company and its employees. Petrobras recently reported a fourth-quarter net loss of 36.9 billion reais (US$10.2 billion), a result of massive--and in some cases unexpected--asset write-downs linked to weak commodity prices. According to Bloomberg, the 46.4 billion reais in impairments equated to more than one-third of Petrobras's market capitalization and exceeded the equity value of 97% of publicly traded firms in Brazil.

Among the write-downs were several fields in the Santos and south Campos basins. Industrial Info is tracking $19.5 billion in active Petrobras projects in the Santos basin and $7.1 billion in the Campos basin.

Altogether, Industrial Info is tracking roughly $43 billion in active projects involving Petrobras. Two of the largest are floating production, storage and offloading (FPSO) projects that are slated to begin production this year: the $1.75 billion Cidade de Saquarema facility and the $1.2 billion Cidade de Caraguatatuba facility, both south of Rio de Janeiro in the Atlantic Ocean.

The new tanker at the Cidade de Saquarema facility will be able to process 6 million standard cubic feet per day of natural gas and 150,000 barrels per day of crude oil, with a crude storage capacity of 1.6 million barrels. The new tanker at the Cidade de Caraguatatuba facility will be able to process 177 million standard cubic feet per day of natural gas, 100,000 barrels of crude oil per day, with a crude storage capacity of 1.6 million barrels. For more information, see Industrial Info's project reports for the Cidade de Saquarema and the Cidade de Caraguatatuba.

According to Market Realist, Petrobras produced 2.8 million barrels of oil equivalent per day in 2015 from its worldwide operations, 93% of which is from Brazilian operations. Liquids account for 80% of Petrobras's total production; despite the ongoing political turmoil, the company plans to increase liquids production alone to 2.8 million barrels of oil equivalent per day by 2020.

Petrobras already has begun operations at several key drilling projects, such as the Cidade de Iracema Norte field, to reach its goal and offset normal field declines. Industrial Info is tracking progress on the $23 million 2017 drilling program and the $26 million 2018 drilling program at the Cidade de Iracema Norte field. For more information, see Industrial Info's project reports for the 2017 program and the 2018 program.

But investors are feeling discouraged by the scandal and the ongoing weakness in commodity prices, and Petrobras is likely to cut costs and sell off properties to raise cash. With prices unlikely to improve anytime soon, the company could follow its peers in the U.S. and Canada and continue curtailing production.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.