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Emerging Markets

Petrobras' Asian boost

As oil markets pause to take stock of the unprecedented changes wrought by last year’s price collapse, one oil company is busy setting out an investment plan of such boldness you’d think the boom had never ended.

Brazil’s state-owned oil giant Petrobras rolled out its bold medium-term vision just as many oil companies look to cut investment and production. The $174.4 billion package seeks to turn Petrobras into one of the world’s five major energy groups by 2020, according to its president Jose Sergio Gabrielli.

The company’s ambitions are partly a result of its discoveries of huge reserves in ultra-deep waters off Brazil, which may contain up to 100 billion barrels of untapped oil. Then, in another confidence boosting development, billionaire investor George Soros became the second largest investor in Petrobras this year.

But the main factor is the deal Petrobras struck last month with China, securing a $10 billion loan from the China Development Bank (CDB) in return for a guarantee of long-term oil supply. The investment plan also relies on traditional sources of funding – mainly its controlling shareholder (the Brazilian state) – but the CDB agreement could help alleviate Petrobras’ funding concerns as long as oil prices remain depressed.

The strategic investment package, which was unveiled in January, may increase leverage from the current 15% to over 25% over the next five years. The overall amount – nearly $175 billion – is 55% higher than the previous 2008–12 plan. Some $28 billion are due to be injected in the pre-salt fields, including Tupi, the largest oil discovery since Mexico’s Cantarell in the mid-1970s.

Petrobras had considered the possibility of postponing some projects in the wake of the global financial meltdown, but Brazil’s president Luiz Inacio Lula da Silva made it clear that, on the contrary, investment had to be boosted in times of economic crisis. “We called our comrade [Gabrielli] and we said: no need to complain, my son. We shall not wait until 2017. We will spend every cent we can spend,” Lula said in early March.

Petrobras is expected to generate cash flow of $120 billion over the next five years assuming oil prices at $45 per barrel. Most of the funding will come from the state-owned national development bank (BNDES), which has received a fresh injection from the Treasury.

Petrobras has also secured a $5 billion bridging loan from five banks (repayable in two years) and took advantage of a narrow window of opportunity in the capital markets in February to raise $1.5 billion for 10 years, at a 7.875% coupon and a yield of 8.125% per year.

Despite its long-term potential, Petrobras may have to face some pressing challenges as early as this year. In particular, $29 billion capital spending for 2009 could be scaled back in light of declining prices and the increasing cost of capital, according to Fitch Ratings. “This would jeopardize the company’s ability to reach its ambitious production and refining capacity targets.”

Beyond the Chinese connection, other Asian partners are also moving closer to Petrobras. Marubeni, a Japanese conglomerate, has agreed to finance a $20 billion refinery project in northern Brazil, according to the Brazilian energy minister Edison Lobao. Mitsubishi will also help the Brazilian company to build a $830 million ship for deep offshore oils and gas drilling. Meanwhile, a special fund is being set up by several Brazilian state-controlled institutions and HSBC to finance equipment and service companies in a move to ease the pressures of a protracted credit crunch. —T.O.

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