Potential impacts on the production curve of Petrobras due to Operation Carwash

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1 Page1 04/20/2015 Potential impacts on the production curve of Petrobras due to Operation Carwash By Yanna Clara(*) and Edmar de Almeida Operation Carwash considerably affected the development of the oil production of Petrobras. The last Petrobras Business Plan indicated a fast growth of the oil production that would reach 4.2 million barrels in 2020, that is, the oil production would double in five years. The Operation Carwash, however, strongly influenced the company and changed this scenario. The company lost its credibility in the financial market and, therefore, the credit, which is indispensable for large investments expected. The Petrobras Business Plan, in relation to the exploration and development of Pre-salt, was already audacious for the next years. Even in a scenario without Operation Carwash, the company already would face great difficulties to reach its goals: the overinvestment and the high leverage were already being considered the major issues of the state-owned company. Due to the high debt levels and brusque oil price fall at the end of 2014, the company would inevitably reconsider projects and priorities, in order to make possible not only the Pre-salt, but also other strategic projects. The Plan and delays The Petrobras Business Plan includes 28 new platforms to come into operation, from 2015 to 2020, out of 38 expected for the period Eight of them are the Replicant FPSOs (these projects are recurrently employed) and four of them are related to Onerous Cession, which are Petrobras's units to be constructed in Brazil and used in the Pre-salt, in Santos Basin. Also, Petrobras portfolio includes agreements related to 28 rigs owned by Sete Brasil, a company established by Petrobras, and several partners for building the drilling rigs in the country. Figure below provides details for the platforms that would come into operation in the next years and the production curve expected for the company, which will slope upwards until 2020.

2 Page2 It is important to bear in mind that there are many reasons that delayed the construction of these FPSOs, for several stages are involved in the process. In general, there is a company in charge of building or converting the platform hull, other companies have to construct the modules and a third company is responsible for integrating the hull and modules, thus completing the construction of the FPSO. Any delay in one of the stages postpones the final delivery of the platform, thus affecting the commencement of operations in the field. Ecovix and Enseada were the only two shipyards contracted for building or converting the hulls of the 12 FPSOs. The first one was responsible for the hulls of 8 Replicant FPSOs, and the second one was responsible for 4 hulls of the Onerous Cession. This strategy involved a high risk to be taken, because keeping construction activities in few shipyards has not been efficient: any delay causes a cascade effect that affects the delivery, since that the shipyard, in general, does not build 2 units at the same time. Moreover, both shipyards are facing difficulties. Both of them have been investigated in the Operation Carwash and they are facing financial problems mainly due to credit restriction, thus causing more uncertainty regarding the conclusion of the projects. Only the hull of P-66 is constructed, and the hull of P-67 is under construction. Ecovix is responsible for both platforms. The hull of P-68 was sent to China to be concluded, in order to avoid more delays. The P-69 is also being built, but the construction of the other 4 did not start yet. Enseada did not conclude the hulls as expected; the hull of P-74 may be concluded until June, The hulls of P-75 and P-77 are being converted in China and must arrive in Brazil at the end of 2014.

3 Page3 Ten companies / consortia are responsible for the modules, and six of them will integrate the platforms as well. Among these companies, five are also involved in the investigation and facing financial difficulties due to credit restriction. Some of these companies, such as OSX (in partnership with Mendes Jr. in Integra) and TKK Engenharia (in partnership with DM Construtora in MGT), are in judicial recovery procedure. Tomé (in partnership with the German company Ferrostaal) is another company that is announcing the closing of its activities due to cash flow problems and scarce credit. A special case is of IESA, which terminate the agreement to construct the compression modules for six Replicant FPSOs. Petrobras is organizing a new public bidding for these modules, to be concluded in this semester. Other module construction companies are carrying out the contract, but few of them are experiencing significant delays. The integration of the 12 platforms will be performed by 6 distinct shipyards. Three of them have been investigated by Operation Carwash. QGI, a Queiroz Galvão and Iesa consortium, is one of these companies. It is responsible for the integration and construction of modules of P-75 and P-77. The company stopped the construction to demand contract amendments in relation to Petrobras. Jurong, a company responsible for the P-68 and P-71, is also putting some pressure on Petrobras. In both cases, delays are considerable, by taking into account that the negotiation shall be concluded until May. Other platforms expected for the period are either being constructed without delays, or waiting for the bidding process. Amongst the platforms to come into operation from 2018, 5 of them are waiting for the bidding process and for 2 of them (P-72 and P-73) there is no integration service hired. The FPSOs for the period are still waiting for the bidding process. The delay related to the platforms is quite serious and undermines the development of exploration performed by Petrobras. This is not the only one reason, for rigs may be a hindrance for the production as well. A platform is connected with several wells and, if one of the wells is not drilled, the production curve of the field does not reach its peak as expected, but later on. Therefore, if there are no drilling rigs available, the final production curve of Petrobras will be affected. Sete Brasil, a private company established to hire the drilling rig companies, is responsible for the 28 drilling rigs. The total investment was US$ 25,7 billion, divided into three stages for the period The company has been facing serious financial problems due to the delay (and possible cancellation) regarding the long-term credit granted by BNDES (Brazilian Development Bank) - a sum of R$ 10 billion approved in At the first moment, the delay occurred due to administrative issues and, afterwards, due to Sete Brasil being investigated by Operation Carwash. Consequently, BNDES required additional guarantees. Moreover, the

4 Page4 company took out bridge loans in several banks totaling R$ 2 billion. Such debts are already due and extended for 90 days since April. Eight rigs are expected to be delivered in the first stage 2015/2016. Two of them to be built by Shipyard Atlântico Sul (EAS) may not be constructed, because the shipyard intends to breach the contract with Sete Brasil due to lack of payment. The other ones are already under construction and may be delivered within term set forth, if another situation similar to EAS s one does not occur. Due to the shortage of resources, Sete Brasil has delayed the payment of shipyards Due to the lack of payments, the shipyards tend to decelerate the construction of rigs, since they are not able to pay suppliers. Thus, the 20 rigs (from 2 nd and 3 rd stages), to be delivered from 2017 to 2020, are facing great uncertainty, because they are at the first stage of the project and/or construction. Summarizing: Only 6 out of 28 rigs, to be delivered from 2015 to 2020, have high probability to come into operation within the term. Partners and creditors are putting some pressure on Sete Brasil to rethink the project, in order to reduce the portfolio of rigs and, therefore, the requirement of financing. Construction of drilling rigs is expected to be cancelled. What about the production? Consequences arising from the delays of the platforms and rigs are inevitable. At this moment, it is impossible to obtain the 4,2 million barrels per day (mbpd) expected by Petrobras for The situation of the companies involved in the Operation Carwash is very complex, and the outcome of the crisis must take time sufficiently. Even the stateowned company strives to meet the deadlines, this situation is an obstacle. If production in 2020 will be definitely lower than 4,2 mbpd, then the fall will depend upon the capacity and agility of Petrobras to seek alternatives and reduce the delays to delivery platforms and rigs. This month, the International Energy Agency (IEA) analyzed in depth the Brazilian production expected. The Medium Term Oil Market Report published this month foresees 3,2 mbpd in relation to Brasil. In 2014, the IEA suggested a production about 4 mbpd in In other words, the IEA is predicting a very high impact of the crisis affecting Petrobras and suppliers on the production curve. In our point of view, the opinion expressed by AIE shall not be seen as a decision. The evaluation of the impact of the current crisis on the production curve should be carefully made. This impact essentially depends on the operational and financial capacity of Petrobras to reduce the delays related to the current projects. It is important not to underestimate the operational capacity of Petrobras. Petrobras is the greatest offshore operator in the world with wide experience in dealing with delays from its suppliers.

5 Page5 Moreover, Petrobras is seeking alternatives for financing its investments. The recent announcements made by Petrobras's regarding credit from Chinese and national banks, before publishing the balance sheet, indicates that the company is still operating. In fact, Petrobras is aware of the necessity to review its planning. It released an official notice in March informing that it is preparing a great divestment plan to allow focusing upon the strategic and profitable projects. The total value of the plan is US$ 13,7 billion, divided into E&P areas in Brazil and abroad (30%), Supplying (30%), and Gas & Energy (40%). The Petrobras s situation is concerning and complex. After changes in the Board of Directors, however, the spirits are being renewed. The balance sheet audited shall be released soon, and a new business plan is being prepared. In order to restore the credibility affected by the corruption scandal, measures are being taken internally, with the objective to improve the business management, thus resulting in better financial management and corporative governance. As might be expected, a company like Petrobras has all the conditions to face the current context. By the way, it is not a good business to bet against the big Brazilian oil company. Sources: Magazine Brasil Energia Petróleo e Gás April, 2015, O Plano C para o Pré-sal de Santos. International Energy Agency, Medium Term Oil Market Report (*)Associate Researcher from the Energy Economics Group