This is not the first time rumors have surfaced around possible energy asset sales in Brazil. But the latest divestment could be the most significant, particularly if the sell-off includes the nation’s much prized pre-salt areas.
Details remain murky but it is expected that a cash strapped, scandal wracked Petrobras would seek to reduce its exposure, particularly to the risky pre-salt. On its face, the $13.7 billion sale is significant. It would be even more so if it marks a new opening in Brazil’s energy sector.
2015 is shaping up to be Petrobras’ annus horribilis. Under Operation Lava Jato (Car Wash) over 100 people are under investigation for alleged corruption at the state-owned oil company, including dozens of congressmen and officials, and the treasurer of President Rousseff’s Workers’ Party. Marcelo Odebrecht, CEO of construction behemoth Odebrecht was the latest to be arrested last week. Related: Russia’s Rosneft To Help Venezuela’s Oil Sector
In the wake of the scandal, Petrobras has announced a $17 billion write down and taken a $10 billion loan from China to ease the pain. Already one of the world’s most indebted companies, low global oil prices and domestic subsidies are not helping its financial situation. Petrobras’ proposed asset divestment is the next logical step.
But two questions remain: First, whether and under what conditions Petrobras would be willing to relinquish its most prized assets in the pre-salt? And who would be interested in buying?
Brazil’s energy sector has hit a rough patch. Since the discovery of the Tupi (now Lula) field in 2007, things have not gone according to plan. A weak turnout for the inaugural pre-salt auction last year only confirmed what many had feared – the risks outweigh the rewards. Despite an estimated 8 to 12 billion barrels of oil in reserves, the Libra auction attracted just one bid.
This is in part due to the fact that exploration in the pre-salt is both expensive and complex. Brazil’s contract conditions also kept the oil majors away, including the requirement that the national oil company be the sole operator and hold a minimum 30 percent stake. Related: Why OIL Will Break Out Of Its Range Soon & What To Do About It
Petrobras’ plan to divest $13.7 billion in assets over the next two years includes thermoelectric power plants, gas distribution, and downstream assets. Speculation that it may now include pre-salt areas has been fueled by reports that several key oil players have been contacted regarding the potential sale. ExxonMobil, Total, BP, and Statoil have reportedly been invited to review the available data but no official statements have been made.
In the case of the pre-salt divestment, Petrobras would be offering a farm-out agreement in which it could sell part or all of its stake in the areas. Whether the companies cited would be interested in the blocks and under what conditions remains to be seen. Onerous local content requirements at least under the existing pre-salt contracts remain a point of contention for international investors. It is unclear whether economics will trump politics in this case.
One interesting consequence of the latest corruption scandal and resulting financial woes could be a real opening of Brazil’s energy sector – as well as other industries – to more foreign actors. If the pre-salt areas are offered under favorable conditions, it could mean a turnaround for Brazil’s sputtering economy. Related: How Big Oil Was Saved From The Oil Price Crash
Of course, any benefits may be a long way off. The International Monetary Fund predicts that Brazil’s economy will contract by 1 percent in 2015, the nation’s most serious downturn in two decades. It comes in stark contrast to the jubilation just five years ago when Brazil was riding an economic boom and growth rates hit 7.5 percent. Still it could signal an initial step towards recovery.
Beyond the current divestment options, interested investors willing to take their chances in Brazil’s oil and gas sector will have another chance later this year as 266 exploratory blocks are offered in both onshore and offshore areas as part of the nation’s 13th Bid Round. It will be a long path to recovery for Brazil but the nation may yet turn things around.
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By Alexis Arthur of Oilprice.com
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