OIL PRODUCTION IN BRAZIL: CHALLENGES AND PROSPECTS

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1 OIL PRODUCTION IN BRAZIL: CHALLENGES AND PROSPECTS Prof. Edmar de Almeida Energy Economics Group Institute of Economics Federal University of Rio de Janeiro Roundtable hosted by Center on Global Energy Policy Columbia University New York, May 18, 2015

2 PLAN OF THE PRESENTATION Brazil s oil and gas sector Importance of Petrobras for national and global supply Petrobras financial crisis and corruption scandal Consequences for Brazilian Oil and Gas Industry The way out of the crisis

3 Brazil s oil and gas sector

4 OVERVIEW OF THE OIL AND GAS SECTOR ON BRAZIL Proven reserves (Dec. 2014) Oil: 16.2 Bbarrels Gas: 471 bcm (16.2 tcf) Production (aver. Feb/2015) Oil and NGLs: 2.53 MMbpd Gas (gross): 87 MMcmd Balance Imports/Exports (Jan- Mar. 2015) Oil: 399 MMbpd Gas: 47.5 MMcmd Source: ANP ~100 companies with E&P concessions, about 55 international and 45 Brazilian, but Petrobras dominates the O&G sector

5 RAPID CHANGE IN RESOURCE BASE

6 THE POTENTIAL GROWTH OF OIL PRODUCTION IN BRAZIL IS ONE OF THE LARGEST IN THE WORLD Field development plans approved by ANP indicate a 4.3 MMb/d oil production in 2021 Projected Oil Production (Mbbl/D) based on contracts approved by ANP Onerous Assignment Contracts Concession Contracts Concession contracts (Pre-salt) Concession contracts onshore Source: - ANP 6

7 FUTURE DEMAND AND PRODUCTION FOR BRAZIL ON THE NEW POLICIES SCENARIO Source: IEA

8 EXPECTED OIL PRODUCTION GROWTH IN BRAZIL HAS A GLOBAL IMPACT Brazil potential increase in oil production represents 51% of the expected demand increase until 2035 Source: IEA

9 ROLE OF BRAZIL IN FUTURE GLOBAL SUPPLY Brazil today represents 2,7% of world production and can increase to 6% in 2035 Oil production growth will depend on Petrobras investments` in the Presalt Major contributors to global oil supply growth in the New Policies Scenario, Source: AIE

10 RESOURCE BOUNTY NURTURED ENERGY NATIONALISM New oil laws of 2010 Petrobras as a sole operator in the Presalt Exclusive rights for Petrobras: Onerous Assignment contracts (5 billion barrels +) Production Sharing contracts (~10 billion barrels in Presalt) Petrobras resource portfolio is very large as compared to its investment capacity need to divest? Five years without E&P bidding rounds have deeply affected the industry Strong emphasis on local content 10

11 Importance of Petrobras for national and global supply

12 DIVERSIFICATION OF UPSTREAM INVESTMENT Today there are about 100 companies, aside from Petrobras, active in E&P in Brazil About 55 international companies (majors and independents) Responsible for most of non-petrobras investment in Brazil About 45 Brazilian companies Mostly newly-created companies Diversity of size and business models Important for onshore exploration However, Petrobras is still responsible for about 70% of all investments in the Brazilian upstream 12

13 TOTAL INVESTMENT IN BRAZIL E&P ( ) Petrobras + partners Source: Statoil

14 Petrobras financial crisis and corruption scandal

15 TO ACHIEVE EXPECTED PRODUCTION, PETROBRAS MUST KEEP ITS INVEST AT HIGH LEVEL The investment increased by more than 4 times on 10-year time Reduction on 2014 Source: Petrobras.

16 THE COMPANY HAS LOST REVENUES BY SELLING PRODUCTS BELOW THE INTERNATIONAL MARKET PRICE Average realization prices in Brazil vs. the US Gulf prices Source: PETROBRAS 16

17 ESTIMATED ACCUMULATED LOSS OF REVENUE BY PETROBRAS DUE TO PRICE CONTROLS Estimated accumulated revenue losses by Petrobras for selling gasoline, diesel and LPG below the international benchmark prices Source: Own Elaboration 17

18 IN THE LAST FOUR YEARS PETROBRAS HAD TO RELY ON CREDIT Debt Index for Petrobras (Net debt / EBITDA) Even without this scandal scenario, Petrobras crisis would come anyway: it's overinvestment and consequent high debt were a large problem itself Source: Petrobras.

19 PETROBRAS DEBT IS NOW A CONCERN Evolution of Petrobras Debt About 45% of the debt must be renewed by the end of 2018 Only 20% of the debt is based in domestic currency Source: Petrobras 19

20 HIGHLIGHTS OF PETROBRAS 2014 RESULTS Sales Revenue growth: 11% Growth in total oil and natural gas production: 5% (2,669 thousand boe/day) Net loss: (-) R$ 26.1 bi (US$ 7.5 bi) This negative result has been fuelled by different factors: Impairment (Refining, E&P and Petrochemical) = R$ 44.6 bi (US$ 16,8) Write-off of overpayment incorrectly capitalized (Car Wash Operation) = R$ 6.2 bi (US$ 2.5) Cancellation of projects Provision for losses in the electric sector

21 2014 RESULTS: IMPAIRMENT TESTS Refining: postponement of projects/assets E&P: decline in oil prices Petrochemical: Reduction in demand and margins Source: Petrobras.

22 2014 RESULTS: WRITE-OFF OF OVERPAYMENT INCORRECTLY CAPITALIZED Amount of 3% over contracts with 27 companies members of the cartel between 2004 and 2012 For companies outside the cartel, specific values mentioned in the depositions Source: Petrobras.

23 IMPLICATIONS OF "NON-COMPLIANCE WITH CORRUPTION LAWS Legal or regulatory sanctions and fines by regulatory agencies in the US Losses with lawsuits Deterioration of companies reputation with the public opinion and peers Increasing difficulties for doing business Moody s announced the downgrade of all of Petrobras's ratings, among which the unsecured debt Source: ABBI e FEBRABAN, Função de Compliance 2003.

24 IMPORTANT IMPACT IS ON TRUST Petrobras had a 220 billions dollars investment plan for the next 5 years The company relationship with its suppliers deteriorated Nearly two dozen companies banned from doing business with Petrobras Some of these companies (Engevix, OAS, UTC and Mendes Júnior) are responsible for the construction of the FPSO and drilling rigs for the pre-salt projects The companies are companies are facing credit access difficulties, which will delay the construction projects Lack of trust for doing business results in higher costs

25 Consequences for Brazilian Oil and Gas Industry

26 BRAZILIAN OIL AND GAS SECTOR CRISIS Cash flow problem High Debt Corruption Scandal Low credit for Petrobras and Suppliers Oil prices Reduction High uncertainty for future domestic production

27 LACK OF FINANCING IS AFFECTING THE ABILITY OF BRAZILIAN INDEPENDENTS TO INVEST Evolution of the Number of Wells Drilled in Brazil Source: ANP 27

28 BRAZIL: SHARP REDUCTION IN EXPLORATORY ACTIVITY IN THE LAST 3 YEARS Evolution of the number of Drilling Rigs in Operation in Brazil Source: Backer 28

29 THE SLOWDOWN IN BRAZIL WAS THE LARGEST IN THE WORLD IN THE H1-2014; ARGENTINA IS GAINING GROUND 29

30 Petrobras business plan was to double production until 2020, reaching 4.2 kbpd Petrobras planned to construct: 22 new FPSOs on period 28 rigs from Sete Brasil Source: Petrobras

31 Plataforms by year of delivery The 2019 and 2020 s FPSOs haven t been tendered Iracema Norte (Cid Itaguaí) Lula Alto (Cid. Maricá) Lula Extremo Sul e CO Sul de Lula (P-68) NE de Tupi (P-72) Lula Central (Cid. Saquarema) Lula Oeste (P-69) Es Águas Profundas Lula Sul Búzios III Iara NW (P-66) (P-76) (P-71) Búzios I (P-74) Iara Horst (P-70) Revitalização Marlim I Lapa (Cid. Caraguatatuba) Tartaruga Verde e Mestiça SE Águas Profundas I Lula Norte (P-67) Búzios IV (P-77) Sul Pq. Baleias Búzios II Maromba I (P-75) Carcará Entorno de Iara (P-73) Source: Petrobras

32 POSSIBLE DELAYS FOR THE FPSOS Iracema Norte (Cid Itaguaí) Lula Alto (Cid. Maricá) Lula Extremo Sul e CO Sul de Lula (P-68) NE de Tupi (P-72) Lula Central (Cid. Saquarema) Lula Oeste (P-69) Es Águas Profundas Lula Sul Búzios III Iara NW (P-66) (P-76) (P-71) Búzios I (P-74) Iara Horst (P-70) Revitalização Marlim I Lapa (Cid. Caraguatatuba) Tartaruga Verde e Mestiça SE Águas Profundas I Lula Norte (P-67) Búzios IV (P-77) Sul Pq. Baleias Búzios II Maromba I (P-75) Carcará Possible Delay Entorno de Iara Not yet tendered (P-73)

33 The way out of the crisis

34 HOW PETROBRAS IS TRYING TO SOLVE THE PROBLEMS The company is trying to improve the credibility by changing the CEO and executives As a state-run company, the president choose the executives of Petrobras On February, the CEO and five executives resigned Announcement of a two-years (2015/2016) disinvestment plan on March, Divestitures total US$ 13.7 billion, and include Exploration & Production assets in Brazil and abroad (30%), as well as assets in the Downstream (30%) and Gas & Energy (40%) segments The company wants to focus on priority investments, mainly oil and gas production in Brazil in areas of high productivity and return

35 PETROBRAS PLANNING ASSUMPTIONS FOR 2016 Oil and Natural Gas Production (Brazil and abroad): 2,886 kboed (+/- 2%) Divestments: US$ 10 billion Investments: Approximately US$ 25 billion (82% in E&P) 37% below 2016 CAPEX (US$ 39.5 billion), in the Business Plan New FPSOs: Cidade de Itaguaí (4Q15) Cidade de Maricá (1Q16) Cidade de Saquarema (2Q16) Cidade de Caraguatatuba (3Q16) Extended Well Test - Libra (4Q16)

36 THE NEW BIDDING ROUND IS A GOOD SIGN The government announced on May 4 th a new bidding round this year, on October The 13th Bidding Round will offer 269 exploratory blocks, no offer on the pre-salt area The offered areas are distributed at 10 basins: Amazonas, Parnaíba, Potiguar (onshore), Recôncavo, Sergipe-Alagoas (offshore), Jacuípe, Camamu Almada, Campos, Espírito Santo (offshore) and Pelotas. The bidding round for the pre-salt area will probably be postponed to 2017

37 AREAS TO BE OFFERED IN THE13TH BIDDING ROUND

38 Thank you Grupo de Economia da Energia