The Rising Influence of Rising Affluence

[DewDiligence]

PBR Boosts Cap-Ex Budget

http://online.wsj.com/article/SB10001424052748704895204575320942806401092.html

›JUNE 22, 2010
By JEFF FICK

RIO DE JANEIRO—Brazilian state-run energy giant Petroleo Brasileiro SA will maintain its aggressive expansion plans with investments of $224 billion over the next five years.

The federal oil company's latest 2010-14 investment budget, disclosed Monday, topped the previous estimate of between $200 billion and $220 billion. The budget compares to investments of $174.4 billion in the previous five-year plan, covering 2009 to 2013.

The ambitious budget makes Petrobras one of the few major oil companies willing to invest heavily amid lower oil prices and global economic uncertainty. It also indicates the company is shrugging off technical concerns raised in the wake of BP PLC's deepwater disaster in the U.S. Gulf of Mexico.

Petrobras said it expects two fields in the U.S. Gulf of Mexico to start production in the second half of this year. Drilling was affected by the moratorium on deepwater drilling after the Deepwater Horizon well disaster.

Output at the two fields are expected to reach 80,000 barrels a day this year. In the second phase of development, it will need to drill 14 additional wells to ramp up output, the company said.

The staggering capital expenditures will be used primarily to develop Brazil's massive offshore oil reserves in the presalt region, which is expected to be pricey and complicated due to the depth of the reserves.

The company will invest $118.8 billion in exploration and production in the 2010-2014 period, with $30.9 billion earmarked for presalt development. Its refining, transportation and commercial sales businesses will get investments of $73.6 billion.

Meanwhile, Petrobras's gas and energy business will receive investments of $17.8 billion, and $5.1 billion will be earmarked for the company's petrochemicals unit. Biofuels, a recent focus of the company, will see investments of $3.5 billion, the company said.

Petrobras said it plans to focus international investments on exploration in the Atlantic Ocean basin, especially in the U.S. Gulf of Mexico and West Africa, Chief Executive Jose Sergio Gabrielli said Monday during discussions of the company's investment plan.

Petrobras has no plans to expand international refining, Mr. Gabrielli added, ruling out rumors that Petrobras was a possible buyer for Valero Energy Corp.'s troubled refinery in Aruba. In 2008, Petrobras had negotiated to buy the 255,000-barrel-a-day refinery.

Petrobras plans to boost daily crude-oil and natural-gas production to 3.91 million barrels of oil equivalent by 2014, including 152,000 barrels a day from the recently discovered presalt reserves. [3.91M boe/day would put PBR in the same league with XOM and BP.] The totals are pegged to rise to 5.38 million BOE a day by 2020, with presalt oil output of 1.18 million barrels a day.

The oil company, however, said it reduced its total production target by 318,000 barrels a day from the 2009-2013 strategic plan as part of its review of future exploration and production investments. The production targets also don't include any output from areas included in the proposed oil rights swap with the government, the company said.

The presalt finds were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

Petrobras will face a financing challenge to pay for its aggressive development goals. The company said that it will need to raise $58 billion in capital to fund the 2010-2014 investment plan. Petrobras also said that it expects operational cash flow of $155.2 billion in the period.

While the company is currently close to the 35% net debt-to-capitalization limit needed to keep its investment-grade credit rating, Petrobras said that it would maintain a between 25% and 35% leverage target for 2010-2014.

The company is working hard to reduce its leverage. Now that the cost of the 2010-2014 investment plan is known, the company can take another step in a planned share offer, part of the Brazilian government's complicated capitalization plan for Petrobras.

Under the plan, the government will grant Petrobras the right to explore and produce up to 5 billion barrels of crude from government-held presalt areas.

Petrobras will pay for the oil rights in new shares, with minority shareholders also having the option to accompany the offer.

Analysts have estimated that the share offer could be valued between $50 billion and $60 billion, which would make it one of the world's largest-ever share sales.‹