Petrobras’ Urucu plant in the Amazon jungle, Brazil. The company is less likely to suffer cash flow problems due to the economic downturn. (PA)
Brazil’s smaller independent oil and gas operators may experience cash flow problems this year and next, which will force them to scale back drilling ambitions, Interfax has learned.
HRT Participações em Petróleo, which is mainly active in the country’s Amazon rainforest, said on Monday it would slow down exploration plans amid a resurgent global economic crisis. The company’s chief executive Marcio Rocha Mello said that HRT would now drill 19 wells in 2012, significantly less than the 31 originally forecast. “There’s a global crisis going on and in moments like this we must protect cash flow,” Mello was quoted as saying by local press on Monday. At the time of publication, a spokesman for the company had not returned calls seeking comment.
Analysts polled by Interfax were split on the extent of investment climate deterioration. Rubens Barbosa, a former Brazilian ambassador to the United States who now runs his own business consultancy in Sao Paulo, told Interfax on Monday that prospects for the country’s economy still looked healthy. “HRT’s announcement is a break from what the government and Petrobras have been saying about the investment climate. Just last week the Petrobras chief executive (Jose Sergio Gabrielli) was saying that all investment plans would be kept.”
Revising plans
However, the global downturn was likely to force smaller companies, rather than those with deeper pockets, such as Petrobras and UK-based BG Group, to revise their expansion plans, according to Barbosa. He said: “The international slowdown is bound to affect Brazil is some way, so it depends on companies’ capacity to absorb the impact. It [HRT’s announcement] could be related to the delay in awarding new tenders in the country. There’s still plenty of regulatory discussion surrounding the partition of royalties between Brazil’s states.”
Brazil’s state-owned company Petrobras told Interfax on Monday that it will not review its investments until 2015, despite the lingering threat of further turbulence in global financial markets. A Petrobras spokeswoman said that the company did not plan to cut the investments programmed up until 2015, amounting to $224.7 billion, “even with the prospect of slower growth for the advanced economies over the next few years”.
“The company’s main market is domestic and there has been no confirmed drop in demand for oil and derivatives in Brazil. On the contrary, we are seeing an increase in the consumption of the main oil derivatives,” she added.
In September, Brazil’s federal government attempted to put an end to a dispute with the country’s states over the best way to divide oil and gas royalties. The state agreed to cut its slice of revenue from a ‘special participation’ fund on large hydrocarbon fields by four percentage points. The state had already agreed to give up 10 percentage points of the royalties it receives from companies wishing to explore the country’s large fields. However, the proposals still need to be accepted by Brazil’s states.
Chris DeSa, an associate director at Control Risks in Sao Paulo, agreed that the country’s ‘minnows’ would be exposed to a tough operating environment. “Petrobras will have easier access to international capital than the smaller independent explorers, so we may see their operations are more affected,” he told Interfax in an interview on Monday (see Bossa nova: Challenges for Brazil’s new wave of explorers, 14 September 2011).
BG Group and Brazil’s other notable independent explorer, OGX Petróleo e Gás Participações, had not commented at the time of going to press.
Brazil’s vulnerability
Even though Brazil’s institutions coped well with the 2008 financial crisis, the country is still vulnerable to inflationary pressures and an unusually strong currency, DeSa added. “It does look as though the international downturn is affecting Brazil in some way, with slightly lower demand for the country’s exports. There has also been an effect on the local market, with both corporate and personal bankruptcies up in Brazil.”
“However, the Brazilian Central Bank has been swift to act and lower interest rates, which has proved to be prescient. The Bank also proved adept in dealing with the previous financial crisis, so that’s a positive sign. Brazil should weather the storm, because it’s still showing good GDP growth, but it needs to watch inflation and the exchange rate. The downturn should provide some buffer to inflation, but neither situation is ideal,” said DeSa.
Almir Barbassa, the Chief Financial Officer of Petrobras, warned in August that the success of Brazil’s oil and gas industry may harm the country’s manufacturing sector in an economic phenomenon called ‘Dutch disease’. The increase in revenue from the country’s hydrocarbons had made the Brazilian currency unusually strong, making the environment more challenging for the country’s manufacturers.
The country has a reputation for strong fiscal vigilance. Last week, Brazil’s central bank cut its key interest rate to 11.5%, with the bank’s monetary policy committee Copom unanimous on the decision despite annual inflation at a six-year high of 7.3%. However, the deepening Eurozone debt crisis prompted some economists to applaud the decision as a preventive measure, given the risk of credit contagion. It is still unclear if Brazil’s recent slowdown is linked to this year’s round of interest rate rises stemming from strong economic growth in 2010, when the country’s economy surged 7.5%. Brazil’s economy is expected to grow between 3 and 3.5% in 2011.
It remains to be seen if the longer-term ambitions of independent explorers will be scaled back. HRT plans to drill 39 wells in 2013 and another 39 in 2014, but will drill eight wells this year. However, the economic slowdown has allowed HRT to save around $250 million on existing and future contracts over the past three or four months, Mello told local press. Although drilling plans have been spiked, HRT’s plans to invest approximately $3 billion up until 2014 appear to be unchanged.
Mello also said that gas production from HRT’s 21 Solimões Basin blocks in the Amazon, in which the company has a 55% stake, should start by late 2012 or early 2013. The area is highly prospective, with Petrobras winning regulatory approval last week for a 140 km pipeline linking the Juruá gas field to the Urucu hub near the city of Manaus (see New pipeline raises prospects of Amazon exports, 19 October 2011).
It is still unclear if HRT’s drilling plans have been impacted by the lack of resolution with prospective minority shareholder, TNK-BP over its Solimões assets. Interfax learned on Monday that the deputy chairman of TNK-BP’s managing board, Maxim Barsky, who is overseeing the deal, has completed the first round of negotiations with HRT, but that talks have now snagged.
In late September, Interfax reported that the outcome of the deal was uncertain because of possible tension between the two parties. A research note by Credit Suisse’s Latin America oil analyst Emerson Leite on 18 September, stated: “We understand some terms of the joint operating agreement were causing deadlocks in the process.” TNK-BP has not commented on the supposed delay to the deal, which would give the Anglo-Russian company 783 million barrels of oil equivalent (MMboe) of prospective and contingent resources and four rigs.
In addition to the Brazilian assets, HRT is also the operator of five blocks offshore Namibia (see Brazil’s HRT sees opportunity in the Atlantic mirror, 27 September 2011).
Global slowdown will hit Brazil’s independents hardest
Petrobras’ Urucu plant in the Amazon jungle, Brazil. The company is less likely to suffer cash flow problems due to the economic downturn. (PA)
Brazil’s smaller independent oil and gas operators may experience cash flow problems this year and next, which will force them to scale back drilling ambitions, Interfax has learned.
HRT Participações em Petróleo, which is mainly active in the country’s Amazon rainforest, said on Monday it would slow down exploration plans amid a resurgent global economic crisis. The company’s chief executive Marcio Rocha Mello said that HRT would now drill 19 wells in 2012, significantly less than the 31 originally forecast. “There’s a global crisis going on and in moments like this we must protect cash flow,” Mello was quoted as saying by local press on Monday. At the time of publication, a spokesman for the company had not returned calls seeking comment.
Analysts polled by Interfax were split on the extent of investment climate deterioration. Rubens Barbosa, a former Brazilian ambassador to the United States who now runs his own business consultancy in Sao Paulo, told Interfax on Monday that prospects for the country’s economy still looked healthy. “HRT’s announcement is a break from what the government and Petrobras have been saying about the investment climate. Just last week the Petrobras chief executive (Jose Sergio Gabrielli) was saying that all investment plans would be kept.”
Revising plans
However, the global downturn was likely to force smaller companies, rather than those with deeper pockets, such as Petrobras and UK-based BG Group, to revise their expansion plans, according to Barbosa. He said: “The international slowdown is bound to affect Brazil is some way, so it depends on companies’ capacity to absorb the impact. It [HRT’s announcement] could be related to the delay in awarding new tenders in the country. There’s still plenty of regulatory discussion surrounding the partition of royalties between Brazil’s states.”
Brazil’s state-owned company Petrobras told Interfax on Monday that it will not review its investments until 2015, despite the lingering threat of further turbulence in global financial markets. A Petrobras spokeswoman said that the company did not plan to cut the investments programmed up until 2015, amounting to $224.7 billion, “even with the prospect of slower growth for the advanced economies over the next few years”.
“The company’s main market is domestic and there has been no confirmed drop in demand for oil and derivatives in Brazil. On the contrary, we are seeing an increase in the consumption of the main oil derivatives,” she added.
In September, Brazil’s federal government attempted to put an end to a dispute with the country’s states over the best way to divide oil and gas royalties. The state agreed to cut its slice of revenue from a ‘special participation’ fund on large hydrocarbon fields by four percentage points. The state had already agreed to give up 10 percentage points of the royalties it receives from companies wishing to explore the country’s large fields. However, the proposals still need to be accepted by Brazil’s states.
Chris DeSa, an associate director at Control Risks in Sao Paulo, agreed that the country’s ‘minnows’ would be exposed to a tough operating environment. “Petrobras will have easier access to international capital than the smaller independent explorers, so we may see their operations are more affected,” he told Interfax in an interview on Monday (see Bossa nova: Challenges for Brazil’s new wave of explorers, 14 September 2011).
BG Group and Brazil’s other notable independent explorer, OGX Petróleo e Gás Participações, had not commented at the time of going to press.
Brazil’s vulnerability
Even though Brazil’s institutions coped well with the 2008 financial crisis, the country is still vulnerable to inflationary pressures and an unusually strong currency, DeSa added. “It does look as though the international downturn is affecting Brazil in some way, with slightly lower demand for the country’s exports. There has also been an effect on the local market, with both corporate and personal bankruptcies up in Brazil.”
“However, the Brazilian Central Bank has been swift to act and lower interest rates, which has proved to be prescient. The Bank also proved adept in dealing with the previous financial crisis, so that’s a positive sign. Brazil should weather the storm, because it’s still showing good GDP growth, but it needs to watch inflation and the exchange rate. The downturn should provide some buffer to inflation, but neither situation is ideal,” said DeSa.
Almir Barbassa, the Chief Financial Officer of Petrobras, warned in August that the success of Brazil’s oil and gas industry may harm the country’s manufacturing sector in an economic phenomenon called ‘Dutch disease’. The increase in revenue from the country’s hydrocarbons had made the Brazilian currency unusually strong, making the environment more challenging for the country’s manufacturers.
The country has a reputation for strong fiscal vigilance. Last week, Brazil’s central bank cut its key interest rate to 11.5%, with the bank’s monetary policy committee Copom unanimous on the decision despite annual inflation at a six-year high of 7.3%. However, the deepening Eurozone debt crisis prompted some economists to applaud the decision as a preventive measure, given the risk of credit contagion. It is still unclear if Brazil’s recent slowdown is linked to this year’s round of interest rate rises stemming from strong economic growth in 2010, when the country’s economy surged 7.5%. Brazil’s economy is expected to grow between 3 and 3.5% in 2011.
It remains to be seen if the longer-term ambitions of independent explorers will be scaled back. HRT plans to drill 39 wells in 2013 and another 39 in 2014, but will drill eight wells this year. However, the economic slowdown has allowed HRT to save around $250 million on existing and future contracts over the past three or four months, Mello told local press. Although drilling plans have been spiked, HRT’s plans to invest approximately $3 billion up until 2014 appear to be unchanged.
Mello also said that gas production from HRT’s 21 Solimões Basin blocks in the Amazon, in which the company has a 55% stake, should start by late 2012 or early 2013. The area is highly prospective, with Petrobras winning regulatory approval last week for a 140 km pipeline linking the Juruá gas field to the Urucu hub near the city of Manaus (see New pipeline raises prospects of Amazon exports, 19 October 2011).
It is still unclear if HRT’s drilling plans have been impacted by the lack of resolution with prospective minority shareholder, TNK-BP over its Solimões assets. Interfax learned on Monday that the deputy chairman of TNK-BP’s managing board, Maxim Barsky, who is overseeing the deal, has completed the first round of negotiations with HRT, but that talks have now snagged.
In late September, Interfax reported that the outcome of the deal was uncertain because of possible tension between the two parties. A research note by Credit Suisse’s Latin America oil analyst Emerson Leite on 18 September, stated: “We understand some terms of the joint operating agreement were causing deadlocks in the process.” TNK-BP has not commented on the supposed delay to the deal, which would give the Anglo-Russian company 783 million barrels of oil equivalent (MMboe) of prospective and contingent resources and four rigs.
In addition to the Brazilian assets, HRT is also the operator of five blocks offshore Namibia (see Brazil’s HRT sees opportunity in the Atlantic mirror, 27 September 2011).