Petrobras Slashes Capex in Bid to Cut Debt

Source: Reuters 6/29/2015, Location: South America

Brazil's state-run oil company Petrobras slashed its long-term spending plan to the lowest level in eight years on Monday as new management moved to reduce the industry's largest debt burden and restore confidence after a devastating corruption scandal.

Petroleo Brasileiro SA, as the company is formally known, will invest $130.3 billion in the 2015-2019 period, the company said in a statement. The capital expenditure plan is 41 percent lower than the $221 billion projected in its previous five-year plan, covering the 2014-2018 period.

It also trimmed its 2020 forecast for its global production by nearly a third to 3.7 million barrels of oil and equivalent natural gas a day (boepd), from its estimate of 5.3 million boepd a year ago.

The investment plan, the company's smallest since 2008, is its first major admission that spending and expansion plans imposed on it by two successive center-left Workers' Party governments over the last decade were not realistic, especially in the face of falling world oil prices.

The plan again postpones the government's hopes of turning high-potential oil fields off the coast of Rio de Janeiro into a political bonanza. Since their discovery almost a decade ago, Brazilian President Dilma Rousseff, who was energy minister at the time, had promised to use the profits from selling such new deepwater oil finds to build schools and hospitals, helping Brazil join the developed world.

Those hopes have receded as a massive kickback scandal has made Petrobras synonymous with political corruption and transformed the company into a liability for Rousseff, who has not been directly implicated but did serve as the company's chair for several crucial years.

As part of the plan, Petrobras reduced its outlook for the price of Brent crude oil to $60 a barrel in 2015 and $70 a barrel for 2016-2019. A year ago it was predicting long-term prices of about $95 a barrel.

"The plan in general sends a much more realistic message than previous plans," said Eduardo Roche, a fund manager with Canepa Asset Management in Rio de Janeiro.

On a global level, the Petrobras cutbacks are the latest, and by far the largest, reduction in capital spending as the global energy industry tightens its belt in a world of lower oil prices - measures that some analysts and industry executives worry could leave the world short of oil as soon as next year.

Petrobras preferred shares, the company's most-traded class of stock, were down 3.3 percent in Sao Paulo.

While the spending cuts should help control the growth of Petrobras' more than $120 billion of debt, the lower production target will also crimp revenue and reduce the expected tax and royalty take for the government.

Aside from the promise of new asset sales and bringing domestic fuel prices in line with world prices, the plan is short on specifics on how it will achieve its goals, especially with global oil prices so low, said Auro Rozenbaum, oil analyst at Banco Bradesco SA.

"Considering the size of their debt I don't know how they will resolve it," he said.

The reductions reverse a capital spending surge at the state-controlled company starting in 2008, shortly after the discovery of offshore deposits with enough oil to supply all current U.S. oil needs for 7 to 14 years.

According to Brazilian prosecutors, huge cost overruns on a refinery growth plan expanded as part of the surge were in part the result of a bribery and political-kickback scheme involving Petrobras officials, contractors and politicians.

In the wake of the scandal Petrobras was forced to write down about $17 billion of assets. Of that about $2 billion was written off as the direct result of the cost-fixing, bribery and kick-back scheme.

About 83 percent, or $108.6 billion, of the new capex plan will go towards exploration and production. The biggest cuts come in refining and supply which saw its budget reduced 67 percent to $12.8 billion, compared to last year's plan.

The impact on Brazil could be large. In recent years Petrobras has spent about $40 billion a year, an amount about double the entire Brazilian federal government's discretionary budget for roads, ports, hospitals, new computers and other social infrastructure. A recent freeze in spending because of the scandal has seen thousands lose their jobs.

Petrobras in its release on Friday said that this year's plan is 37 percent lower than the previous plan. That number though, is based on the removal of about $15 billion worth of items that were originally announced in last year's plan.

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