Last month I talked about all manners of sport. Although the 2014 World Cup is fast approaching, other more pressing events have meant Brazil has been eagerly discussed in the Oilfield Technology office.In announcing that its Board of Directors had approved the latest 2030 Strategic Plan last month, Petrobras explained that the context of today’s investment environment has “changed materially” since 2007 (when the preceding 2020 Strategic Plan was publicised). The 2008 economic crisis, the US-led shale gas boom which is affecting the geopolitics of energy, uncertainty surrounding the pace of China’s growth and Brazilian domestic regulatory framework changes were all cited as contextualised changes affecting the company’s strategy going forward.
The company has presented an arguably quite modest vision: of growth in oil production up to 2020 followed by sustained production levels of 4 million bpd on average between 2020 - 30.
However, Petrobras’ and indeed Brazil’s contextualised climate today means many are sceptical of these figures. Some facts are hard to ignore. With a debt of US$ 114.3 billion, the state-owned company has acquired the title of ‘the most indebted oil company in the world’ according to Bloomberg. A weakened Brazilian real against the US dollar has further exacerbated the debt. Government-imposed policies keep the company selling imported fuel at a loss to fight inflation.
But all is not doom and gloom. The company also made public its 2014 - 18 Management Plan, which shows a cautious and sensible take on investment, cutting US$ 16 billion from last year’s plan. The new plan will see US$ 220.6 billion invested in the next five years, with 70% dedicated to exploration and production projects. This represents a 4.3% (US$ 6.4. billion) increase from the 2013 - 17 plan. Of this share, 60% will be spent on pre-salt projects and 40% on post-salt ventures.
Analysts have pointed out that the rising debt has encouraged Petrobras to reduce downstream investments and focus on upstream. “Something had to give,” says Gianna Bern, President of Chicago-based risk-management adviser Brookshire Advisory & Research. “They are re-directing capital spending to the higher-margin, higher-value upstream side of the business over the lower-margin refining side of the house.”
An investment plan that emphasises cost control, efficiency and execution at a time of new pre-salt production units starting up and offshore rigs being deployed shows the company is moving in the right direction. Crucially, this is a time for global assistance, not abandoning projects yet to be commissioned!
Another reason for foreign oil and gas companies to continue to look to invest in the seventh largest economy in the world is its changing culture. Deloitte notes in its Oil and Gas Reality Check 2013 that the country is likely to see resource nationalism subside in the future, and the country’s softened production sharing terms to a minimum of 30% from earlier levels of 45%, underline this development. Furthermore, the customs regime changes from December 2013 are also encouraging. The REPETRO regime will reduce the tax burden on oil and gas companies by suspending federal taxes incurred on the import of goods destined for use in the hydrocarbons industry.
“Culture eats strategy for breakfast,” is a remark attributed to writer and consultant Peter Drucker and was made famous by Mark Fields, President of Ford Motor Company. Cultural changes across continents are always going to be more challenging, and ideas can get miscommunicated, but as Brazil grows more open to technical assistance, and its projects take off – now is the time to start more dialogues and continue to push for continued partnership. After all, proven reserves are always proven reserves.
In time for the Rio Oil & Gas Show, we will be producing our annual Brazil supplement – published in Brazilian Portuguese to make sure no technology or case study gets lost in translation. If you’ve got a success story to share, then please do not hesitate to get in touch. Vejo vocês no Rio!