Petrobras: Dead In The Water 20 comments
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Brazil's oil giant Petrobras (PBR) on Friday postponed the disclosure of its new business plan so that it could evaluate the impact of the global financial crisis.
The global credit crunch has smashed the deepwater building program at Petrobras. Whether it can pay for current orders is questionable. The Brazilian state investment council voted to shore up PBR in the short term. That suggests Petrobras has cash flow problems now -- without the presalt development cost expected to total $500 billion over the next decade.
We noted previously that Petrobras was borrowing to pay dividends, but the precipitous drop in oil price hit its business plan hard. Suddenly, a $20 billion bond issue is impossible.
PBR's published capex budget covered construction of huge new petrochemical and oil refineries, thermal energy network, maintenance and overhaul of P-17 and P-23 platforms, drillship and FPSO charters, and construction of the new Rio Grande shipyard. It has contractual commitments in Africa and deepwater GOM. Zero $ capex was budgeted for production of Tupi-Carioca.
Funding the presalt play was supposed to be easy. Modec is building three FPSOs for Tupi pilot production, which Petrobras agreed to pay $400,000 per day for 5 years with deferred option to buy at $1 billion each. $5 billion total, no cash upfront. Jurong Shipyard in Singapore is funding another FPSO for Roncador field, $1.6 billion plus operating cost. Eight more FPSOs are supposed to be magically assembled on a crash schedule at Rio Grande when it's completed and if they somehow pull together a trained local workforce and 3000 new homes on government subsidies.
Petroserv, Sembcorp Marine, and Norway's BW Offshore are busy converting old rustbuckets into shiny new FPSOs for Petrobras that will rent for $250,000 a day with an option to buy at the low, low discount price of $250 million. Three were tendered, $2.2 billion plus operating costs.
Meanwhile, Queiro Galveo is building three semi-submersibles, and the Quip Consortium (Queiro, UTC and Iesa) have orders for 10 FPSO hulls, plus topsides for P-53, P-55 and P-63 built by SBM.
Jurong Singapore, Daewoo, Keppel Fels and Sevan Norway are bidding more work. It's difficult to track the entire list. PBR announced 40 total, of which 28 deepwater rigs to be built at domestic shipyards, 14 drillships and 14 semi-submersibles. Delba Baiana tapped WestLB Capital for $488 million to start four of those rigs. Aker Solutions has a multi-billion dollar order for subsea trees and National Oilwell Varco is tipped to provide thrusters and generators. The whole subsalt program is contingent on solving an esoteric puzzle -- corrosion resistant risers that are immune to CO2 and hydrogen sulphide. Technip is working on it. PBR needs about 100 miles of this superpipe.
So what's the total? Brazilian energy minister Edison Lobao says $115 billion. Maybe that's the order book as of today -- about 1/3 of the deepwater iron required to lift the tens of billions of barrels of oil that PBR claim as proved and probable subsalt reserves. Let's suppose that it's plenty to start with. Does it make sense as an investment?
Petrobras CEO Jose Sergio Gabrielli:
For each 150,000 barrels per day of output and a production system comprising a floating platform, wells and subsea lines, the cost may be between $6 billion and $8 billion. We don't know whether we'll need 20, 40 or 50 such production systems.
Not counting green crews, mismanagement, lost tools, sidetracks and drilling blunders, let's say PBR's guesstimate is correct: $7 billion to lift 150,000 barrels a day, 50 million barrels a year times 5 years = $30 per barrel. No way, Jose. Corrosion, natural decline, taxes, and interest expense make this financially improbable. Labor and supplies are another $20 per barrel. It does not include transporting whatever net oil & gas is produced 300 km by nonexistent pipeline or a never-before-attempted floating LNG liquefaction train. No one in the oil business has experience fracing tight reservoirs four miles down, and Wide Azimuth seismic won't be available until Q2 2009.
Bottom line: PBR is counting on state funding, vendors and shipbuilders to finance construction, and betting that production will pay for it all. We affirm our negative outlook and SELL rating.
Disclosure: No position long or short in any oil company or ETF.
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This article has 20 comments:
The unintended consequence of the ongoing financial bailout will be inflationary pressures to the commodity markets.
Also, PBR maybe forced to give up future exploration in all other parts of the world in order to fund the new fields. The dividend appears to be gone as well.
Its like asking a custom build shoemaker to sell his wares for less than cost of the Leather.
Dream on. BTW, Devon Energy now expects to produce 1/3rd less Nat.Gas than previously forecast in 2009, the costs of extraction exceed the price of NG. Haynesville was mentioned in particular. The Interview was on CNBC on Oct.17th.
"I am the head of investor relations at Petrobras. I read with bemused
interest your article on Petrobras. It was sent to me by someone who read Seeking Alpha. Your article was full of gross factual errors with no
apparent understanding of how our company works. I am not sure publishing this helps the reputation of your firm. It is one thing to be independent, it is another to be accurate.
"If in the future, if you would like to speak with Petrobras to confirm the
accuracy of your statements/opinions, feel free to contact me.
"Sincerely, Theodore M. Helms"
Option to Lease FPSO:
CAPEX risk (EPCI) is taken by contractor
Obtain “life of contract” warranty on FPSO
Payment of lease coincides with income from field
Minimize expenditure (pay only for what is needed, during time needed)
Residual value risk is taken by contractor
Redeployment risk is taken by contractor
Wildly fluctuating oil prices (50% in 4 months!!!) are preventing both the development of new supplies AND the development of alternative energy. Every time someone tries to build up capacity in either area in response to high oil prices, they get nearly bankrupted a short time later by a price collapse.
Those smart, smart guys in Saudi Arabia - gotta love em!
Investments planned for between 2009 and 2013 may now be extended to a date closer to 2020, Gabrielli said, the Brazilian newspaper reported today.
If Petrobras wants me to back down, they need to publish Jubarte daily subsalt production, GOR, API, sulphur and water cut.
On June 2, 2008, we issued a sell rating on PBR which at the time was trading at $72 a share. Its P/E was double that of Exxon and return on equity was half. "There is absolutely no sense in PBR's premium valuation," I wrote, "except a momentum trade on announcement of big Tupi reserves, bigger Carioca reserves, and big profits in the future." In a report to subscribers, we estimated pre-salt lifting costs would be $40 per boe. I said Tupi was tight sour gas. Not light sweet oil. Those remarks were highly contentious.
Recent estimates of Tupi lifting costs range from $10 a barrel (Deloitte & Touche) to $35 (Jose Antonio Figueiredo, executive manager for engineering at Petrobras). My best guess now is $50, based on complexity of subsea installations, horizontal drilling, corrosion resistant risers, gas separators, injection wells, support vessels and FPSOs. Maybe more than $50. Ultra-deepwater drilling needs oil at $70 a barrel to be viable, according to OPEC President Chakib Khelil.
There's equal confusion about the long term cost of producing and transporting Tupi's 5 billion barrel reportedly recoverable reserves. It could be $50 billion (Deloitte & Touche) or $115 billion (Brazilian energy minister Edison Lobao) or perhaps $200-300 billion (Petrobras CEO Jose Sergio Gabrielli). In any case, I'm told that Petrobras is only committed so far to a $5 billion pilot project that will run two years before a decision is taken how to develop Tupi. And that brings us to the geology.
At the mid-September Rio Oil & Gas Expo, PBR's director of pre-salt exploration Jose Formigli presented a well core photo from the "sag phase" at 4920m which is immediately below the salt trap and is apparently their best reservoir. How they managed to recover a core, I don't know, but it has always been my policy to take Petrobras at their word. It's a beautiful photograph, identified as stromatolite -- a carbonate formed by bluegreen algae that's as vuggy and porous as a sponge, a world class reservoir. Very remarkable, very exciting. Except that it's only 5 inches tall and was squashed by compaction under a couple thousand feet of salt. Formigli also showed a photo of recently-formed stromatolites on a beach in Australia. Very nice. Two feet tall. He would have been better off showing the stromatolite trend in the Bahamas, which are four or five feet tall, or maybe the giant Precambian example in China, which is 15 feet. Bottom line: Tupi's buried algae fossils are ball-shaped, disconnected and meaningless. A three- or four-foot section, however wonderfully porous and permeable, does not justify $100 million ultradeepwater horizontal production wells.
Anadarko recently reported a 195-ft hydrocarbon pay in the adjacent pre-salt Carioca trend, which is probably the same sag carbonate sequence, mostly dolomitized limestone with a thin stromatolite layer on top. I'm speculating now because Anadarko was particularly coy about what kind of "pay" they found on wireline logs. Could be gas, might be oil. Drilling will continue to deeper horizons in the rift phase, undoubtedly tighter and higher pressure rocks.
What's driving all this exploration activity is oil-prone Type I algal kerogen in Tupi-Carioca and good evidence of peak or slightly postpeak maturation. Enormous areal extent of thick salt covering an organically rich paleo lake looks good. Unfortunately, we've been here before -- in deepwater salt offshore Angola 30 years ago. Arthur Berman of World Oil takes up the cautionary tale: "Horizontal drilling and hydraulic fracturing are being considered by Petrobras. Tupi reservoir rocks may be similar to the Toca carbonates of the Lower Cretaceous (Barremian-Aptian) Bucomazi Formation in West Africa. At the Kambala Field in Cabinda, Angola, Toca reservoirs are 75 to 300 ft thick and consist of partially to fully dolomitized carbonates that have matrix porosities of 2-10% and very low permeability. At Kambala, production is controlled by faulting and fracturing and, while the field contains more than 1 billion bbl of oil in place, cumulative production after 30 years is less than 50 million bbl." That's a recovery factor of 5% including recent horizontal infill drilling.
It's important and pertinent because 175 million years ago in the Jurrasic era, Tupi and Kambala were two halfs of a single paleo lake in the center of supercontinent Gondwana. The eastern half rifted and became Brazil's Santos-Campos platform ringed with upthrown blocks and volcanic seamounts. See www.geoexpro.com/geosc.../
No one is denying that there is rich potential in Brazil's pre-salt. "The most important source rocks in the South Atlantic and in the greater Campos basin are the lacustrine black shales and marls of the Neocomian to Aptian Rift and Sag sequences. They reach up to 300 m (984 ft) thickness with total organic carbon (TOC) up to 9%, composed of dominant Type I, amorphous organic matter, mainly derived from algal and bacterial remains." See www.offshore-mag.com/a...
All of Brazil's current offshore oil production, 2 million barrels per day from shallow sandstones, originally came from pre-salt source rocks. Oil migrated through salt welds and fractures caused by magmatic dikes and lava flows. See www.mantleplumes.org/B...
The thing at issue is money, not geology. Undoubtedly there are big oil and gas reserves subsalt, all of it under tremendous pressure that implies gas coning, asphaltenes, sulphur and CO2. Rocks are probably dolomitized and have to be fractured, which Petrobras has openly acknowledged. I don't think it makes any sense financially.
"Your whole sell rating is based on the supposed difficulties of the pre-salt. At our current stock price the market is valuing Petrobras at about 50% of our PV 10 calculations. Since the pre-salt is not in our reserve position, they are valuing only existing proved reserves using SEC criteria at a long term oil price of around $50. PV-10 includes no value for our probable and possible reserves in our traditional reservoirs, much less our pre-salt. You are doing a disservice to your readers to not at least mention this." (Theodore Helms, executive manager Petrobras investor relations)
To which, I say P-36. If it makes anyone feel better, I'll change my sell rating to speculative. But please don't buy any oil company based on "probable and possible reserves." Buy production. Actual oil and gas delivered to a refinery. Petrobras is a net importer. They make money from exploration & production. They lose money downstream. Each quarter PBR has slightly less cash, although I accept they can borrow more from the Brazilian government, from China and Japan.
Remember Ben Franklin? Neither a borrower nor lender be.
www.projectfinancemaga...
More detail via Gulf News:
Norway's Sevan Marine has lost 70 per cent of its value this month amid concern it won't get financing for two drilling units.
Houston-based Atwood Oceanics Inc. said October 16 that it won't exercise an option to build a deepwater rig at Jurong Shipyard Pte. Ltd. in Singapore. New rigs were being ordered to ease a shortage of deepwater gear needed to exploit offshore prospects like Brazil's Tupi, announced in November by Petroleo Brasileiro, or Petrobras.
"Petrobras would probably be the dominant oil and gas company that gets hit by this," Uhlmer said.
Jose Sergio Gabrielli, chief executive officer at state-controlled Petrobras, said the Rio de Janeiro-based company may need to help find financing for some of its suppliers. "We are concerned about the supply chain of products for Petrobras," Gabrielli told reporters at a conference in Houston last week.
Chief Financial Officer Almir Barbassa, speaking on the sidelines of the same conference, added that some suppliers are affected by the loss of trust by lenders.
"This causes much more problem to our supply chain, as Gabrielli said, than to ourself directly, but we cannot survive without our supply chain," Barbassa said.
www.gulfnews.com/busin...
Keep in mind that MS speculates in oil futures and makes a market in East Coast physical oil inventories. The question should be when and how much of those "massive untapped reserves" can be monetized. I think the answer is 2015 or beyond to break even. Speculative rating affirmed, no matter what Morgan says.
This company has market leading technology and its patented hull is very cheap to construct. The properties of the cylinderal hull would give Petrobras cheap, reliable (99.9% uptime in North Sea 10-12m waves this autum) and high capacity carrying units both for drilling purposes and FPSO. The hull is also easily refitted to other uses such as liquid gas.
This could aid Petrobras greatly in this venture. Cheap oil is long gone, but perhaps peak-oil is also? We may find us in the case where oil prices move in the 40-90 dollar range for years to come, it would not be a stupid move for a large company to bootstrap and focus on cheap and self-reliant solutions. Why not buy the technology and do it yourself, it would be the natural choice of a large nationalize, oil-company from an semi-socialist country, thus also create jobs at home.
www.sevanmarine.com/in...