Latin Finance - March 2008 - 34

Brazil oil & gas Clarence Tong, senior vice president for project and the five year budget plan was released. international finance at Mizuho Corporate Bank, agrees. “For “It’s too early to say how much money it will take to develop Petrobras to reach its 2012 total target production level of over these fields, or exactly when we’ll need it, but the numbers will certainly grow,” says Barbassa. “By the middle of this year – July three million barrels of oil equivalent a day, they have to find and confirm a lot more reserves, which means more drilling, and or August – when we release our new five year plan, we should that means more rigs and drill ships,” he says. In 2007, Petrobras be able to make some projections.” Still, when asked about one of the numbers circulating in the markets – an extra $20 billion – only produced around 1.8 million barrels of oil equivalent a day. Tong notes that the typical source of funds for such big Barbassa says that even though calculations are still being done, projects in Brazil, state-owned development bank BNDES, is not “if I were a betting man, I’d bet that that’s too low.” very active. Since the platforms are built outside Brazil, he With that kind of development cost, oil prices have to remain explains, BNDES has little interest in investing in them. “But high for the fields to be profitable. Although Barbassa says that’s just fine, since there’s currently a strong appetite among Petrobras could not provide an estimate for the minimum price needed to turn a profit in Tupi, analysts are starting to guess. For international banks for this kind of deal,” Tong adds. Banks would also be interested in financing pipelines in Walter de Vitto, energy analyst with the São Paulo economic Brazil, as Mizuho has done in the past, think tank Tendências, prices of about $50says Tong. Right now Petrobras is $60 a barrel would make Tupi profitable. financing them on its own, but he “Clearly at current prices, it’s a great deal,” speculates that if the natural gas fields he says. next to the recent oil finds prove viable, McCarthy at Bear Stearns has a similar there might be room for outside estimate. “We calculate that if oil is at $70 a investors. barrel, they’ll make $15 a barrel,” he says. For Barbassa, one thing is already clear: Petrobras will need a lot of money at some Risky Waters? point. “Recently we haven’t needed to raise Denis de Castro, director for project and money on the capital markets,” he says, commodity finance, South America, for noting that in 2007 Petrobras amortized UniCredit, also sees major potential in more debt than it raised. But this will offshore oil platforms. “We’ve helped probably change. finance several of these rigs, and we “In two to three years, the heavy expect to do more,” he says. “The investments in these new fields will begin, fundamentals are there, and so is the and we expect to start accessing the capital demand.” markets more and more each year,” says De Castro adds that, unlike many Barbassa. “We’re underleveraged right now other big-ticket projects in Brazil, project and rated investment grade by the three finance for oil platforms offers a fair major agencies, so we’re in a comfortable amount of judicial security. “The asset is Heavy investment coming: Petrobras’ Barbassa situation for when we want to start raising in Brazilian waters, so under Brazilian money.” law, but since the specific project Barbassa adds that, contrary to the hopes of some analysts, company itself is offshore, it offers fewer legal risks.” De Castro Petrobras will not start issuing investment plans for time periods also notes that Petrobras’s strict requirements and excellent longer than five years. “Internally, we work with longer plans, record on environmental safety generally prevent one of the and I can say that we’re expecting to invest in these new fields most common obstacles to infrastructure investment in Brazil: for over 10 years, but we’ll continue to release only five year judicial injunctions to protect the environment. Tong agrees. plans to the public.” “We haven’t had any problems with regulations here, since the rules are clear,” he says. “We perceive the political risks in Brazil as pretty low too,” Tong adds. Project Finance Possibilities There are still risks, de Castro says, but they are the same as All this may open up opportunity for financing supporting projects anywhere in the world. “Petrobras usually offers a projects. Last year, for example, several charters and oil drilling contract for five to seven years, but a platform can be expected service contracts were awarded by Petrobras, enabling winning bidders to enter into EPC and project financing arrangements for to function for 25 to 30 years. So if the market collapses after the contract expires, you could be in trouble.” However, de Castro sophisticated deep sea drilling rigs at a value in the range of adds, under current conditions it is possible to reduce this risk by $500 million apiece. Barbassa specifies that the number of such arrangements last structuring deals so that 80% to 85% of the loan is already paid back by the time Petrobras’s initial contract expires. year was seven. Petrobras has not yet calculated how many or Longer term, the possibilities for investors are huge, not just what kind of additional rigs it will need in coming years, but the in platforms and drill ships, but production facilities, pipelines, number will likely be high. and anything to do with oil and gas services. So even if things “That’s where the action is going to be,” for outside investors seem quiet over the next year or so on the finance front, no one and lending banks, says Stephen Hood, senior partner should mistake Petrobras’s long-term ambitions. “Right now it’s responsible for oil and gas at Mayer, Brown in São Paulo, whose the quiet before the storm,” says Barbassa. LF clients include Petrobras. 34 LATINFINANCE March 2008

Latin Finance - March 2008

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