Business

Brazil Gives Petrobras Added Rights for Billions in Advance Payments

Brazil's government agreed Tuesday to sign over additional production rights for potentially huge oil fields to state-run oil company Petróleo Brasileiro SA, or Petrobras, in exchange for billions of dollars in advance payments.

The Wall Street Journal
25/06/2014 15:10
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Brazil's government agreed Tuesday(June 24) to sign over additional production rights for potentially huge oil fields to state-run oil company Petróleo Brasileiro SA, or Petrobras, in exchange for billions of dollars in advance payments.

Petrobras will receive expanded production rights to four oil fields off the coast of Brazil that it acquired from the government in 2010. But the company will have to pay a "signing bonus" of two billion Brazilian reais ($898 million) to the government in 2014, plus an estimated BRL13 billion in oil during the following four years.

 

The unexpected deal came as Brazil's federal government is looking for ways to meet its budget goals this year. Economists say slowing growth, high inflation and election-year spending will likely drive authorities to seek revenue from so-called nonrecurring sources to meet its 1.9% primary surplus target for 2014.

 

News of the agreement, which will likely increase Petrobras's investment burden as it seeks to drastically increase production in coming years, weighed on the company's shares. Petrobras's stock declined 3.6% to close 17.64 reais Tuesday.

 

The company, for its part, tried to paint the deal in a positive light, saying it will reduce oil-exploration risk.

 

"Petrobras doesn't have the least doubt that this is an exceptional opportunity," Chief Executive Maria das Graças Silva Foster said at a news conference late Tuesday.

 

The agreement gives Petrobras the right to increase output of hydrocarbons from the Buzios, Entorno de Iara, Florim and Nordeste de Tupi oil fields.

 

Brazil's national petroleum agency, which carries out exploration activities, has increased its estimates for the fields' potential oil reserves since Petrobras originally acquired production rights in 2010. As a result of Tuesday's agreement, Petrobras will have the right to produce between 9.8 billion and 15.2 billion barrels of oil at the fields through 2051, in addition to an initial contract for five billion barrels. The oil is located thousands of feet below the seafloor in the difficult-to-reach "pre-salt" layer.

 

Ms. Graça Foster stressed that the numbers are government estimates for the fields' potential. Petrobras's total proven oil reserves—calculated using more stringent criteria—amount to 16 billion barrels.

 

Production from the fields should begin in 2021 and peak at around one million barrels of oil a day in 2026, Ms. Graça Foster said.

 

She also played down the immediate impact of the deal on Petrobras's already stretched finances and ruled out the need to take on more debt to finance the signing bonus it will have to pay this year. Ms. Graça Foster said Petrobras will have to increase its 2014-18 investment budget by around 3%.

 

"This is an enormous satisfaction for me," she said. "There is no oil company in the world I know of that has had such an opportunity to exploit such large oil reserves in areas that it knows so well—like the back of its hand, in fact."

 

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