brazil reduces oil production plans

[GRG55]

Re: brazil reduces oil production plans

...
So what are the Brazilians up to now?

• Petrobras alone can't possibly raise or borrow the huge sums needed to develop Brazil's offshore oil resources;
• Although Petrobras is one of the more competent NOCs [national oil company] it does not have access to all the knowledge and data needed to efficiently develop the ultra-deep Santos basin;
• Petrobras needs the select few IOCs that can supplement its capabilities in the ultra-deepwater...and it probably needs some of their cash too;
• What is going on now is just more posturing...and not very sophisticated posturing either :p
• Expectations [raised in part by some of the ridiculous discovery claims coming from Brazil itself] that Brazil would "fill the gap" with large increases in oil exports were always misplaced. There was never any logic behind the idea that Brazil would export raw crude and not maximize the domestic industrial benefits from its own energy. Brazil is not a totally corrupt, completely hopeless fourth world nation like Nigeria...but humans the world over seem unable to avoid the corrupting influence of petroleum, and that potential for personal gain for a select few influencial and well connected individuals might be a motive to maximize exports. Regardless of how fast Brazil, or the rest of the world, would like to see production increases, Tupi and the other Santos Basin fields will take two to three decades to develop fully.

The important issue imo is whether Brazil will develop its resource at a sensible pace, using appropriate external resources, and maximize the benefits for themselves...or will the politicians and leaders fall under the spell of "potentially vast riches" and follow the same well worn path of so many other nations that were in the same position.

What was one of the more competent NOCs (National Oil Company), Petrobras, has succumbed to the corrupting politics of oil, and will now probably never fully recover.

Business News| Fri Sep 11, 2015 1:07am BST

Petrobras spending plan already obsolete, new cuts likely - sources

RIO DE JANEIRO

Brazil's state-run oil company Petrobras, which slashed its five-year spending plan by 40 percent in June, will likely cut back further as growing debt costs, falling oil prices and a weak currency have already made the plan obsolete, two company sources told Reuters on Thursday.

Standard & Poor's decision to cut Brazil's sovereign credit rating to "junk" grade on Wednesday was followed by a separate downgrade for Petroleo Brasileiro SA, as Petrobras is known, on Thursday.

The sources said the downgrade will raise the cost of refinancing Petrobras' more than $130 billion of debt and reduce the capital available to drill wells, build production ships and refineries and pay for infrastructure to boost output and revenue.

"The June plan is already obsolete, its outlook for oil prices, debt costs and the currency are no longer realistic. The plan will have to be changed," one of the sources said.

In a statement released late on Thursday, Petrobras said its project financing was sound in the medium term and is not affected by a downgrade in credit risk by a ratings agency.

Hailed as a return to reality after years of missed output goals, record spending and a giant corruption scandal that led to $17 billion of writedowns, the plan unveiled in June cut the 2015-2019 spending goal to $130 billion from $221 billion...

...The S&P move is also Petrobras' second downgrade to junk this year after Moody's Investors Service stripped the company in February.

Many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade. That could lead to a plunge in the price of existing Petrobras debt and limit the pool of buyers for new offerings...

[GRG55]

Re: brazil reduces oil production plans

Petrobras is one of the more competent and capable NOCs, but still subject to tremendous political influence and pressures. That's not usually helpful.

If Mr. Gabrielli, who apparently believes that developing the Santos Basin ultra-deepwater fields is some sort of guaranteed winning lottery ticket, is indicative of the thinking in the Petrobras boardroom then that company will in the not too distant future be a widows and orphans short.

...Mr. Gabrielli, the Petrobras president, argues that the government has good reasons for wanting to limit foreign participation. In 1997, oil prices were much lower and Brazil’s economy was struggling. Today, Brazil has more than $220 billion in foreign reserves, oil prices are higher and Petrobras has become the fourth biggest company in the Americas.

“The financial condition is completely different,” Mr. Gabrielli said. And the development of the new fields, once seen as risky, “now is a winning lottery ticket.”...

Winning lottery ticket indeed. Petrobras has become the Pemex of the southern hemisphere.

Future Of Brazil’s Oil Industry In Serious Doubt

Posted on Mon, 16 November 2015 22:59

Oil market analysts keep a close watch on the weekly and monthly production figures from the U.S. EIA, watching for a sign that a contraction in output will help to balance global supply and demand.There are a few reasons why so much attention is paid to the U.S., rather than other places around the world. First, the U.S. has consistent and reliable data, unlike a lot of other places, which makes analysis easier. Second, the U.S. is the principle culprit behind the collapse in oil prices, as its rapid run up in production pushed supplies well beyond demand. Third, U.S. shale, the source of the recent uptick in supply, rises and falls much more quickly than conventional oil fields, especially large-scale projects such as deep offshore.

Still, it is useful to pay attention to supply changes from outside the U.S. For example, in its November report, OPEC raises a few red flags on Brazil, where a deteriorating economy, a simmering corruption scandal, and a major pullback in the state-owned oil firm Petrobras, could all conspire to cut into Brazil’s oil output.

Brazil’s inflation has jumped to its highest level since 2003, running over 10 percent according to the latest figures. The central bank hiked interest rates to 14.25 percent, the highest in nine years to combat inflation, but so far it has been unsuccessful. Meanwhile, GDP is shrinking, with an expected contraction of 2.2 percent in 2015. And the unemployment rate has hit 7.6 percent, the highest since 2010.

Brazil is expected to increase oil production by 180,000 barrels per day in 2015, hitting 3.04 million barrels per day (mb/d). But 2016 is a different story. Petrobras has been embroiled in a corruption scandal since last year, which has cost the company tens of billions of dollars. Given that Petrobras was already the most indebted oil company in the world, major cut backs in spending were in order...

...The significant slowdown in capital investment on behalf of Petrobras means that the depletion from maturing fields could at some point overwhelm new production. Brazil increased production this year, but that was because it still had a backlog of new projects coming online. But the project pipeline is drying up...

...The strike of oil workers in early November impacted at least 450,000 barrels per day of production. Unions are upset about Petrobras’ planned asset sales, which they see as a backdoor move at privatization. Petrobras, desperate to slash its debt burden, sees asset sales as a necessary evil. The work stoppage impacted output at 50 oil platforms. The two sides recently reached an agreement on November 13 to end the strike, which will include a pay raise of 9.53 percent, and the company will also produce a report within 60 days that studies alternatives to cuts in investment. However, it is unclear how Petrobras can turn around its debt situation while still satisfying worker demands to resist spending cuts...

[jk]

Re: brazil reduces oil production plans

" a corruption scandal since last year, which has cost the company tens of billions of dollars"

i'm impressed. it makes me realize how penny ante are my own ambitions.

[Polish_Silver]

Putting it all together

Winning lottery ticket indeed. Petrobras has become the Pemex of the southern hemisphere.

"Given that Petrobras was already the most indebted oil company in the world, major cut backs in spending were in order...

...The significant slowdown in capital investment on behalf of Petrobras means that the depletion from maturing fields could at some point overwhelm new production. Brazil increased production this year, but that was because it still had a backlog of new projects coming online. But the project pipeline is drying up...

a) Company is highly indebted.

b) project pipline is drying up

c) workers will accept a pay cut in return for profit sharing from future projects.

d) The technology needed for the ultra deep water project is already on the drawing board, and is bound to work first time.

[GRG55]

Re: brazil reduces oil production plans

I believe in some ways it's worse than '97. However, the international coordination and cooperation to deal with it this time appears to be light years ahead of the late 1990s.

During this cycle a great many of the EMs assumed the hot money needed them more than they needed the hot money. Brazil is but one example as the early posts on this thread tried to illustrate. But this corrupting pattern was repeated in many other resource dependent EMs, Kazakhstan & Kyrgyzstan being two I had the opportunity to witness up close earlier this decade. Chinese hot money, a much bigger factor than in the 1990s competing with the capital from more traditional sources, proved an extraordinarily potent fertilizer for the increasingly sophisticated officially sanctioned corruption damn near everywhere.

The longer the boom went on the worse the corruption became, and external financial support (capital inflows) from traditional sources for many of these economies started to dry up years ago as the restrictions and losses on foreign investment mounted. The Chinese, unhampered by such niceties as the FCPA, play by different rules, and so does Chinese money. Predictably, these economies were in trouble long before the recent currency dislocations. Their "lender of last resort" became China, which in the past year or two has lent some significant sums to the largest of the basket cases including Venezuela, Brazil and Russia.

As China's own internal economic challenges mount it seems to be seeking to maintain its needed leadership role, but share the funding responsibilities with others. The New Development (aka BRICS) Bank, the AIIB and the remarkably rapid formalization of cross-linkages with the ADB and the Washington Institutions (IMF & World Bank) suggest perhaps the coordinated ability to deal with the fallout from this latest currency crisis may (may!) be more effective than the hamfisted IMF-led efforts in the wake of 1997. That's only my supposition, however. What will be interesting to watch is that the official new money, including the Chinese share of those funds, will come with a lot of strings attached that the recipients are unaccustomed to.

Regardless, it seems certain that the "rising middle class" in much of greater Asia and Latin America is suffering a major setback as the purchasing power of their considerable savings is wiped out with the widespread collapse of their local currencies. I am watching to see if the currencies of the Persian Gulf oil exporting Arab monarchies are forced to reset their US$ pegs, as many citizens in those nations will see a drop in their purchasing power and standard of living in that event. The ability of EMs to shift from their export dependent mercantile economic model would appear to be significantly impaired, and that might result in some serious global trade tensions in the years to come.

After all the hoopla last year, haven't heard much lately about China- Russia cooperation/BRICS initatives. Maybe China wants to avoid being too closely associated with Russia's military adventurism in the Middle East? Maybe China has enough domestic issues that demand its attention? Maybe something else?

Can Things Get Any Worse for Russia? You're About to Find Out

February 23, 2016 — 7:00 PM MST

For a decade, Dmitri Barinov has been following the volatile economy of his homeland from the safe distance of Union Investment’s offices in Frankfurt. Last year, as other money managers were steering clear of Russia’s broken economy, the Moscow-born Barinov pulled off something of a coup: He persuaded his bosses to take the plunge and buy Russian government bonds. It was a narrow bet, but he ended up winning because the central bank—after implementing the biggest interest rate hike since the Russian financial crisis in 1998 to prop up the collapsing ruble—changed course and aggressively backtracked. In the first 10 months of 2015, ruble-denominated government bonds handed investors such as Barinov a 25 percent return in dollar terms, the biggest gain for local bonds anywhere.

This year not even Barinov can spot an escape from the rubble of an economy mired in its longest recession in two decades. Sanctions imposed by the U.S. and the European Union to punish President Vladimir Putin for meddling in Ukraine remain a drag on growth. And oil’s decline to a 13-year low has been catastrophic for Russia, where almost 50 percent of government revenue comes from crude and natural gas. “With oil, you rely on a very volatile factor,” says Barinov, who oversees about $2.6 billion in assets. So as far as he’s concerned, “all bets are off.”...

...With the 2015 budget based on $50 a barrel, says former Deputy Economy Minister Mikhail Dmitriev, “even $40 a barrel is a dangerous scenario for Russia.” The country holds parliamentary polls in September and a presidential election in 2018, when Putin is expected to run again. The election cycle puts pressure on the government to spend beyond its means, says Dmitriev, who five years ago accurately foresaw the street demonstrations over allegations of vote rigging in legislative elections that turned into the biggest protests of Putin’s rule. “If social dissatisfaction boils over,” he says, “Russia will adopt a populist economic policy for an extended time.”


That kind of spending could exhaust Russia’s National Wellbeing and Reserve funds—currently totaling about $120 billion—within a year or two, says former Russian government adviser Sergei Guriev, who takes over as chief economist of the European Bank for Reconstruction and Development in mid-2016. “After that,” he says, “they will have to increase taxes on businesses, which will undermine incentives to invest, resulting in continuing capital outflow and a further decline in GDP.”...

...Finance Minister Anton Siluanov set the tone for the event, warning that without deep budget cuts to keep the deficit at 3 percent, the country risks a financial crash like that of the late ’90s, when Russia defaulted on its debts, the ruble crashed, and inflation spun out of control.

Siluanov’s assessment surprised no one. Russian GDP contracted 3.7 percent last year and could fall as much as 3 percent in 2016 if oil prices average $35, according to the central bank. In January, the ruble sank to new depths—60 percent below its value against the dollar in mid-2014...

[Polish_Silver]

Oil vs opium

After all the hoopla last year, haven't heard much lately about China- Russia cooperation/BRICS initatives. Maybe China wants to avoid being too closely associated with Russia's military adventurism in the Middle East? Maybe China has enough domestic issues that demand its attention? Maybe something else?

Can Things Get Any Worse for Russia? You're About to Find Out

February 23, 2016 — 7:00 PM MST

For a decade, Dmitri Barinov has been following the volatile economy of his homeland from the safe distance of Union Investment’s offices in Frankfurt. Last year, as other money managers were steering clear of Russia’s broken economy, the Moscow-born Barinov pulled off something of a coup: He persuaded his bosses to take the plunge and buy Russian government bonds. It was a narrow bet, but he ended up winning because the central bank—after implementing the biggest interest rate hike since the Russian financial crisis in 1998 to prop up the collapsing ruble—changed course and aggressively backtracked. In the first 10 months of 2015, ruble-denominated government bonds handed investors such as Barinov a 25 percent return in dollar terms, the biggest gain for local bonds anywhere.

This year not even Barinov can spot an escape from the rubble of an economy mired in its longest recession in two decades. Sanctions imposed by the U.S. and the European Union to punish President Vladimir Putin for meddling in Ukraine remain a drag on growth. And oil’s decline to a 13-year low has been catastrophic for Russia, where almost 50 percent of government revenue comes from crude and natural gas. “With oil, you rely on a very volatile factor,” says Barinov, who oversees about $2.6 billion in assets. So as far as he’s concerned, “all bets are off.”...

...With the 2015 budget based on $50 a barrel, says former Deputy Economy Minister Mikhail Dmitriev, “even $40 a barrel is a dangerous scenario for Russia.” The country holds parliamentary polls in September and a presidential election in 2018, when Putin is expected to run again. The election cycle puts pressure on the government to spend beyond its means, says Dmitriev, who five years ago accurately foresaw the street demonstrations over allegations of vote rigging in legislative elections that turned into the biggest protests of Putin’s rule. “If social dissatisfaction boils over,” he says, “Russia will adopt a populist economic policy for an extended time.”


That kind of spending could exhaust Russia’s National Wellbeing and Reserve funds—currently totaling about $120 billion—within a year or two, says former Russian government adviser Sergei Guriev, who takes over as chief economist of the European Bank for Reconstruction and Development in mid-2016. “After that,” he says, “they will have to increase taxes on businesses, which will undermine incentives to invest, resulting in continuing capital outflow and a further decline in GDP.”...

...Finance Minister Anton Siluanov set the tone for the event, warning that without deep budget cuts to keep the deficit at 3 percent, the country risks a financial crash like that of the late ’90s, when Russia defaulted on its debts, the ruble crashed, and inflation spun out of control.

Siluanov’s assessment surprised no one. Russian GDP contracted 3.7 percent last year and could fall as much as 3 percent in 2016 if oil prices average $35, according to the central bank. In January, the ruble sank to new depths—60 percent below its value against the dollar in mid-2014...

If you start taking opium, you like it so much that you quit your job, leave your family, turn to a life of crime. (or is that only in novels?).

When I got off the plane in Taipei, I saw a sign proclaiming that possession of heroin was a capital offense. (My client claimed that it was not enforced, but you know the saying "never trust an employer")

It seems like countries that depend a lot on oil never develop a proper middle class, the ability to manufacture tradable goods, etc.