RIO DE JANEIRO—Brazil’s state-run oil company Petrobras intends to sell 70% of its 254 assets located in mature and shallow-water fields in the country.
The announcement was made in January and reported to Brazil’s oil and gas regulator ANP. Most of the assets to be sold are located in Brazil’s northeast region. The move reinforces the commitment of the new Brazilian administration, which took office in January, to make the company more business oriented and financially healthier.
Petrobras has conducted its divestment plan over the past three years in an effort to tackle its giant debt, which had risen to more than $100 billion by 2015. The Brazilian operator expects to raise US$26.9 billion through 2023 with this divestment process. In November, Petrobras reported that it reached US$8.3 billion through divestments carried out between 2017 and 2018.
Petrobras’ 2019-2023 Business and Management Plan focuses on financial planning and the pursuit of profitability of the company’s businesses for the next five years. “The plan incorporates a new top metric, seeking to ensure profitability, in addition to maintaining the safety and debt reduction metrics that guide the company’s strategies,” Petrobras said in a statement released in December. “Through [cost discipline], debt reduction and commitment to profitability, the company estimates a strong free cash flow generation in the plan period.”
For Horacio Cuenca, research director of upstream Latin America for Wood Mackenzie, some of the largest assets up for sale represent good opportunities for the right type of operator. Those with low overheads focused on improving operational efficiency and maximizing recovery factors can profitably extend the productive life of these fields.
“We do expect to see interest for the best assets, depending on the commercial terms offered by Petrobras, especially regarding the sale of oil and gas production, the allocation of decommissioning expenditures and establishing a baseline of environmental and labor liabilities,” he said.
Cuenca said he believes sharing the cost of future decommissioning expenditures in light of regulatory uncertainty surrounding abandonment will go a long way toward enabling smaller companies to participate. Cuenca also pointed out that establishing competitive terms for the commercialization of future oil and gas production given the lack of alternatives for any new entrant, especially on the smaller scale assets, will also be a key success factor.
“The clusters with the biggest remaining reserves and lower recovery factors present the biggest upside for a potential buyer,” he said. “Proximity to export terminals will be a big plus. Enough incremental production can justify new transport and export facilities, allowing the new operator to achieve better commercial conditions for the sale of its production.”
The recent ANP initiative to reduce royalties on incremental production for mature fields represents another positive regulatory upside seen by the expert as another important move to attract future buyers of Petrobras’ assets. “Operators can request a reduction to a 5% royalty rate [from the usual 10%] on incremental production for fields that have been producing over 25 years or have depleted at least 70% of their recoverable reserves,” Cuenca said.
Oil prices must also be evaluated by companies. “[Oil prices] will continue to be volatile, but there is a growing consensus that the coming years should see an average of US$65 to US$70/bbl,” Cuenca continued. “If these market prices are accessible to small-scale producers onshore Brazil, this will be an advantage for the divestment program.”
The analyst also said the biggest challenges for Petrobras will be ensuring that potential buyers are shielded from any existing environmental and labor liabilities. He added that Brazil must solve regulatory uncertainties that can impact the divestment program negatively, especially surrounding decommissioning requirements and the risk of environmental and labor disputes.
“The companies can reach contractual agreements trying to reduce this exposure for the buyers,” he concluded.
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