Flashlight Petrobras

Writer Frank P. Neuhaus Founder and director iManagementBrazil Ltda. São Paulo, Rio de Janeiro - Brazil

Photos & Illustrations iManagementBrazil Ltda. Shutterstock, 2014 iStudioBrazil, Brazil all photo rights registered

July 2014

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PrefaceThe discovery of ultra deep-water pre-salt oil fields by the Brazilian giant Petrobras raised highest expectations in this sector. Meanwhile such expectations have cooled down. Nevertheless, unique chances for new suppliers are opening up. On the one side Petrobras are reflecting the entire value chain for the ultra deep-water pre-salt oil fields - on the other side they are reconsidering  the position and competence of every single supplier and start the really sudorific work to develop the giant project. !Under huge administrative and management pressure, political irritation and a huge financial deficit, Petrobras opted to turn back to the pre-salt exploration block BM-S-10, where the company made the first drillings in ultra deep-water exploration fields in April 2014. The project has again been given to the National Oil, Gas and Bio-Combustible Agency (ANP) in order to avoid further delays in developing the area. !Despite the large challenges and serious problems, the development of the pre-salt exploitation project is going ahead and the new production record has been achieved for the first half of 2014. With a focus set on sophisticated technology and improved productivity, the doors are wide open for new suppliers. The new hub in Santos has made great progress and the R&D center in Rio de Janeiro defines the new technological requirements.!The following pages illustrate the present situation and display not only the four reasons for the project crisis, but also real opportunities in the Brazilian industrial sector.

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2006

2007

2008

2009

2010

2011

2012

2013

2014

Discovery of ultra deep-water pre-salt oil layers in the Brazilian Atlantic

Capitalization of R$ 120 billion executed by the national development bank BNDES

Ms. Graça Forster assumes the presidency of Petrobras

31 billion barrel of oil reserves registered confirms Brazil among the 10 largest oil nations

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The principal financial indicators are getting worse.1

1,6

1,7

1,8

1,9

2

2,1

2006 2007 2008 2009 2010 2011 2012 2013 2014 (E)

The oil production suffered a stagnation during the past years …!(in million barrels per day)

0

7,6

15,2

22,8

30,4

38

2006 2007 2008 2009 2010 2011 2012 2013 2014 (E)

… and interrupted the cash generation of the company.!(in billion US$)

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 (E)

investmentsdebts

As the investments for the pre-salt exploration increased a lot, the debts of Petrobras exploded.!(in billion US$)

0

48

96

144

192

240

2006 2008 2010 2012 2014 (03/14)

The development investment vs. debts provoked strong devaluation of the market value. !(in billion US$)

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A global comparison: Petrobras stays behind the competitors in the same sector.2

Petrobras

average of the 10 major competitors

best market performer: Ecopetrol, Colombia

0 5 10 15 20

Petrobras is the company with the the lowest rentability …!(Return on Equity in 2013, in percentage)

Petrobras

average of the 10 major competitors

best market performer: Chevron, USA

0 1 2 3 4

… and the company with the highest debts ratio in the sector.!(debts in relation with cash generation)

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The investors have no confident for the time being.3

Exxon Mobile

BP

Shell

Petrobras

Total

Chevron

0 5,5 11 16,5 22

Despite presenting one of the major global oil reserves proved …!(in billion of barrels)

Petrobras

Petrochina

BP

Shell

Exxon Mobile

Chevron

-70 -52,5 -35 -17,5 0 17,5 35

… Petrobras is the company with highest devaluation in the sector between 2010 to 2014 !(in percentage)

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Price Control Stagnation of Production

Enforced Local Content

Delayed Projects

The price control policy of the government drains the cash position of Petrobras. Having to serve the domestic market, the company imports diesel at a price higher than the selling price to the consumer.

The production increase depends on investments coming from the cash flow, reduced by governmental price control and a strong value chain of suppliers which is very modest in this moment.

In 2010, the government defined the present local content rules for suppliers operating in the pre-salt exploitation areas. Without sufficient supplier capacity, Petrobras delays the production increase and suffers from high cost of the national value chain.

The two major refinery projects of Petrobras, Abreu e Lima (RNEST) and CompeRJ, are delayed. Compensating processing capacity, Petrobras imports diesel and derivatives. Price controls by the government do not allow to adjust the sales price to the buying price. 

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Example: SBM OffshoreThe Dutch company shared the Brazilian market with large service contracts. But due to a neglected and inadequate contract management negative impacts on pre-salt project development as well as balance sheet of Petrobras will be realized.

The company

largest global manufacturer and operator of maritime platforms

Impact on scope of supply

suspension of 04 exploitation and production platforms

2nd. quarter of 2014

suspension of contracts with Petrobras due to investigation of corruption against the European company in Brazil and the Netherlands

Present contracts with Petrobras

08 contracts contract value billion US$ 22.1

Impact on Petrobras production (without costs of de-connection from drilling position)

reduction of 9% or 190 million bpd in 2014 reduction of 14.3% or 392 million bpd in 2017 reduction of 11.2% or 373 million bpd in 2018

Impact on P&L of Petrobras

loss of billion US$ 15.0

Global impact on ultra deepwater pre-salt campaign of Petrobras

reduction and partly suspension of production at fields Marlim Sul, Capixaba, Anchieta and Paraty during the period of 03 years

(graphic design and content by iManagementBrazil Ltda., São Paulo, Brazil)

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Petrobras is the only global petroleum operator reporting annual production increase during six consecutive years.!2007: 1.918 million bpd2013: 2.590 million bpd plus of 35%, or 140.000 bpd (record in the industry)estimation end of 2014: 2.790 bpd +/- 1%!After eight years and 24 drilling points only, on June 09, 2014, a new production record of ultra deep-water pre-salt oil fields was established in the Bacias de Campos and Santos: 480.000 bpd!Within the next weeks, the emblematic production number of 500.000 bpd will be reached due to new drillings in the Bacia de Santos.!New platforms in 2013: 08 new stationary production units and service tender assisted drilling units were finished; 05 units started operation in the same year, the remaining 03 units are operating since the beginning of 2014!New platforms in 2013: additional 04 production units will installed and start operations!2014: approx. 3.690 bpd !!

Extract 2014

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Indications for new suppliers

The re-definition of the entire value chain in order to develop the pre-salt oil layers is on track.

1

The development of the new offshore hub in the City of Santos, State of São Paulo, is reality now.

2

Suppliers with a clear focus on productivity and technology have strong comparative advantages now.

3

An increasing group of Brazilian suppliers (manufacturing, service and engineering companies) are open for international partnerships and buy-in processes.

4

New suppliers from Asia and North America are sharing the market rapidly. Specialized European suppliers have great business opportunities.

5

New international suppliers must accept the registering process CRCC; it cannot be substituted by unrealistic other processes offered by consultants acting in the market.

6

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!!!Contact Details !@mail: info@imanagementbrazil.com.br www.imanagementbrazil.com.br !+55 11 5522 41 98 (São Paulo) !+55 21 97660 24 29 (Rio de Janeiro) !Skype: frank.p.neuhaus !!Registration Office Atibaia, SPR. Brigadeiro José Vicente Faria Lima, 1.059CEP 12942-655 AtibaiaState of São Paulo, SPBrazil

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