The Fuse

Petrobras Strikes Impacting up to 500k b/d of Brazil’s Oil Production

by Nick Cunningham | November 05, 2015

A massive pile of debt, falling revenues, and a blockbuster corruption scandal have turned the Brazilian oil company Petrobras into a shadow of its former self. The state-owned company’s failures mean that Brazil has no chance of meeting the ambitious oil production targets it set for the end of the decade.

Petrobras has been forced into taking corrective measures, including large spending reductions and plans to liquidate assets. When these plans were put into place, it was unclear if they would put the Brazilian company on sound financial footing, but now a new crisis is brewing that could present further setbacks for the Brazilian giant, as labor disputes threaten to create a meaningful supply disruption.

Oil workers resist asset sales

After three months of failed negotiations, Brazil’s largest oil workers union initiated a strike on November 1 to protest the company’s proposed asset sales, which the union sees as a plan for privatization and large-scale job losses. Union members also seek higher wages, a point on which Petrobras has shown willingness to negotiate. But there is not much in the way of common ground on asset sales, which Petrobras sees as an unavoidable necessity at this stage.

After the collapse of oil prices and the vast corruption scandal, the embattled company had no choice but to come up with a plan to right the ship. Petrobras is the most indebted oil company in the world, a problem that has mushroomed over the past year as oil prices collapsed and the company is beset with corruption charges.

Petrobras is the most indebted oil company in the world.

The company’s plan for the next five years relies very heavily on downsizing. Petrobras proposed $15.1 billion in asset sales for 2015 and 2016, plus an additional $42.6 billion in 2017 and 2018. In early October, Petrobras also issued another downward revision to its projected capital investment program, cutting spending from $28 to $25 billion for 2015, and from $27 to $19 billion in 2016.

Supply impacts

None of this bodes well for the thousands of workers who fear job losses. The November 1 strike involves an array of unions under the banner of the Oil Workers Federation (FUP), consisting of platform and refinery personnel. The Petrobras strikes have impacted facilities across the country, stretching from Rio Grande do Norte in the northeast to Rio Grande do Sul in the south.

So far, Petrobras is downplaying the strike, saying that “distribution is functioning within normal limits and there is no forecast of a market shortage.” Still, the company said it was “evaluating the impact” and was “taking all necessary measures to maintain production” at platforms and refineries affected by the strike.

The union has taken a different tone. FUP says that the strike has shut in production at a long list of Petrobras’ facilities, so far affecting at least 450,000 barrels per day of oil production. Data is spotty, so the number should be taken with a grain of salt—FUP has some incentive to portray an outsize impact.

FUP says that 47 out of 55 platforms in the Campos basin are experiencing work stoppages. Of the 47, FUP says 31 are completely paralyzed.

But that doesn’t mean the union is all bark and no bite. FUP announced on November 4 that 47 out of 55 platforms in the Campos basin are experiencing work stoppages. Of the 47, FUP says 31 are completely paralyzed. The Campos basin is the core of Petrobras’ production base, responsible for about 70 percent of Brazil’s oil output. The longer the strike lasts and the more it spreads, the more damage will be done to Petrobras.

The effect on the country’s pre-salt platforms is unclear at this time. Oil production from the pre-salt hit a record high 1.12 million barrels per day (mbd) in October.

More pain at a bad time for Brazil

Petrobras saw its credit rating downgraded by S&P in September to junk status. The financial pressure will only climb in the near-term. On November 3, Moody’s cited the $24 billion in maturing debt in 2016 and 2017 as a looming problem for Petrobras. “We believe that Brazilian banks’ ability to continue to lend to Petrobras has declined and that the company will have to maintain strong liquidity in a context of a weak Brazilian economy, volatile oil prices, difficult prospects for asset sales and political uncertainties,” Moody’s Vice President and Senior Credit Officer Nymia Almeida said in its note.

“Petrobras cut its capital spending plans for the next four years to protect its cash, but starting in 2017 this strategy will hurt the company by limiting production growth.”

Petrobras is facing a catch-22. It desperately needs to cut spending to reduce debt, but that approach will also slash future production, and thus hamper the company’s long-term revenues. “Petrobras cut its capital spending plans for the next four years to protect its cash, but starting in 2017 this strategy will hurt the company by limiting production growth,” Almeida said. In June 2015, the company admitted as much, lowering its forecast for oil production to 2.8 mbd in 2020, down from a previous estimate of 4.8 mbd. Petrobras produced 2.13 mbd in September.

To make matters worse, the sharp devaluation of Brazil’s currency, the real, is a further drain on the company, as it needs to import refined fuels to meet domestic demand, purchases that are made in dollars. If the real falls by 25 percent, for example, it “would reduce the company’s EBITDA by half,” according to Almeida.

Now, the solution that Petrobras has come up with to fix its rather dire financial predicament—asset sales—has run into stiff opposition by the thousands of workers that it employs. The strike could exacerbate these financial troubles if supply disruptions persist. According to the Rapidan Group, Petrobras could use contingency crews to maintain production at its facilities, but that may only buy the company two weeks or so before the “system becomes strained.”

Obviously, a lot depends on how long the workers decide to extend the strike. Production will bounce back relatively quickly after the workers and Petrobras can reach a compromise. However, even if Petrobras can convince the unions to end the strike, it still faces a very long and uncertain road to recovery.