IHS Global Insight Perspective | |
Significance | China and Brazil have concluded negotiations that began six months ago and sealed an agreement that will see Petrobras receive a US$10-billion loan from the China Development Bank. |
Implications | Although oil deliveries under the supply agreement with Sinopec's subsidiary will start when Petrobras receives the first tranche from the loan, the two accords are separate. In this sense the financing deal with Petrobras differs from the previous oil-for-loans deals signed between China, Russia, and Venezuela, although China's motivation is essentially the same. |
Outlook | The loan and oil supply agreements will support the Chinese government's policy of boosting state and commercial oil reserves, while helping to finance Petrobras’s future investment plans. |
Brazil's state-owned oil firm Petrobras has announced the signing of final agreements with the China Development Bank (CDB) for a US$10-billion loan that has been under negotiation since May (see Brazil: 20 May 2009: Brazil and China Ink Oil Loan Deal During Inter-State Visit). The 10-year loan will be used to help finance the company's ambitious US$174.4-billion Business Plan, with the funding to be provided in separate tranches (see Brazil: 27 January 2009: Petrobras Unveils Revised Business Plan for 2009–13). Petrobras also announced that the first withdrawal notice to be issued by the company will be accompanied by the start of a long-term export agreement between Petrobras and the Sinopec subsidiary Unipec Asia. The export deal anticipates the supply of 150,000 b/d of oil during the first year and 200,000 b/d over the subsequent nine years. However, unlike several recent oil-for-loans deals reached by China, Petrobras made it clear that the loan is "a trigger to the exports agreement", but the agreements are independent and do not represent a securitisation structure.
The US$10-billion loan is the largest Brazil has ever received from China, with the loan and supply agreements helping cement relations between the two emerging economic powerhouses and building significantly upon the blossoming trade partnership that saw trade flows surge by an average of 50% between 2006 and 2008. Meanwhile the supply accord fits in with China's strategy of increasing energy security through diversifying its crude oil import dependence away from the Middle East.
Outlook and Implications
The oil price slump that followed the onset of the international financial crisis had provoked concerns about the ability of Petrobras to finance the hefty investment plan needed to develop existing projects as well as a series of recent finds in the pre-salt layer. This in turn led to the release of the company's five-year business plan being delayed for several months while Petrobras reworked its sums. Even when the US$174.4-billion plan was finally unveiled, reduced cash generation resulting from lower oil prices meant that there was a large hole in the finances that would have to be filled by loans, while the global credit crunch and the large sums involved meant that the company was forced to be more creative in how it went about raising the necessary financing.
Thanks to the CDB loan, financing from the Brazilian national development bank (BNDES) and from the U.S. Export-Import (Ex-Im) Bank, and funds raised from bond sales this year, Petrobras has managed to plug the financing gap in its 2009-13 Business Plan, and providing that oil prices remain around the US$65/b it should have no problems in implementing its investment plans up to 2013 (see Brazil: 30 June 2009: Petrobras Says Financing Needs Covered to 2013 and Brazil: 2 June 2009: Petrobras Sees Financing Problems Ease as Oil Price Strengthens). Nonetheless the company still faces huge logistical challenges when it comes to developing the pre-salt layer. Not only will platforms be located around 300 kilometres away from the coast—at least double the distance of current production platforms—but the depth of the reserves poses new technological challenges for Petrobras and its partners. Furthermore, the potential offered by recent discoveries and unexplored areas in the pre-salt layer, which may stretch further north than previously anticipated, means that additional investments will be needed to continue exploration beyond the life of Petrobras’s current business plan.