Peak Oil meets Peak Credit
evaporation of global credit seem certain to delay development of huge
oil reserves off Brazil’s coast, which the government had hoped would
solve many of the country’s ills.
Just two months ago, with the price of oil at around $120 a barrel,
Brazil was brimming with confidence over the potential 50-80 billion
barrels of oil, with newspapers running cover stories and editorials on
the issue daily.
President Luiz Inacio Lula da Silva, who called the oil a "gift from
God," advocated taking greater a cut for the government to drive Brazil
to developed-country status. Analysts said this would also boost support for his chosen successor in 2010.
But the financial crisis has delayed plans by the government and state-controlled
oil company Petrobras, which needs to spend hundreds of billions of
dollars to extract the 7-km (4.5-mile) deep oil from beneath a thick
layer of salt below the ocean floor.
Petrobras (PETR4.SA: Quote, Profile, Research)(PBR.N: Quote,
Profile, Research) postponed the eagerly awaited announcement of its
new investment plan from this month until the end of the year. Chief
executive Jose Sergio Gabrielli said the delay was due to market
Petrobras has said its exploration plans were based on an oil price
of around $35, but officials have said that level may be as high as $50
for the more challenging "subsalt" fields. On Thursday, oil was
hovering around $68 a barrel, down from a record high of $147.27 on
Aside from the oil price slide, analysts say Petrobras faces
problems getting the large number of deep-water rigs it needs as
suppliers struggle with the credit crunch.
Petrobras plans to tender for 28 rigs this year and for 63 by the
end of 2018, a large share of those available in the world, but some
contractors have hit financing problems.
"The pre-salt is going to have to suffer significant delays, a
matter of years," said Brian Uhlmer of Pritchard Capital in Houston,
who follows the world rig market.
Uhlmer said about 20 deep-water rig constructions have been delayed
or canceled, about a fifth of the total number of new rigs planned by
Gabrielli said this month that Petrobras had concerns about its
supply chain and would try to help providers find financing for the
rigs, which can cost up to $800 million each.
Petrobras, whose share price has plummeted about 65 percent since
May, also could face its own funding strains if the oil price fails to
Credit Suisse, which sees Petrobras raising its five-year spending
from 2009 to about $170 billion from $112 billion, said in a report
last month that Brazil’s biggest company would have a cash-flow
shortage with oil at $65 per barrel.
In that scenario, it said Petrobras would need to raise $15 billion
in new debt in 2009 and increase its overall debt to $82 billion by
2013 from $14.2 billion this year.
"You don’t have to be an economist to imagine how this can impact
Petrobras’ plans. They’re going to need massive capital and in an
environment where you have little," said Erasto Almeida, an analyst at
Eurasia Group in New York.
With the reserves seen as strategically vital and a way to build up local industry, Petrobras can rely on government help.
The government, which wants Petrobras to use more locally built
ships and platforms, this month threw its nascent ship-building
industry a 10 billion real ($4.7 billion) credit line and also raised
the amount that state bank BNDES can lend to the oil company.
Petrobras also is partially cushioned from world oil prices as it gets about half its revenues from domestic fuel sales.
The uncertainty for Petrobras and other oil companies involved in
the subsalt development such as the BG Group (BG.L: Quote, Profile,
Research) and Repsol (REP.MC: Quote, Profile, Research) has been
aggravated by a two-month delay of a government plan on changing the
country’s oil rules.
The government was thought to be favoring a model in which a new
state firm would take over the rights to the reserves but would leave
production to companies. Currently, it auctions the concessionary
rights to oil blocks to the highest bidder and charges royalties and
taxes in return.
After the massive Tupi field was estimated to have 5-8 billion
barrels of recoverable light oil off the Rio de Janeirocoast late in
2007, the government removed nearby blocks from the auction schedule
pending new rules.
"You have very difficult economic conditions, funding conditions, so
clearly the government will have to step back a bit," said Francois
Moreau, head of the Estrategia and Valor consultancy in Rio. "I think
they got very excited and they wanted to deliver politically."
A senior advisor to Lula told Reuters that the government was
waiting to see how the crisis panned out before making its final
decision. "It’s better to have a clearer scenario regarding the
crisis," the official said. "We don’t have to make an immediate
While the government likely wants to wait for markets to stabilize
before announcing the plan, it also faces pressure to implement the
changes before Lula’s term ends in 2010.
The country’s fragmented Congress, in which Lula’s ruling Workers’
Party does not have majorities, would need to approve any new law.
"I think this (crisis) will moderate a bit what the government will
propose and also maybe make it a bit more difficult for Congress to
approve," said Almeida.
"Before the crisis I thought there was a likelihood it would be approved; now I think that the probability is decreasing."
from toys to mobile phones and from T-shirts to pipes has tumbled to
multi-year lows, in further evidence of the slump in global
The drop in petrochemicals prices goes well beyond the fall in oil
prices, suggesting that demand for plastics and synthetic textiles is
extremely weak as the Asia-Pacific export-oriented nations, including China, suffer from reduced overseas orders.
The cost of naphtha – the cornerstone of the petrochemical industry
– fell last week to a five-year low of $284 a tonne in the far-east
Asia market, down 76 per cent from July’s record high of $1,200 a
tonne, according to Platts, the pricing agency.
At current levels, naphtha, a by-product of crude oil, is trading well below the cost of crude, a highly unusual phenomenon.
While naphtha prices have tumbled more than 70 per cent in three
months, oil prices had fallen 45 per cent – a gap that traders
described as “unprecedented”.
“It is a bloodbath,” said Shahrin Ismaiyatim, head of petrochemicals
at Platts. “There is a steep decline in demand in the US and Europe and
that is also affecting China . . . But this is not yet the bottom of
Analysts said some of the price movements were unheard of in at
least 20 years. They pointed out that the price of benzene, a
petrochemical derived from naphtha used for plastics and dyes, fell
last week below the cost of naphtha for the first time since the
1980s, as demand vanished.
In response, the petrochemical industry, from Sumitomo in Japan to
Lyondell in the US, has reduced processing rates as producers forecast
that demand will remain weak for the rest of the year and probably in
the first half of next year.
The cuts during petrochemical plants’ troughs are likely to trigger
a further drop in oil consumption on top of current weakness in
gasoline, diesel and jet fuel demand, resulting in a further drop in
energy prices, analysts said.
The cost of other petrochemicals has also slumped. For example, the
price of polyvinyl chloride – a plastic popularly known as PVC – in
China dropped last week to a five-year low of $635 a tonne, down from a
record $1,320 a tonne in July.
The drop comes on the back of lower export demand for plastic
products and reduced consumption from Chinese construction. The price
of ethylene – used to manufacture containers such as shampoo and
ketchup bottles – fell to $780 a tonne, down from a record of almost
$2,000 a tonne in July.