Petrobras Hurt by Transocean Rig Loss in Brazilian Court

Petroleo Brasileiro SA is likely to lose 11 percent of its drilling fleet because Brazil banned Transocean (RIG) Ltd. from tapping deep-water fields, the latest misstep hindering the development of Latin America’s biggest oil discoveries since 1976.

A Brazilian court on July 31 ordered Transocean, the world’s biggest offshore drilling contractor, to halt operations within 30 days after one of its rigs was involved in a spill at the Frade offshore field operated by Chevron Corp. The ban threatens to shut down 7 of the 66 Petrobras rigs drilling off the coast of the South American nation that is home to more than 50 billion barrels of crude oil.

Petrobras, as the state-controlled producer is known, cut output growth targets in a $236.5 billion investment plan announced in June, partly because of delays in acquiring equipment needed to drill deep-water wells. The Rio de Janeiro- based company is set to report tomorrow a 70 percent drop in second-quarter adjusted profit after it missed production goals, according to the median estimate of 10 analysts in a Bloomberg survey.

Transocean is “one of the key rig suppliers for Petrobras,” Scott Gruber, an analyst at Sanford C. Bernstein & Co. in New York, said in a telephone interview. “It would further put at risk their already revised production targets going forward.”

Track Record

Petrobras has missed output goals for at least the past eight years as production from its deep-water discoveries failed to compensate for faster-than-expected declines at older fields in Brazil’s offshore Campos Basin. The company, which forecasts its output to remain little changed through the end of 2013, has a track record of missing project deadlines as requirements to purchase goods and services from local suppliers contribute to delays, Chief Executive Officer Maria das Gracas Foster said on June 25 when presenting the company’s five-year investment plan to investors and analysts.

Chevron (CVX) -- the second-biggest U.S. oil company, which was also ordered by a regional federal court to halt operations -- plans to appeal the injunction and is preparing to resume production at Frade, the company said yesterday in an e-mailed response to questions. Transocean will use “every legal means necessary” to prove that the case has no merit, the company said in an e-mailed statement. Petrobras didn’t reply to a phone call and e-mail seeking comments.

‘Underwater’ Targets

Magda Chambriard, the head of Brazil’s oil regulator ANP, said July 19 that Transocean had no role in the Frade spills and that the agency was in talks with Chevron to resume output. The Brazilian court said the suspension of operations will last until the federal prosecutor’s office, the oil regulator and environmental agencies complete investigations into the spill.

“In the end, if they make such a big deal about it, it’s Brazil that’s going to get hurt,” Cleveland Jones, an oil specialist and geology professor at Rio de Janeiro State University, said in a telephone interview yesterday. “Petrobras is already under the gun from missed production targets. If something like this were to hit they’d be underwater for sure.”

Chevron and Transocean are also fighting two lawsuits seeking as much as 40 billion reais ($19.6 billion) in damages related to the spills. Petrobras may be liable for 30 percent of any damages Chevron must pay at Frade because it’s a minority partner in the field, Petrobras said in a March 30 filing.

Giant Fields

The discovery of giant fields in Brazil’s so-called pre- salt region, an area the size of Florida in deep waters off the coast of southern Brazil, propelled Petrobras to become the second-most expensive major energy producer in the world in 2008 at 17 times reported profit, according to data compiled to Bloomberg. Since then, Petrobras has slipped to 10th place at a ratio of about eight times earnings, the data show.

Petrobras has lost 14 percent for investors this year in U.S. dollar terms, the worst performance by a global oil company with a market value of more than $50 billion, according to data compiled by Bloomberg. Colombia’s Ecopetrol SA returned 40 percent while Cnooc Ltd. and Chevron registered 16 percent and 5.6 percent returns, respectively.

Petrobras fell 0.7 percent to 19.69 reais at 3:07 p.m. in Sao Paulo trading.

Lost Output

Petrobras has already lost production this year due to the shutdown of Frade, which pumped 60,000 barrels a day.

The company will take steps to prevent a rig shortage as a result of the court ruling, said Wagner Freire, a former Petrobras director. Petrobras has 66 rigs in Brazil, according to Rigzone, a website that monitors global oil drilling.

“This decision will raise a lot of questions, mainly from Petrobras (PETR4),” Freire, who was in charge of Petrobras’s exploration and production division from 1985 to 1990, said in a telephone interview. “Petrobras is going to complain because you can’t stop” drilling, he said.

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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