Petrobras Slumps as Oil Boon Exacerbates Spending Burden

Petroleo Brasileiro SA fell the most in six weeks as exploration success at one of its biggest deep-water prospects in Brazil signaled billions of dollars of additional expenditure for the world’s most indebted producer.

Shares in Petrobras, as Brazil’s state-run oil company is known, slumped 3.6 percent to 17.64 reais, the biggest drop since May 8. It was up 3.2 percent before the announcement.

Petrobras will have to pay 2 billion reais ($900 million) this year to tap more crude at its giant Buzios field and surrounding area than its license authorizes, the Rio de Janeiro-based company said in a statement after a meeting of energy authorities in Brasilia today. The government expects to receive 13 billion reais from 2015 through 2018 as part of a production-sharing arrangement based on projected output.

“It’s very bad news, it’s what drove Petrobras from a gain of 3 percent to a 4 percent decline,” Fernando Goes, an analyst at brokerage Clear Corretora, said by phone from Sao Paulo. “It’s 2 billion reais more they’ll have to pay.”

The company may sell assets to help make payments to the government, Chief Executive Officer Maria das Gracas Foster told reporters in Rio. It is the first time Petrobras is making “advanced payments” for an oil project, she said. The company won’t seek partners for the new area.

Four Times

Petrobras has found as much as four times the amount of crude that it’s authorized to produce at an offshore license it acquired four years ago. The company is already struggling to develop all the oil it has found in other sections of the pre-salt region and investors are more eager to see the company increase output than make discoveries after output has remained flat for the past four years.

The surplus area probably will start producing by 2020 or 2021, Oil and Gas Secretary Marco Antonio Almeida told reporters in Brasilia.

“If Petrobras had the financial capability, we would charge 15 billion reais upfront,” Almeida said. “We are providing Petrobras with a great oil area to explore.”

Petrobras is investing about $100 million a day to expand its capacity to produce and refine crude, contributing to the biggest cash flow deficit of any oil company, according to data compiled by Bloomberg.

In 2010, it paid $42.5 billion in shares and cash for the rights to produce 5 billion barrels at a section of the so-called pre-salt region that holds the Buzios field, formerly known as Franco. The area holds 9.8 billion to 15.2 billion barrels of recoverable oil in addition to what Petrobras was authorized to produce under the original contract, it said.

Profit Sharing

“This is a great opportunity for Petrobras,” Foster said. “It’s a big challenge, but we’re prepared.”

A government committee authorized Petrobras to produce the additional barrels under a profit-sharing model, Energy Minister Edison Lobao told reporters in Brasilia today. Production under the contract will add an additional one million barrels a day to the company’s production curve, Foster said.

There are no limits on how much Petrobras can produce under the profit-sharing contract, Jose Formigli, head of exploration and production, told reporters at the same event.

Shares of Petrobras have returned 10 percent this year compared with a 16 percent average gain among global peers tracked by Bloomberg.

While the initial payments will put a strain on Petrobras, the project probably will be profitable in the long term, Luana Helsinger, an oil and gas analyst at brokerage GBM Grupo Bursatil Mexicano SA, said by phone from Rio.

“There’s a good chance the move will correct tomorrow,” Helsinger said. The project “probably has value and will bring cash flow.”

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