Brazil's Hopes for Home-Grown Offshore Rigs Hits Credit Snag

NEW YORK (Dow Jones Newswires), November 6, 2008

The credit crunch is complicating Brazil's plan to use the discovery of massive new offshore oilfields to jumpstart its domestic oilfield services industry.

Brazil, a net oil importer until 2006, is primed to become one of the world's biggest producers over the next decade as it develops several fields in a portion of the Atlantic Ocean known as the Santos Basin thought to contain billions of barrels of crude. In addition to boosting production, Brazil hopes to follow in the path of Norway, which in the 1970s used the discovery of oil in the North Sea to create world-class drilling and technology sectors. Over the past two years, state-run energy giant Petroleo Brasileiro SA, known as Petrobras, has awarded 20 out of 30 contracts to construct drilling rigs to Brazilian-based firms with little experience in deepwater drilling.

But the fledgling Brazilian deepwater rig industry is running up against the realities of the tight credit market. Several of the contract winners haven't been able to borrow money needed to finish construction on the rigs they promised, which can cost more than $600 million each. Should their struggles continue, Petrobras will be forced into a difficult choice. The rising energy giant would need to add billions of dollars to a long-term budget already in jeopardy over concerns about the future availability of credit to ensure the rigs get built on time, or risk delaying Santos Basin production for lack of equipment. With Brazil hoping to increase production by 2 million barrels of oil equivalent a day by 2015, Petrobras' options may be limited.

"They're not going to delay development; that is the top order," said Brian Uhlmer, an oilfield services analyst with Pritchard Capital Partners in Houston.

Uhlmer is one of several U.S.-based analysts who have said recently that they see up to 10 of the 30 rigs as likely candidates for delays or cancellations due to a lack of financing. Brazilian companies are particularly vulnerable because they agreed to contracts that stipulate the completed rigs will work for Petrobras at well below the going world market rate.

The world's largest drillers, which operate out of the U.S. and Norway, are betting that Petrobras will soon become desperate enough to give up on its below-market contracts and hire established companies - on the drillers' terms. Rigs that can drill in waters as deep as the Santos Basin's can cost more than $600,000 a day to hire, a rate that has not dropped even as oil prices have plunged by more than 50% since July.

"While we don't believe it's likely that we or other major contractors would be interested in stepping into those agreements due to low day rates ... it has opened up some dialogue with Petrobras about additional opportunities," said Kurt Hoffman, director of marketing at Noble Corp., an offshore driller that operates out of the U.S., in a conference call. Day rates are the price rig operators charge producers per day, and provide the vast majority of drillers' revenue.

Government To The Rescue  

Petrobras, however, has several options it can exhaust before calling in companies like Noble, and the company has a strong incentive to stick with its original plan to hire Brazilian firms.

In addition to boosting Brazil's oilfield services and shipping industries, Petrobras is eager to trim costs by utilizing the country's low-cost labor and easy access to high-quality steel and other raw materials.

"There is a political component to this," said Erasto Almeida, a Latin America analyst with Eurasia Group, a consultancy. "Clearly, it's the priority to develop a national oil industry, equipment providers and all."

Brazil's government, which also sees economic development opportunities in the country's emergence as an oil power, has already stepped in to assist other sectors affected by the credit crunch. The government-affiliated Brazilian National Development Bank could be used to finance projects. The government also injected 10 billion Brazilian reals ($4.72 billion) into the country's Merchant Marine Fund, which could support funding for Brazilian shipbuilders, including firms constructing oil platforms and tankers for Petrobras.

The government also raised the financial ceiling imposed on Brazilian banks lending to Petrobras by BRL8 billion ($3.78 billion).

If emergency financing fails, Brazil would next encourage the stronger domestic rig builders to acquire the weaker ones, said Adriano Pires at the Brazilian Center for Infrastructure, a Rio de Janeiro-based consultancy.

"In all of the confusion surrounding the (financial) crisis, some companies are going to fail and there will be consolidation," Pires said.

The financial health of the firms that won Petrobras rig contracts varies. Odebrecht has won three deepwater rig orders. The Rio de Janeiro infrastructure construction firm reported $17.7 billion in revenue last year. Delba Group, by contrast, is virtually unknown outside Brazil, but is tasked with building six rigs for Petrobras.

"Delba is a tiny operation ... they've had virtually no luck in getting financing," said Judson Bailey, an analyst with Jefferies & Co. in Houston. "Odebrecht is much larger; they should be able to get financing."

Delba declined repeated requests for comments.

Miguel Gradin, vice president of Odebrecht's oil and gas segment, said the company's solid financial base means it can afford to wait for the current financial storm to blow over. The company already has financing completed for a rig under construction in Abu Dhabi. Financing for two other rigs on order from docks in South Korea is "at an advanced stage," to be completed when there is greater liquidity in credit markets, Gradin said.

More important, Gradin said, is that the company's rig orders will come in on time - and on budget.
Silver Lining  
Even if some new rig orders fall through, the credit crunch could make it easier for Petrobras to find the rigs it needs. The global economic downturn has sent oil prices tumbling to around $65 a barrel, from nearly $150 in July. The lower price has already emboldened producers to take a tougher line when negotiating contracts with rig operators, said Bob Long, chief executive at Transocean Inc., owner of the world's largest offshore rig fleet.

Should that trend continue, Petrobras may catch a break if the company needs to hire rigs at market rates to replace orders for new rigs that fall through, said Pires, the infrastructure consultant.

"The crisis is going to cause a deceleration in all of the oil companies' investment plans," Pires said. "That means that prices will come down and equipment availability will go up."

Petrobras has said it will push ahead with deepwater drilling projects off Brazil's coast, even if the price of oil falls as low as $35 a barrel. Transocean believes most deepwater drilling will continue as planned so long as oil prices stay above $60 a barrel, Long said Wednesday in a conference call with analysts.

Copyright (c) 2008 Dow Jones & Company, Inc.

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