Petrobras Earmarks $224B for 2010-2014 Strategic Plan

RIO DE JANEIRO (Dow Jones Newswires), June 21, 2010

The board of Petroleo Brasileiro approved the company's $224 billion investment plan over the next five years, Petrobras said Monday.

The federal oil company's investment budget comes above the high end of the $200 billion to $220 billion guidance that was released earlier this year. Petrobras earmarked investments of $174.4 billion in the previous five-year plan covering the 2009-2013 period.

The ambitious investment budget for the 2010-2014 period means Petrobras remains one of the few major oil companies willing to invest heavily amid lower oil prices and global economic uncertainty, while also shrugging off technical concerns raised in the wake of BP's deepwater disaster in the U.S. Gulf of Mexico.

The staggering capital expenditures will be used primarily to develop Brazil's massive offshore oil reserves in the so-called presalt region, expected to be pricey and complicated because of the depth of the reserves.

The presalt finds were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

Petrobras will also face a financing challenge to pay for its aggressive development goals. The company is close to the 35% net debt-to-capitalization limit needed to maintain its investment-grade credit rating.

Credit-ratings agency Fitch Ratings director Jose Luis Villanueva warned Thursday that if Petrobras's leverage increased more than expected, the company faced greater risk of a downgrade than upgrade.

"The risks of greater government intervention and increased leverage are growing," Villanueva said at a conference in New York.

But Petrobras is working hard to reduce its leverage. Now that the cost of the 2010-2014 investment plan is known, the company can take another step in a planned share offer--part of the Brazilian government's complicated capitalization plan for Petrobras.

Under the plan, the government will grant Petrobras the right to explore and produce up to 5 billion barrels of crude from government-held presalt areas. Petrobras will pay for the oil rights in new shares, with minority shareholders also having the option to accompany the offer.

Analysts have estimated that the share offer could be valued at between $50 billion and $60 billion, which would make it one of the world's largest-ever share sales.

Petrobras delayed the release of its 2010-2014 strategic plan as Brazilian lawmakers debated the overhaul of the country's oil laws proposed by President Luiz Inacio Lula da Silva. The capitalization plan was part of President Lula's proposals.

Uncertainties surrounding Petrobras's planned share offer and the country's new oil regime have weighed heavily on the company's shares so far in 2010. Petrobras's locally traded shares were down 18.4% through Friday compared with a 6.1% decline in the benchmark Ibovespa stocks index.

Petrobras's preferred shares opened 1.3% higher at 29.85 Brazilian reals ($16.98) in trading Monday on the Sao Paulo Stock Exchange.

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