After five years of delays, cost overruns and rampant borrowing, Brazil's state-run oil company Petroleo Brasileiro SA is setting production records again.
Any celebrations, though, may be muted.
The 27 percent decline in the price of Brent crude oil since June promises to erase the gains of an output bonanza that investors and the government were counting on to boost profit, finance expansion, pay debt and fund schools and hospitals.
For each $1 drop in the price of Brent, Petrobras stands to forgo more than $900 million of cash from oil sales, according to Reuters calculations based on Petrobras' second-quarter data.
In other words, each $1-dollar drop deprives the company of cash equivalent to the cost of building one of the giant, floating oil-production ships the company depends upon to tap its offshore riches.
Petrobras plans to build dozens of such ships, but paying for them looks more difficult now Brent crude is below $84 a barrel, its lowest level in nearly four years.
The company's $221 billion five-year investment plan is one of the largest corporate spending programs ever and its $140 billion of debt makes Petrobras the most indebted of any major oil firm.
"Petrobras' strategy looks awfully aggressive, and I would have also said that six months ago when oil was worth a lot more," said Pave Molchanov, oil and gas analyst with Raymond James in Houston. "Its plan for 2020 will likely have to be toned down."
With oil now trading at 16 percent below the $100-a-barrel average world price that Petrobras has projected through 2030 in its strategic plan, the company stands to forgo about $14 billion (34 billion reais) a year in potential cash from oil sales after royalties.
That's more than double its 14.9 billion reais of debt due next year and nearly 17 percent more than its 29 billion reais of maturing debt in 2016.
Lower prices could also intensify a widening political debate over the company's future. Already a key issue in the country's Oct. 26 presidential election race due to allegations of corruption and kickbacks, Petrobras' financial difficulties and production delays are now national issues.
These problems have managed to partly overshadow Petrobras' success in producing a record 2.78 million barrels of oil and equivalent natural gas per day (boepd) in September. This expanded on the 2.76 million boepd produced in Brazil and abroad in August, at the time Petrobras' best result since December 2010.
If cash and debt problems grow, they may pressure future administrations to seek foreign investment and reverse recent moves to boost state and Petrobras control of major oil developments.
And at $84 a barrel, Petrobras cash from oil sales would rise by less than a third by the end of 2018 even if the company meets its goal of boosting total oil and gas output by three-quarters to nearly 5 million barrels a day.
PRESSURE ON PRICES
The price declines could last for some time. On Tuesday, the International Energy Agency said growth in demand for energy may have stopped rising and that prices will likely have to fall further before major world supply reductions can start.
In response, Brent fell 4.3 percent on Tuesday, its biggest one-day drop in more than three years. It fell 1.9 percent to $83.39 a barrel on Wednesday.
Petrobras said it can still profit if prices fall further. Last year it said it could make money from its biggest new ultra-deepwater "subsalt" fields even if Brent tumbled to between $40 and $45 a barrel.
There have been precedents for such collapses. Oil slumped to $36 a barrel at the end of 2008, down from an all time high of nearly $150 a barrel about eight months earlier. It averaged less than $20 a barrel for most of the 1990s.
While Petrobras says it can make money at $40 per barrel, it would make a lot less than its planning documents currently forecast. At $45 a barrel, for instance, Petrobras oil and gas revenue in 2018 would be only 15 percent of the amount expected under its strategic plan, according to Reuters calculations.
And that assumes Petrobras will be able to meet production targets with lower oil prices. While the company's prime ultra-deepwater "subsalt" fields are young, high-producing and able to make money at below $80 a barrel, according to the IEA, some of Brazil's older fields in shallower water may quickly become uneconomic.
Brazil is one of the countries, along with Angola, Norway and Britain, where a significant amount of offshore production ceases to be economic at about $80 a barrel, the IEA added. As a result, lower prices could limit revenue further by forcing Petrobras to shut uneconomic fields.
Petrobras officials were not immediately available for comment.
The company may, however, get a bit of relief from the lower prices, at least in the short term, Molchanov and other analysts said.
This is because lower crude prices also mean lower fuel prices. Brazil's government has forced Petrobras to subsidize domestic gasoline and diesel by preventing the company from raising prices to world levels.
Because Petrobras has been unable to meet all of Brazilian domestic fuel demand, it has had to import gasoline and diesel and sell it in the Brazilian market at a loss.
On Oct. 13 the price of gasoline on the international market fell below that in Brazil for the first time in four years, according to Credit Suisse. This could help Petrobras, which has no plans to cut local prices, make up for the nearly 50 billion reais in refining-unit losses in the last two and a half years. [ID:nL2N0S9281]
"This is great for Petrobras in the short term," said Adriano Pries, head of the Brazilian Infrastructure Institute in Rio de Janeiro and a former board member of the ANP, Brazil's oil regulator.
"In the medium term it's bad because Petrobras is in the process of making large investments and has a huge debt," he added.
