Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about^(a) whether investors will see the project as financially viable.

The drying up of international financing,^(b) significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn,^(c) a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%.^(d) They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras.^(e) This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

The expression in bold type and the item in brackets are semantically equivalent in

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

In paragraph, among the possible changes to the Brazilian concession laws for the exploration of the deepwater blocks in the subsalt region, the author mentions

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

In “... possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area.”, the expression “give the upper hand” means

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

The participation of the private sector in the exploration of Brazil’s new oil finds is considered

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.^(a)

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.^(b)

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social^(c) (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing.^(d) The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation.^(e) Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

The only fragment that DOES NOT refer to an aspect that might represent an obstacle for the progress of the exploration of Brazil’s deep water oil reservoirs is

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

“While...” and “However,” could be correctly replaced with

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

http://www.economist.com/

displaystory.cfm?story_id=13348824&source=login_payBarrier

Large Brazilian companies are inclined to count on local banks for credit, as explained in paragraph, due to the

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

THE ECONOMIST

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According to paragraph, the overall reason for Petrobras to postpone disclosing its 2009-13 strategic plan was announced to be the

Text II

The next oil giant?

Mar 19th 2009

From the Economist Intelligence Unit ViewsWire

Financing hurdles

At the time of the Tupi discovery, oil prices were close to US$100/b, but since then they have fallen to around US$40/b. Weak prospects for a significant pickup in the medium term have raised questions about whether investors will see the project as financially viable.

The drying up of international financing, significantly lower oil prices and the technological and geological challenges related to the development of the new oil finds make long-term cost calculations difficult.

Because of this, Petrobras decided to delay the announcement of its five-year strategic plan by four months. It was finally made public in February 2008 and included very ambitious financial goals. The revised plan for 2009-13 is based on an average oil price of US$42/b and calls for investments of around US$174.4bn, a 55% increase from the US$112.4bn stated in its 2008-12 investment plan.

Petrobras has gone some way towards securing financing for this year’s outlays. The company has raised US$10.5bn of the US$28.6bn it needs. Of the remaining US$18.1bn, it is set to receive US$11.9bn from the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, Brazil’s national development bank) in the form of a 30-year US$11.9bn loan, with an additional US$5bn bridge loan expected from a consortium of international banks. Petrobras would need to raise a further US$10bn to cover its investments in 2010.

Growing difficulties in accessing international capital markets could scupper these plans or—at the very least—sharply raise the cost of borrowing. The brief easing of credit conditions in January allowed Petrobras to issue a 10-year, US$1.5bn bond on the eurobond market. But low risk appetite on the part of foreign investors, recent currency-derivatives losses and continued uncertainty regarding the value of the Real mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads.

What role for private capital?

While the role of the state oil company is not in question, the level and manner of participation by the private sector is not as clear. Brazil opened its hydrocarbons sector to private investors at the end of the 1990s. Since then, it has held annual bidding rounds that have become a model of transparency and have attracted large numbers of private participants.

However, Brazil’s new oil and gas potential has raised doubts about the extent of that openness in the future, as the government debates the preferred degree of private participation. Following the Tupi discovery, the government removed 41 deepwater blocks in the sub-salt region from the ninth bidding round for the first time since it started holding international rounds in 1998.

In 2008 Brasília again withheld offshore blocks from the 10th bidding round. Seven companies currently hold concessions for the development of the sub-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess.

A specially created government task force is studying possible changes to the concession laws that would give Petrobras the upper hand in the development of the Tupi area. The task force is considering options such as raising taxes and royalties on private companies producing in the new areas. Under current concession contracts, private operators sell the oil they produce in exchange for a relatively low government take of between 5% and 10%. They also pay a special participation tax of 10-40% of revenue on large fields, depending on volume, location, depth and age; this level could also be raised. A more dramatic approach under consideration is to turn concession contracts into production-sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs.

Any changes to the current contractual agreements would need congressional approval. But the final decision will be in the hands of the president, Luiz Inácio Lula da Silva, based on the suggestions made by the task force. Whichever line he takes will set the stage for hydrocarbons developments in a future oil-rich Brazil beyond the end of his presidential term in 2010. The government hopes that by engaging in a debate early on in the development of the south-eastern oil reserves, it will pre-empt a possible shift to resource nationalism.

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The question mark in the title “The next oil giant?”, in connection with the arguments exposed in the text, suggests that the author

Text I

Deepwater Oil Finds Spur NYK to Invest in New Vessels

by Mari Iwata

A raft of giant oil strikes in global deepwaters is prompting Japanese shipping company NIPPON YUSEN KABUSHIKI KAISHA (NYK Line) to invest more in floating production vessels that it can offer for lease, a senior executive said. NYK Line says Petroleo Brasileiro SA (PBR) will be its biggest customer in the near term, as Brazil’s state-owned oil company targets first production from large oil finds in the subsalt region.

Good news flowing from drilling campaigns in Brazil’s deep water continued Tuesday when Petrobras said its Guara prospect in the Santos Basin holds between 1.1 billion and 2 billion barrels of oil equivalent.

Other big discoveries in the area include Tupi, which was the Western Hemisphere’s largest discovery in more than 30 years. 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.

Fewer Rivals

In June, NYK and three Japanese partners invested in Etesco Drilling Services LLC, which will lease drill ships to Petrobras. A drill ship is already on order and due for delivery in January 2012. It will be leased to Petrobras for a maximum 20 years for drilling in Brazil’s subsalt region.

Hitoshi Nagasawa, managing officer of NYK Line, said NYK isn’t involved in operating the drill ship in this project, and is merely an investor. “However, we’ll learn from our experience partnering companies, as our ultimate goal is to operate (floating vessels) on our own,” he said.

NYK is one of Japan’s two major crude oil and liquefied natural gas carrier companies, and has a track record in loading and offloading these products. It is also joint operator of a drilling vessel owned by the Japanese government. NYK aims to make operating and leasing floating vessels the third pillar of its business after LNG shipping and very large crude carriers, or VLCCs.

At present, Petrobras’s ambitious drilling plans in deepwater will ensure the Brazilian company remains its largest customer in the near term, Nagasawa said.

But the company is studying several more projects involving floating vessels, said Nagasawa. He declined to give specifics, but said: “We will partner with and invest in other companies if we think the project is good. But we won’t do a project alone, because the investment is too large for one company.”

NYK is also seeking other projects than drill ships.

These include floating production, storage and offloading vessels, or FPSOs, floating storage and offloading vessels, or FSOs, and floating storage and regasification units, or FSRUs.

NYK posted a net profit of Y56 billion for the fiscal year ended March 2009, roughly down by half from a year earlier. The earnings decline was due in part to weakening demand for shipping in the second half and higher costs due to a strong yen.

The container shipping sector was among the most attractive to new entrants until the global economy started to turn down in fall 2008, with the intensifying competition contributing to weaker margins. But the business of leasing and operating floating vessels for use in deep-water areas has more barriers to entry because it requires deeper technological knowledge and higher investment, Nagasawa said.

slightly adapted from: (TOKYO) Dow Jones Newswires Sept. 10, 2009

URL: http://www.rigzone.com/news/article.asp?a_id=80199, retrieved

on 22 December 2009.

According to Text, all of the following statements are true about NYK, EXCEPT the fact that the company