China Offers US$10-bil. Loan to Brazil for Pre-Salt Development, According to Report

Minister of Energy and Mines Edison Lobão said in an interview with the Brazilian daily Folha de São Paulo,published yesterday, that China has offered state oil company Petrobras a US$10-billion loan for the development of pre-salt reserves in Brazil. According to the report, the Chinese could ask for a share of production in return for the credit line. Lobão also suggested in the interview that if necessary Petrobras could use part of the government's international reserves to finance its investments.

Petrobras delayed the release of its revised business plan amid concerns that the international credit crunch would impair the company's ability to finance investments in a series of recent pre-salt discoveries. The company's current 2008–12 Business Plan anticipates US$112.4-billion-worth of investment across a range of projects. Some, however, suggest that the full cost of developing Brazil's discovered and undiscovered pre-salt reserves could be as high as US$600 billion. Its revised plan for 2009–13 is due to be unveiled on 19 or 20 December, according to recent comments by a Petrobras executive.

Government ministers have repeatedly stated that investments in the pre-salt discoveries will go ahead. The government has already lifted borrowing limits to allow the national development bank BNDES to lend more to Petrobras. Nevertheless, the controversy generated by the recent news that Petrobras had taken loans from two other federal banks—Banco do Brasil and Caixa Econômica Federal—show that there are limits to the support that can be provided from the domestic banking system at a time when the government is trying to keep domestic credit lines to smaller businesses open as well. The Chinese loan offer, along with an earlier report that Brazil was in discussions with a sovereign wealth fund based in the United Arab Emirates over possible support for pre-salt production, shows that the government is also willing to consider less traditional sources of financing for new investments in the oil sector.

Outlook and Implications

Despite the global credit crunch Petrobras has in the past few weeks still been able to raise capital abroad. Petrobras's difficulties lie instead in the sheer scale of investment that the company needs to make in order to develop a series of new discoveries in the pre-salt layer, as well as to proceed with all the other projects included in its business plan. It has stated that it intends to proceed with the development of the pre-salt fields, and that pre-salt production is still feasible even in a lower-oil-price environment. There have been suggestions in the local press, however, that the pace of development of pre-salt production could be affected and that associated projects such as plans to build two new refineries aimed at the export market could be delayed. Petrobras is also likely to have to rely more on domestic credit, non-traditional sources of financing, and help from its foreign partners to finance investments in pre-salt projects.

Finding the necessary capital is not the only challenge facing Petrobras. The discovery of a new exploration frontier in Brazil poses considerable technical challenges, and additional investment will be needed in associated infrastructure such as the construction of new pipelines. The anticipated oil boom has also set a new series of challenges for the government, which has set up an inter-ministerial committee to look into possible changes in regulations to maximise the state's share of revenues, including a proposal to create a new state oil company to manage reserves in the pre-salt layer (see Brazil: 1 July 2008: Minister Supports Creation of New State Energy Company; Petrobras Opposed). These discussions have created some uncertainty for investors but the outlook for Brazil's oil sector remains promising.

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