Petrobras Postpones Deep Spending Cuts

By Jeb Blount and Rodrigo Viga Gaier

RIO DE JANEIRO, June 16 (Reuters) – Brazil’s state-run oil company Petrobras will likely delay details of major cuts to its $221 billion five-year spending plan until July, two sources said, when the government plans to announce a rescue program for the industry.

Petrobras, which is struggling with a corruption scandal, falling oil prices, stagnant output, and the largest debt of any oil company, had planned to announce deep spending cuts, expected to be about 30 percent of the proposed spending, by the end of June.

However, executives at Petroleo Brasileiro SA, as Petrobras is formally known, have run into internal and political resistance to cuts given the major role the company plays in Brazil’s economy, a top Petrobras executive with direct knowledge of company discussions told Reuters.

The government is only coming to terms with Petrobras’ economic fragility and how government efforts to increase control over the country’s natural resources could make Petrobras weaker still, the senior coalition member told Reuters.

Both officials requested anonymity because final details of the government’s and Petrobras’ plans have yet to be decided. Both have regular contact with Rousseff and other top government and Petrobras officials.

“The industry depends on Petrobras, and the government wants a coordinated response, but they also know they can’t wait too long,” the second source, a senior member of Brazilian President Dilma Rousseff’s ruling coalition, said.

BIG SPENDER

In recent years, Petrobras’ more than $40 billion of annual spending on ships, platforms, oil systems and refineries has been nearly double the Brazilian government’s own discretionary spending on infrastructure. Now, as Petrobras cuts back – the government, faced with inflation and a stagnant economy – is cutting its own budget too.

Meanwhile a price-fixing, bribery and corruption scandal has forced Petrobras to stop payment to leading suppliers, leading to bankruptcy filings by major contractors and widespread layoffs.

The government’s July oil plan is likely to mimic a program announced earlier this month to bolster shrinking government funds for investment in ports, highways and other infrastructure with private capital, one of the officials said.

Making Brazil’s oil industry more attractive to non-government investment from Brazil and abroad will require more than broad policy statements, the senior ruling-coalition official said.

That will require changes to Brazil’s 2010 oil law, the official said, most notably ending a requirement that Petrobras take a minimum 30 percent stake and serve as operator in any new development contracts in Brazil’s most prolific oil areas.

Ending the requirement, which would open development to international majors such as Royal Dutch Shell Plc and Exxon Mobile Corp, has been endorsed by Petrobras CEO Aldemir Bendine, the head of oil regulator ANP, and Brazil’s energy minister Eduardo Braga. All have said Petrobras cannot afford to lead all development.

DEBATE PLANNED

The Senate expects to discuss such a change on June 30 and may present a bill to change the law under expedited debate and voting rules, Eunício Oliveira, head of the Brazilian Democratic Movement Party (PMDB), said on Tuesday. The PMDB is the largest party in the Senate and the main coalition partner of Rousseff’s Workers’ Party (PT).

Oliveira said the bill would likely substitute a Petrobras right of first refusal to operate and participate financially in new areas in place of its current obligation.

“Petrobras doesn’t have the cash to take on 30 percent today,” Oliveira said. “Brazil changed, the economy changed, Petrobras changes and people need to adjust.”

Despite growing Senate support, a change is unlikely to be made by July, the official said, adding that it could possibly win Rousseff’s support. The official’s opinion is backed by a third source, a senior government bureaucrat involved in day-to-day oil-planning talks.

“We’re at the beginning,” the coalition official said. “Some want change, but not everyone. Few in Congress have thought about it. Then there’s the President, and it’s her law.”

Oil-industry officials, including some at Petrobras, also want Brazilian-content requirements, blamed for higher costs and project delays, eased. Rousseff has said she won’t change them. (Additional reporting by Marta Nogueira in Rio de Janeiro and Alonso Soto in Brasilia; editing by Richard Pullin, Bernard Orr)