Thursday, 22 January 2009

Short Comment on PDVSA/Petrobras Problems Over the Pernambuco, Brazil Refinery

We have been insisting on the problems facing PDVSA, the Venezuelan state-oil company, because it is not a secret that it is facing serious cash-flow problems. Tumbling prices will likely force it to trim staff (there are rumours that it already shed 5,000 workers this month), rework investment plans, speed up asset sales overseas, and borrow from the government -- because international banks are refusing to extend credit. Dow Jones recently quoted PDVSA Finance Chief Eudomario Carruyo as saying that ''revenue had plummeted by half´´ in the last quarter.

he announcement by Petrobras yesterday that it will complete a planned oil refinery in northeast Brazil on its own should it fails to agree on a fuel-supply contract with PDVSA, dear reader, does only ring the warning bells. Bloomberg reported that Petrobras very much wants to build the refinery with PDVSA but ''it will build it on its own if it has to,´´ citing refining director Paulo Roberto da Costa. As we said in recent posts, the major credit events facing PDVSA are 1) payment delays to suppliers, and; 2) the reworking and/or suspension of joint ventures to build refineries in Latin America and Southest Asia. In the case of Brazil's Abreu e Lima refinery, we believe that the Venezuelans were interested in stopping the project by alleging that it was too costly for them or not profitable under the current circumstances.

For Petrobras and PDVSA, the Abreu e Lima refinery is a strategic project. For Petrobras, the refinery would help increase national refining capacity a few years before the Tupi pre-salt layers begin to produce oil massively. Petrobras, also rumoured to be facing cash shortages, is thought as capable of building a refinery on its own. The problem is, with no doubt, the violent correction in prices that is making some investment plans unfeasible.

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