Petrobras struggles with equipment shortfalls

Petrobras cut investment in 2011 for the first time in eight years as Brazil's state-run energy company struggled to buy the equipment, technology and services needed to carry out its $225 billion expansion plan to exploit one of the world's most promising offshore oil frontiers, a report said.

Petrobras invested 72.5 billion reais ($42.05 billion), a 5.1% drop from 76.4 billion reais in 2010, company executives said on Friday according to Reuters.

A day earlier, Petrobras said fourth-quarter profits tumbled 52% on sluggish oil output and refineries so overtaxed that the country has had to boost gasoline imports.

Petrobras shares tumbled on Friday, headed for their biggest daily decline since August due to falling profit, sluggish production growth and news of an expensive equipment order for offshore rigs.

Incoming chief executive Maria das Graças Foster must improve this performance if Petrobras is to achieve its goal of nearly tripling output to 6.4 million barrels a day in 2020, enabling Brazil to challenge the United States as the world's No. 3 oil producer.

"The challenges we face are structural," said José Sérgio Gabrielli, who will step down on Monday after more than six years as chief executive. "We are definitely in a moment of transition."

That transition involves turning $150 billion of active but unfinished investments into operating projects, said Almir Barbassa, chief financial officer.

Those projects have been held up by world-wide shortages of everything from giant steel spheres for refineries to jet turbines to power oil platforms, said Renato Duque, Petrobras' head of supply services.

"It's not just in Brazil, it's international," he said at a news conference at company headquarters in Rio de Janeiro. "There are shortages of everything."

Those shortages, though, may soon get worse.

On Thursday Petrobras told Reuters it agreed to pay a whopping $76.3 billion over 15 years to lease 26 deepwater oil drilling rigs from Brazilian company Sete Brasil and Cyprus's Ocean Rig.

Petrobras shares slid more than 6% on Friday due to the sharp decline in profit and the new rig order, which included five more drill ships than first planned. Petrobras preferred shares fell 6.82% to 23.76 reais in Sao Paulo, wiping nearly a third off this year's gains.

On Thursday, the company reported fourth-quarter net income of 5.05 billion reais, down sharply from 10.60 billion reais in the same quarter of 2010 and far below the 9.20 billion real average estimate of 10 analysts surveyed by Reuters. It was also lower than Petrobras' third-quarter profit of 6.33 billion reais.

Petrobras' difficulties in meeting targets or keeping up with demand extend to most of its major operational units.

Its profits were crimped in 2011 by surging demand for gasoline. Soaring vehicle sales and transport in Brazil are straining the company's domestic refining capacity and led to the import of 70,000 barrels a day of gasoline in December, a record high.

Gabrielli said the growth in Brazil's fuel market simply exceeded Petrobras' ability to keep up.

"It's impossible to foresee in normal circumstances that the consumption of fuels would grow at three times the rate of (gross domestic product)," Gabrielli said.

He said a ramp-up in the company's production of gasoline, cooking gas, diesel and naphtha had reached a limit. Fuel supply problems, he added, would not be resolved until 2013.

The problems, he said, were caused by a drop in ethanol production.

Because biofuels complement Brazil's overall fuel market, any shortfall in its ethanol supply causes a spike in demand for gasoline and other fossil fuels.

"The problem isn't in the oil industry, but in the ethanol sector," said Gabrielli. Ethanol output fell due to a poor cane harvest last year. The crop yield is expected to improve in 2012.

Brazil's huge cane ethanol industry produces the biofuel for an auto fleet where more than 90 percent of all new cars sold are flex-fuel vehicles, which can run on any mix of ethanol and gasoline.

Drivers tend to switch between ethanol and gasoline when supply and demand factors make one or the other better value for money.

Despite huge investments, Petrobras's global output of 2.72 million barrels a day was lower in December than a year earlier.

Barbassa, the CFO, said domestic oil output could have been 40,000 barrels per day higher were it not for unplanned platform outages. The company produces just over 2 million barrels of oil a day in Brazil.

Net debt rose to 54.9 billion reais, up from 36.6 billion reais in 2010 and that 150 billion reais in active, unfinished investments would boost future results.