Petrobras Extends Gas Import Deal With Bolivian Company To Fuel Its Thermoelectric Plant In Brazil
Petroleo Brasileiro Petrobras (NYSE:PBR) and the Bolivian state-owned oil and gas company, YPFB, recently agreed to extend the supply of natural gas to a Brazilian thermoelectric power plant until December 31, 2016. Currently, YPFB supplies 2.24 million cubic feet of natural gas per day to the thermoelectric plant in Brazil’s centerwest city of Cuiaba under a contract that is set to expire on August 31. The extended gas supply contract will allow Petrobras to compensate for dwindling output from drought-stricken hydroelectric power plants in Brazil. [1]
Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily oil production in Brazil was 1,931.4 thousand barrels per day (MBD), an estimated 90.9% of Brazil’s total oil production. We currently have a $21/share price estimate for Petrobras, which values it at almost 10x our 2014 diluted EPS estimate of $2.1 for the company.
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Brazilian electricity demand is mainly supplied by hydroelectric power plants with a total installed capacity of 85.7 Giga Watts (GW), which account for 68% of the country’s total power generation capacity. Accordingly, there is limited scope for thermoelectric power producers such as Petrobras to supply the grid. However, weather changes impact the Brazilian demand for thermoelectric power significantly since hydroelectric power plants are largely dependent on annual rainfall levels. [2]
In the years of abundant rainfall, Brazil’s hydroelectric power plants generate more electricity and consequently less generation from the backup thermoelectric power plants is required. On the other hand, when the rainy season disappoints, draining hydropower plants of water, the demand for thermoelectric power in Brazil rises sharply.
This year, one of the worst droughts in close to 50 years in Brazil’s southeastern region, which is home to Sao Paulo and Rio de Janeiro, has severely depleted reservoirs in the country crimping water and electricity supplies. Dam levels have been at their lowest since 2001, the last time electric power supply was rationed in South America’s second largest economy. This has led to higher thermoelectric power demand in Brazil, which is mostly being fueled by natural gas.
According to Petrobras, Brazil’s total natural gas demand rose by 6% y-o-y during the second quarter, which led to a corresponding 10.4% increase in the commodity’s import. The company produced 4.7 GW of thermoelectric power during the same period, up form 4 GW last year. Brazil’s national grid operator, ONS, has said that it will keep the backup thermoelectric power plants in operation until at least 2015. This is expected to result in higher electric power sales by Petrobras in the coming quarters. [3]
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Notes:- Bolivian natural gas imports to the Brazilian market, investidorpetrobras.com [↩]
- Petrobras 2013 20-F SEC Filing, sec.gov [↩]
- 2Q14 Webcast, investidorpetrobras.com [↩]