Latin America's own version on Enronitis has been playing out the last few months as market observers work out the likely fall-out from Venezuela. After a slew of downgrades to Petroleos de Venezuela (PDVSA)'s heavy oil projects, bankers in the region might be forgiven for an outbreak of nervousness regarding upcoming financings. Brazil's oil company, Petrobras, however, looks set to send two sizeable gas and oil transport projects to market this year.

According to Pedro Augusto Bonesio, Petrobras' executive manager for project finance, the rationale behind its use of non-recourse debt has changed. ?Previously?, he says ?we looked to guarantee funding for large projects when we could not be certain that our budget would not be cut in the middle of capital intensive programmes.? Since Petrobras moved outside of hands-on government control in 1998, it has had far greater certainty about what its capital expenditure will be and how to meet funding requirements.

A key element of earlier funding structures was their ability to avoid balance sheet treatment under Brazilian generally accepted accounting principles (GAAP). However, Petrobras American Depositary Receipts also trade on the New York Stock Exchange, and US GAAP is not quite as forgiving. More importantly, Bonesio stresses, ?the beauty of using the non-recourse structures nowadays is not getting them off balance sheet, but the access to funding even in a troubled market on a long-term basis, the guarantee of drawdowns during project implementation, despite market hiccups, the possibility of lower cost of funding and the considerable tax benefits.?

The advantage of ring-fencing funds raised is that its exploration and production development activities are less vulnerable to price shocks. 1999, for instance, saw sharp drops in prices, but did not dent the ongoing programme to develop the Campos basin, which is located off the south-east coast of Brazil. In June 2000 Petrobras closed over $3 billion in financing for the Espadarte, Voader e Marimba (EVM) fields, and the Barracuda and Caratinga properties.

These deals, which were financed separately, used similar structures, dependent on Dutch-registered special purpose vehicles that avoid large tax liabilities. It also meant that since the leasing vehicles were registered offshore the production could be deemed an export. The two deals, therefore, marked the first involvement of the Banco Nacional de Desenvolvimento Econômico e Social (BNDES) into the oil and gas market. It also highlighted the close relationship between Petrobras and the Japanese trading companies.

Barracuda and Caratinga's SPV is owned by Mitsubishi and Itochu, whilst Mitsui and Marubeni are behind the EVM project. The role of the Japanese was formerly seen as a largely financial partnership, but, says Bonesio, Petrobras wants to move more towards forming strategic partnerships with corporates with the relevant skills in exploration and production.

The Japanese are not the only partners to have worked alongside Petrobras ? several banks and pension funds, including ABN Amro, Bradesco and Petrobras' own pension fund, Petros, have been domestic supporters. Marlim has been successful in accessing the debt and equity markets in Brazil. The original Companhia Petrolifera Marlim raised $1.5 billion in the local capital markets between 1998 and 2000, led by ABN Amro. A second SPV, NovaMarlim Petroleo, raised $150 million in domestically-subscribed equity, and $684 million equivalent in domestic debt. NovaMarlim went out in 2002 and despite a worse financing environment than the time of the last issue, Bonesio says that the issue was very well received

According to Bonesio, however, the domestic capital markets will not be an important source of funding for the producer going forward. This despite the fact that cross-border money has, if anything, got more expensive (witness the spreads at which sovereign bonds have traded in the last few months). Part of this confidence will come from the limited success that Petrobras has had in its power financings.

Petrobras, alongside ABB Equity Ventures, A&A Electricity Investment and, later on, Petros, is a sponsor of the Termobahia plant. Termobahia proved that a gas-fired power plant could get financed in a market as hydro-dominated, not to mention dysfunctional, as Brazil's. Petrobras views such plants as useful ways to monetise gas reserves that would normally be expensively re-injected at the well-head. As such it was the main driver in putting up a tolling agreement that would satisfy offshore banks.

The $184 million in debt on the plant came through an Inter-American Development (IDB) A/B loan, marking the first time that the IDB and Petrobras had worked together. Bank of America placed the B loan at the end of 2001, and six months later SG and BBVA led another B loan for the Termopernambuco plant, which had a Petrobras supply contract but had Iberdrola-owned subsidiaries as offtakers and sponsors.

Petrobras is also, alongside El Paso, sponsor of the $740 million Macae project, whose International Finance Corporation and SG-led financing ws set for launch last year, but has now been postponed. El Paso's current liquidity and regulatory problems are only a small part of the reasoning behind the delay.

Recovery in Brazil's electricity market has not made the picture for power bankers any prettier. Indeed, after the rationing that hit the sector in the middle of last year, Brazilians seem to have taken to energy conservation with relish. Now that the rains have again filled the country's hydro-electric reservoirs, there is little evidence of an increase in demand that would encourage more gas-fired capacity ? it is still around 20% off its peak. And reform of the sector is unlikely to be a priority of President Luiz Inácio Lula da Silva.

In this atmosphere, rumours have spread that Petrobras is planning to exit the power sector altogether, dealing what most participants see as a fatal blow to Brazil's gas-fired programme. According to Bonesio, however, these concerns have been overplayed, and have been dealt with by the company's strategic plan. ?We decided at a time when shortages were projected to participate in 29 projects. We have now reviewed the numbers that were behind that and have decided that the regulatory environment and market do not justify these plans.? Bonesio says that plants currently in development will not go beyond their first phase ? usually fairly basic simple-cycle configurations or the first set of turbines in a combined cycle set-up ? until Petrobras has an environment that will allow it to sign long-term contracts or sell onto a working spot market. Given that peaking capacity is the most important thing that gas can bring to Brazil's generation mix, this could be a blessing in disguise.

More promising is the series of transportation projects that Petrobras plans to bring to market over the next few months. The first of these is Project Malha (Portuguese for network), which links the important industrial areas of northeastern and southeastern Brazil. This $840 million undertaking will initially connect an LNG terminal and regasification facility, known as GNL do Nordest to consumers and corporates, including several Petrobras facilities, in the south-east.

In future, the pipeline could be reversed, carrying gas north as and when raw gas exploration activities in the Campos basin become more important. At this stage Petrobras would be in a position to be an exporter. Bolivian gas producers will need to take note ? the Brazilian market may not be as lucrative as it has previously been.

Petrobras will still be working with Japanese players on the project ? Mitsui, Itochu and Mitsubishi will be the sponsors ? in part because their bids were so competitive. Bonesio gives one clue to this advantage when asked what the prospects are like for European banks' involvement in future projects. He says that ?we have talked, and presented, to European banks on our last two pipeline projects, but the perception we had was that they thought that they would not be able to compete with Japanese institutions. We have good relationships with the global lending community however, and several international banks participate through their Tokyo branches on these deals.?

Syndication on the project has been tentatively set for March, although no formal advisory or arranging mandate has been inked, with the exception of the retention of Clifford Chance as legal counsel. The financing structure calls for a tenor that would correspond with a ten-year lease contract with Petrobras, and a 10% equity component. This could be followed in June by the financing on the second major project ? the PDET pipeline.

PDET is a system designed to reduce the dependence of Petrobras' oil production operation on a constant fleet of tankers to receiving terminals on the southeastern coast. This is expensive, time consuming, and causes congestion at ports. PDET would run from seven production platforms to onshore infrastructure such as refineries, and has been tendered in two parts. The offshore work has been awarded to Mitsubishi and Marubeni, while the onshore portion is in the hands of Mitsui and Itochu. This $1.2 billion deal will also be pitched largely to Japanese institutions, again on the back of lease or transport contracts with Petrobras.

The producer has few concrete financings in the pipeline beyond this, but is examining the LNG market closely. It is fortunate that, in line with Brazilian GAAP, it can make hefty contract promises to make projects financeable but will not have to assume the debt associated with them. Bonesio says ?we have been examining the prospects for the LNG market to monetise gas reserves in the Amazon, but have not yet decided whether there is enough value to proceed. The spot market is not very solid, but may improve in the future. Moreover, we can sign contracts with marketing subsidiaries to underpin a project's credit.?

More interestingly, he sees a time when Petrobras, which would be one of the few significant southern hemisphere producers, could sell gas in June, when there is low winter demand to markets such as the US, where electricity use rockets during winter months. This arbitrage play would lie behind any LNG schemes that come forward in future years.