Mention Brazil and many images come to mind, not least of which are football, samba, favelas and of course – carnivals, but with oil reserves of 8.3 billion barrels waiting to be fully developed, the enormous South American country is gearing up for black gold fiesta, writes Aaron Woolner.

However, reserves are one thing – getting at them is quite another. To solve this problem Petrobras developed the PDET masterplan that will enable the state-owned oil company to pipe the oil from its fields in the Campos basin, which is located offshore Rio de Janeiro.

The PDET development will link five offshore fields – part of a region that currently produce four-fifths of the country’s oil production – with the refineries in the south-east of the country.

This project is part of  Petrobras’ attempts to reverse the anomaly that, despite vast natural resources, leaves Brazil as the world’s six largest consumer of oil, but only the sixteenth largest producer.

With energy consumption set to increase by an additional 3.3 per cent annually, the Brazilian government had to act quickly to turn a burgeoning trade deficit in oil and gas to a surplus and ramp up domestic production by more than 600,000 barrels a day (bpd), up from 1.6 million bpd.

But PDET is not significant only for the increased oil production it will bring to Petrobras, it also represents an improved status for the Brazilian company.

‘Petrobras received a very aggressive tariff on this deal,’ says Dan Bartfield, partner at Milbank Tweed that acted for the Japanese companies in this deal.

‘As a result of its improved credit rating it is now a world class oil company, and in future developments can expect terms on par with this status. It may be in the wrong zip code but with projects like this it has got to be taken seriously now,’ he adds

The project

The oil fields of the Campos Basin are located in water of depths of up to 2,600m and presently the vast majority – 80 per cent – is transported by ship to the refineries of Sao Paulo and Minas Gerais.

The US$1.6bn plan put forward by Petrobras envisages transporting the majority of this production to shore via an offshore infrastructure and a 610km onshore pipeline to link-up with the fields with the country’s refineries.

While agreement has yet to be reached on the land-based section of the development, earlier this year Petrobras and its two Japanese partners in the Campos Basin – Marubeni and Mitsubishi – signed loan agreements on the US$910m offshore section of the plan.

The PDET project envisages that PDET will gather crude oil from five Campos Basin platforms for transport by tanker to Petrobras' coastal terminals, or for direct export to other countries.

The role of two of Japan’s leading sogo shosas (trading houses) has given a far-eastern flavour to a project that will see the construction of a fixed platform, two mono-buoys, platform interconnections through sub-sea oil lines.

The financing

The involvement of Mitsubishi and Marubeni is by no means the end of Japanese influence in the PDET project – more than 50 per cent of the senior debt was provided by the Japan Bank for International Cooperation (JBIC), with the rest coming from a syndicate of international banks lead by Mizuho.

Teruyusa Kushima, deputy director of JBIC’s corporate finance, says: ‘We provided a US$491m term loan, with US$327m coming from the commercial banks – the rest of investment came as an equity injection from the two participating Japanese companies.’

The inclusion of JBIC meant that the project was structured slightly differently from a standard project finance transaction.

‘To some private banks this project is regarded as classic project finance,’ says Kushima. ‘To them this is a non-recourse financing in relation to Mitsubishi and Marubeni, and indeed if there is a default on the debt they cannot go to these companies for funds.

‘But to JBIC this is not project finance but instead corporate finance to Petrobras because of the way the loan was put together. The project is financed through an SPV [called PDET Offshore] and they hold all the assets.

‘Petrobras then pays rent to the SPV, so our security is the cashflow coming from Petrobras.’

In addition to the loan, Mitsubishi and Marubeni loaned US$91m to the SPV as subordinated debt to be repaid over the same 14-year tenor as the senior lending.

The project is essentially entirely debt financed. Following Brazilian law, the SPV put in a token amount of equity but the JBIC deputy director says this still left PDET ‘99.999 per cent debt financed’.

Citing client confidentially Kushima would not disclose the price of debt on the issue but he was confident the rate was competitive.

‘At JBIC we invest on a policy, rather than profit basis. We are not seeking a profit so, relatively speaking, our rates are not as high as a private bank,’ he says.

Conclusion

While the pace of Brazil’s economic development may not yet be at the rate of the Asian giants, its energy consumption is set to continue – and so will the increased investment in its energy industry.

As Patricia Hammes, lead partner at Shearman & Sterling who worked on this project, says: ‘As the relationship between Japanese investors and financial institutions with Petrobras has developed, the transactions have become increasingly simplified in structure reflecting the investors' and lenders' growing comfort with Brazil and the global stature of Petrobras.

‘We see a continuing commitment on the part of our Japan-based clients to continue to invest in Brazil and in particular in projects led by Petrobras.'

As well as the Campos Basin, which is currently the engine room of the country’s oil and gas production, there are further prospects off the country’s north east coast.

What can be predicted with a fair degree of certainty is the continued presence of Japanese companies in Brazil as the energy-hungry Asian nation casts its net ever further afield for the oil and gas supplies it needs to power its industries.

Kushima confirms that the strong Japanese presence in this stage of the PDET deal was no accident.

‘This is one of the biggest projects that JBIC has invested in so far in Brazil – as an investment finance – and our additional projects with Petrobras and other Brazilian energy companies demonstrates our strong continuing relationship,’ says Kushima.

‘We hope that this will develop further over time,’ he adds.

Petrobras has outlined an investment budget of US$15.7bn for the projects in the Rio de Janeiro region alone it seems likely that figure will increase, rather than go-down.

‘Petrobras is looking at spending a lot of cash in the near future,’ says Bartfield. ‘This will be the model for future developments and you can expect to see a very strong deal flow.’

The project at a glance