Fitch believes transactions backed by offshore oil rig contracts in Brazil's pre-salt layer benefit from the significant support Brazil's federal government has provided for development of the local oil and gas industry and the continent's largest petrochemical company, Petrobras. However, oil rig transactions also hold some operator credit risk and asset level volatility that should be well understood.
“Drilling Rig Financing -- Brazil Runs Ultradeep (Assessing Risks in a Developing Asset Class)”
Over the past five years, one-third of the oil discovered worldwide was found below Brazilian waters. During this time, significant investments in development of the local industry have been made. On Sept. 6, Banco Nacional de Desenvolvimento Economico e Social (BNDES) announced that it will make approximately BRL8.00 billion (USD3.94 billion) in loans available to oil and gas projects this year. Approximately one-half of these loans are destined to finance equipment and expansion of the petroleum network in the country. In our view, these investments and the overall development of a local oil and gas industry provides a stable credit environment for Petrobras' suppliers and service providers. These factors are important background to the ratings assigned to these transactions so far, as they mitigate key risks inherent to drilling rig financing transactions, particularly the potential for the underlying charter agreements to be revoked.
At the current price of oil we believe contract revocability risk is unlikely. But if oil prices were to drop and exploration activity becomes uninteresting to oil companies, contract offtakers would be more likely to seek contractual revisions or even cancellation. The largest oil and gas companies in the region, such as Petrobras, have significant bargaining power. Contract risk also comes from the credit quality of the vessel operator as well. We believe it is possible for Petrobras to cancel contracts if operators go bankrupt.
We believe it is also important to understand the leverage and asset volatility in these transactions. The relatively high oil price has led for some leverage increases, pushed up the demand for off-shore oil rigs and caused an increase in day rates and a rise in asset values. We believe that the large number of rigs under construction and a potential drop in oil prices could affect the oil rig day rate environment and cause asset values to decrease. Nonetheless, the current dynamics surrounding the Brazilian oil and gas industry alleviate many of these concerns.
Source: Your Oil & Gas News.