Petrobras Selling Cheap Power as Brazil Seeks to Limit Aid

Apr 30, 2014 12:32 pm ET

(Updates with aid package in first and fourth paragraphs.)

April 30 (Bloomberg) -- Petroleo Brasileiro SA agreed to sell energy to distributors for below-market rates as the government seeks to fight inflation amid record spot prices and limit the use of a $5.4 billion aid package.

Petrobras, as the state-run oil producer is known, was the biggest seller at an auction today after government-controlled utility Centrais Eletricas Brasileiras SA, or Eletrobras. They provided distributors with five-year contracts at about a third of spot-market rates that surged in past months as Brazil faces the worst drought since at least the early 1970s.

Petrobras and Eletrobras are shouldering the burden of supplying cheaper energy as the government seeks to stem increasing public spending and rising consumer prices. The plan adds to the use of subsidized fuel sales from Petrobras that have led to billions in losses for the crude producer.

The drought that’s draining hydropower dams of water, the source of most of Brazil’s energy supplies, hurts distributors as they buy energy at all-time highs in the spot market and then resell it for a loss at a government-set price cap.

Today’s auction means consumers will pay “a lot less” for electricity, Mauricio Tolmasquim, the head of Brazil Energy Research Agency EPE, told reporters in Sao Paulo.

Brazil last month pledged about 12 billion reais ($5.4 billion) of aid for utilities to cope with the record spot prices. The energy sale will limit the need to draw on the funds.

Record Price

Spot prices hit the maximum allowed 822 reais level on Jan. 31 as a dry spell in parts of Brazil reduced hydroelectric energy supplies, increasing dependence on costlier thermoelectric power. Some distributors tap the spot market to cover demand.

Petrobras sold 28,529 gigawatt-hours under five-year contracts at the auction organized by the Brazilian power trading board. That was 28 percent of the 101,692 gigawatt-hours sold. The auction set a ceiling price of 271 reais ($121) per megawatt-hour.

With the rainy season running from November to April, Brazil’s dams are forecast to be below historical levels for the rest of the year, leading to a 94 percent chance of rationing, according to a March 31 estimate by Citigroup Inc. Fitch Ratings Ltd’s head of Latin American sovereigns, Shelly Shetty, said April 10 that there won’t be rationing.

To keep gas-fired power plants running as it seeks to preserve dam levels, Brazil relies on Petrobras to import liquefied natural gas, or LNG. The oil company, in which the government owns a controlling stake, sells the fuel at a loss.

Value Loss

The oil producer has lost 70 percent of its market value since mid-2008 after failure to meet production targets and losses from fuel subsidies discouraged investors. The shares fell 0.2 percent to 16.66 reais at 1:30 p.m. in Sao Paulo and are down 17 percent in the past year.

Brazil received an unprecedented 637,289 tons of LNG in March, 76 percent more than a year earlier, according to Bentek Energy LLC, a Denver-based industry consultant.

Dam levels are at the lowest for April since 2001, the last time South America’s second largest economy rationed power supply, according from grid operator ONS. Water flows, a benchmark for future dam levels, will decline in May from April, the ONS data show.

--With assistance from Peter Millard in Rio de Janeiro and Helena Chung in Sao Paulo.