Petrobras Lays Out Production, Spending Plans

Brazil's federal energy company Petrobras expects to produce 2.2 million barrels a day (mb/d) of crude and natural gas liquids (NGLs) by 2007, CFO Sergio Gabrielli said in a conference call Friday. Petrobras has adopted an "extremely conservative" outlook for the 2003-2007 period, expecting a Brent crude average price of US$27.54/b in 2003 and US$15/b for 2004-2007. Therefore all planned production through 2007 would be feasible and profitable at those prices, he said.

The 2007 production forecast sees Petrobras refining 1.58mb/d itself in meeting 100% of domestic demand, while still having 640,000b/d available for export. The forecast includes projects such as B53 and B54, which are still in the planning stage, and includes only minimal production from joint ventures. The crude and NGL production forecast for 2005 is 1.82mb/d, 4% lower than previous estimates, mainly due to delays in starting operations at a number of offshore projects, although this has been offset in part by greater than expected production at the Marlim Sul and BC-60 fields.

Total investment in 2003-2007 will be US$34.2bn. The domestic market will account for 85% or US$29.2bn of that figure, including US$19bn to purchase goods and services, meaning local content will account for 65% of spending. At an average annual domestic spending rhythm of US$3.8bn, Petrobras expects suppliers to create 141,000 jobs through 2007, fulfilling a company goal of increasing support to local industry.

Of domestic spending, 65% will be in exploration and production (E&P), 24% in downstream activities, 5% in gas and energy, 3% in distribution and 3% in corporate activities.

Total spending in 2003 will be US$7.2bn, of which Petrobras will cover US$5.8bn through cash flow and conventional financing, while project financing will account for US$600mn and specific purpose companies (SPCs) for US$800mn.

Petrobras did not comment on plans for Argentina since antitrust authorities in that country are yet to authorize its US$1.13bn purchase of Argentina's Perez Companc. But Gabrielli did say 85% of international investment would be in E&P and 54% of international production growth would come from Argentina and Nigeria. Refining and marketing would represent 11% of international expenditure and other items another 4%, he said. In its international operations, Petrobras does not plan any acquisition of a similar scale to Perez Companc, preferring to integrate operations and pay special attention to the Southern Cone market, Gabrielli said.

Gabrielli expects growing demand from the power sector to allow Petrobras to be able to leverage its purchases of Bolivian natural gas. Gas sector growth predictions have been scaled back on the spluttering local and world economy, and growth areas apart from electric power will be in supplying previously uncovered areas and in developing the vehicular natural gas (VNG) market. Natural gas demand for 2007 is estimated at 48.8 million cubic meters a day (mcm/d), up from 28.5mcm/d in 2002. Thermoelectric power will account for 35% of demand compared to 19% in 2002, and industrial fuel 49% (65% in 2002). Gas and power investments in 2003-2007 include US$1.2bn on a series of pipelines throughout the country, and US$500mn on completing the Ibirite, TermoRio, TermoSul and Norte Fluminense thermoelectric projects. Petrobras will not invest in any power projects other than those that it has already started.

With oil prices expected to average only US$15/b, it is essential to add value to oil production, and Petrobras plans to do this on heavy investment at its existing refineries, focusing on products that give the greatest value to the company and have the strongest influence on improving its balance of payments. Diesel is the most consumed product and together with jet fuel will account for 42% of oil products in 2007, according to today's forecasts. By 2006 Petrobras production will match domestic demand for diesel. The country's refining sector is and will remain attractive as long as the return on investment continues to be adequate, downstream director Rogerio Almeida Manso da Costa Reis said. Almeida does not see any room in the market for new refining capacity at the moment, but said there could be room for new capacity coming on stream after 2008. Therefore Petrobras has set aside resources for investing in new refineries in the final few years of the 2003-2007 plans.

The company plans to maintain US$0.85/b refining costs in 2005-2007, and increase throughput of Brazilian refineries to 1.4mb by 2007, an increase of some 200,000b from today. Refinery investment in the 2003-2007 period will be US$5.5bn. Previous plans to buy a refinery in the US have been scrapped. "We are not going to buy any refining capacity in the US," Gabrielli assured.

Petrobras is Brazil's largest fuels distributor with a 32.9% market share, and the company plans to increase customer loyalty by associating the brand with the highest quality, and export the brand throughout the region, Gabrielli said. The company is developing a new mechanism for fuels pricing, which has been designed to allow the government to reduce price volatility that arises from Brazilian prices tracking international levels. With the recent ups and downs in international prices, the mechanism has not been introduced yet, but could start "very shortly," Almeida said.

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