Petrobras Production Plans, Brazilian Oil Consumption Impact Oil Exports

Brazil's path to becoming a major oil exporter will depend partially on whether Petrobras' executes its production expansion plans on its proposed time schedule, according to a June 30 report by Barclays Capital.

Since 2000, the nation has gone from having a deficit in oil supply, or implied net imports of 790,000 b/d, to implied net exports at present of 480,000 b/d, a trend that will likely continue as new oil projects are brought on stream over the next few years. Petrobras expects to increase domestic oil production from 2.1 million b/d in 2010 to 3.95 million b/d in 2020, a 6.5 percent year-over-year increase; other companies are planning to add production as well.

However, Barclays sees adding such sizeable volumes on schedule to be challenging. "The pace of output growth in Brazil has consistently fallen short of initial targets in recent years, with actual combined output in 2009-10 coming in some 30 percent below initial International Energy Agency estimates," Barclays said. With a huge investment plan of approximately $214 billion through 2014, and an incremental share of investment to be poured into the development of the pre-salt area, the likelihood of project slippages remains high.

Recent delays in Petrobras' release of its 2011-15 business plan "suggest a possible renewed focus on reducing capex [capital expenditure] costs," Barclays added. "Local content rules and construction backlogs will also likely constrain the speed of development and, in our view, a 5% rate of output increase over the next 10 years should be seen as a positive result."

Barclays also sees risk for Brazilian oil consumption growth to exceed three percent per year, the consensus estimate for consumption growth, in the context of continued healthy economic growth, which means exportable production runs the risk of falling short of 1 million b/d by 2020. Transportation is expected to be a key source of oil consumption growth as car ownership in Brazil is still well below the country's potential, and rising living standards will help drive vehicle penetration higher and, in turn, oil consumption. The transport sector currently accounts for the bulk of Brazil's oil consumption at 60 percent.

"Additionally, the potential for rising infrastructure investment during the period could add a further layer of strength to domestic oil demand and energy demand more generally," Barclays said, adding that it expects primary energy demand to rise by over 40 percent over the next decade.

In spite of having sizeable gas reserves, Brazil's natural gas production has grown slowly in recent years, constrained by transportation and low domestic prices. The country was a net importer as of 2010, with most gas sourced from Bolivia or from deliveries to its two liquefied natural gas (LNG) regasification facilities.

Most of the country's gas production takes place offshore in the Campos Basin; the pre-salt fields offshore Brazil are estimated to contain substantial amounts of gas. Petrobras plan to quickly expand gas production in coming years, anticipating a threefold increase in output by 2020, largely associated with ambitious oil output targets. Achieving these targets, however, will depend on a parallel expansion of pipeline and other infrastructure, especially due to the distance of offshore fields from the Brazilian coastline, Barclays said.

Brazil's Export Outlook

Brazil is the world's largest exporter of coffee, sugar and orange juice, a dominant exporter of meat, soy products and iron ore and an increasingly important producer of oil, corn and other raw materials. Barclays noted that prospects for strong global commodity demand growth over the next 10 years, amid a struggling supply side, implies a high and rising call on Brazilian commodity exports in the coming years.

However, Brazil's infrastructure requires investment to fuel sustainable growth. Barclays quoted the World Economic Forum's 2010-11 global competitiveness report, which ranked Brazil 62nd out of 139 countries for the quality of infrastructure. The report identifies the most problematic areas in the quality of ports, which ranked 123rd, roads, which ranked 105th, air transport infrastructure, which ranked 93rd, and railroad infrastructure, which ranked 87th.

The report noted, "This assessment reflects the appalling state of the transport infrastructure in the country, its underdeveloped railroads, the unexploited potential of its 48000 km of navigable waterways, its congested ports and airports." A survey published in the same report noted that poor infrastructure was the third most problematic factor for doing business in Brazil.


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