Brazil Oil Output to Continue Steady Rise in 2007

RIO DE JANEIRO Jan 03, 2007 (Dow Jones Newswires)

Brazil's crude oil output is expected to jump to record levels in 2007, exceeding 2 million barrels a day for the first time toward year-end.

As in previous years, most of the production increase will come from state-run oil firm Petroleo Brasileiro SA (PBR), or Petrobras.

But this year will also see a deepening of the globalization of the Brazilian oil industry: Petrobras plans to make further acquisitions abroad, especially in refining, while at the same time more foreign oil companies are slated to start producing oil in Brazil, eroding Petrobras' current near-monopoly on output.

"The great factor in 2007 will be (oil) production growth," said Victor Martins, oil analyst at Banco Safra in Sao Paulo. "If the oil price stays around current levels, that will give Petrobras quite substantial returns."

Awash with cash after a series of record quarterly profits, Petrobras has earmarked to invest 47.5 billion reals ($22.3 billion) in 2007, almost half of that in Brazilian exploration and production. Petrobras' net profit in the third quarter of 2006 was BRL7.09 billion, up 26% from a year earlier.

The oil firm in 2007 plans to start production at five new offshore rigs over the course of the year, that will add a massive 580,000 barrels a day in new oil production capacity.

The first new platform to go on stream is the FPSO Cidade do Rio de Janeiro rig that is slated to start output in January from the Espardarte field in the Campos Basin off the coast of Rio de Janeiro at a water depth of 1,350 meters. Once the rig reaches its full output capacity, it will pump up to 100,000 b/d of oil and 2.5 million cubic meters of natural gas a day.

Some of the new rigs will only reach their full output capacity in 2008. Moreover, output from active fields is diminishing at an annual rate of 10% to 15%, the range of natural field decline.

That's why the company has given a cautious number for its expected real output increase in 2007: domestic production will average 1.979 million b/d this year, Petrobras' Chief Financial Officer Almir Barbassa recently said. In 2006, analysts reckon Petrobras' average production came in around 1.8 million b/d.

Including gas, Petrobras expects its domestic output to average 2.23 million barrels or oil equivalent, or BOE, a day in 2007. The company calculates its combined Brazilian and foreign oil and gas output to average 2.5 million BOE/d this year.

By the end of 2007, Petrobras' domestic oil-only output will break through the 2 million b/d barrier, CFO Barbassa said. In November, Petrobras produced 1.813 million b/d of oil from its Brazilian fields.

"Petrobras will continue to generate cash through the increase in production," said Luiz Broad, oil analyst at the Rio de Janeiro-based brokerage Agora. "I think its stock will continue to beat the Ibovespa stock index."

Agora in December raised its target price for Petrobras shares to BRL62.40 and maintained a "buy" rating on the stock, largely on the expected jump in domestic oil output.

So far this week, Petrobras shares have risen 1.4% to BRL50.04 on the Sao Paulo stock exchange, after soaring 36% in 2006. The Ibovespa index last year rose 33%.

Next to the expected big output increase, the company also hopes that a buyback of 2.09% of its preferred stocks over the course of 2007 announced in December will help to boost its market valuation.

"Because of the bureaucratic nature of these procedures and investments, we feel this buyback will be completed slowly but consistently," Bear Stearns said in a recent research report. The bank, however, doesn't expect the buyback to have a great effect on trading or liquidity.

Eying Refining Overseas

Petrobras' greatest challenge in 2007 will be to add value to its rising oil exports, said Martins from Banco Safra. "For that, they will have add more refining capacity, be it in Brazil or abroad," he said.

Brazilian crude is very heavy and sells at a discount to lighter varieties such as Brent crude. By refining its oil abroad, Petrobras will be able to add value to its exports.

Not surprisingly, Petrobras in recent months has said it is eying refining assets in several countries in Europe, Asia and the Americas.

In December, CFO Barbassa told Dow Jones Newswires that Petrobras may close a deal in January or February on a stake in a refinery on the southwestern Japanese island of Okinawa.

The Nansei Sekiyu KK refinery, which has a processing capacity of 100,000 barrels a day, is 87.5% owned by Exxon Mobil Corp. (XOM) through its Japanese unit TonenGeneral Sekiyu KK (5012.TO). Major trading house Sumitomo Corp. (8053.TO) holds the remaining stake.

"Okinawa is an export hub," Barbassa said. "From there, you can export to several countries such as China or South Korea."

In September, Petrobras had already closed the acquisition of a 50% stake in the Pasadena Refinery System in Texas from Astra Oil, the U.S. refining arm of Belgian Compagnie Nationale a Portefeuille (NAT.BT), for $360 million.

Globalization Works Both Ways

While Petrobras increasingly ventures overseas, foreign firms in 2007 are determined to kick start their production in Brazil.

Devon Energy Corp. (DVN) in July plans to start output at the Polvo field in the Campos Basin off the coast of Rio de Janeiro state, a Devon press official said Tuesday. At its output peak, the field will produce 50,000 b/d.

Devon is lead operator in the project with 60%, while South Korea's SK Corp. holds 40%.

The Polvo field is the first of a series of new projects by foreign firms that will add more than 300,000 b/d to Brazil's crude output by the end of the decade according to recent output start announcements.

"It took quite a while since the opening of Brazil's oil sector in the late 1990's for foreign firms to enter Brazilian production for real," said Monica Araujo, an oil analyst with the Ativa brokerage in Rio de Janeiro. "These projects take years to develop."

Brazil opened up its oil sector to foreign competition in 1997, and held its first government oil and gas exploration and production block auction in 1999.

So far, only Royal Dutch Shell (RDSB.LN) and Repsol-YPF (REP) have some oil production in Brazil. Shell currently produces about 30,000 b/d from an already declining field in the Campos Basin.

Repsol has a 10% stake in the Albacora Leste field, from which Petrobras started to pump in April with its P-50 rig. The rig soon will reach its output capacity of 180,000 b/d.

Shell, Chevron Corp. (CVX) and Statoil ASA (STO) all are slated to follow Devon in coming years to bring new Brazilian fields on stream with a production of up to 100,000 b/d each.

Copyright (c) 2007 Dow Jones & Company, Inc.