Doubts that Brazil’s below-ground potential could be limited by above-ground risks.

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Business Monitor examines key issues affecting the oil and gas industry in Brazil and provides short- and long-term forecasts for the sector.

industry analysis, business forecasts, business monitor
Business Monitor expect Brazil's crude production to rebound from its 2012 fall and flatline in early 2014.

Business Monitor has just released its latest findings on Brazil’s developing oil and gas industry in its newly-published Brazil Oil & Gas Report.

With several deepwater fields yet to come online in H2 2013, such as Papa Terra or Roncador 3, along with Frade's restart, Business Monitor expect Brazil' s crude production to rebound from its 2012 fall and flatline in early 2014. They also believe that further down the line, Petrobras' colossal pre-salt development plan will support this upward trend. Fields such as Lula, Iracema or Franco will boost crude output above 4mn barrels per day by 2020. Muted primary interest in Brazil's first subsalt round is triggering doubts that the country's below-ground potential could be limited by associated above-ground risks. Thus, Business Monitor expect the string of contractual terms and bidding fees imposed by ANP to be relaxed before the next pre-salt round expected in 2015. Finally, they continue to believe there is a risk that Brazil will become increasingly dependent on LNG imports in the coming years, as large international sporting events will require the country to leverage its gas power generation capacity.

Key trends and developments in the Brazilian oil and gas sector covered in the report:

■ Only 11 companies agreed to pay the US$1mn fee required to place bids on the Libra field auction in November 2013. This is much less than the 40 companies initially expected by ANP. While this is a sign that stringent regulation is likely to deter investors, Business Monitor do not see this as a risk to their forecasts. Rather, it limits certain upside risks that could come from foreign international oil companies (IOCs) entering the market. They expect that ANP will review the pre-salt production sharing agreement before 2015.

Business Monitor maintain their long-term bullish outlook for Brazil's crude production. While fields such as Papa Terra and Roncador 3 will help the country's output to rebound in 2013, they believe that it will be subsalt developments such as the massive Lula or Franco fields that will contribute to the country's long-term outlook. They expect oil production to keep growing throughout the forecast period, from 2.2mn b/d in 2013 to more than 4.0mn b/d after 2020.

■ Business Monitor nonetheless outline that with a total of 39 FPSO and production units required by Petrobras to meet its production target, the country's timely resource development is likely to face delays. Stringent local content requirement is overwhelming Brazilian shipyards. Not only could Petrobras face delay due to the slow construction of its production units, but the company could also miss its target because some of the shipyards in question are yet to be completed.

■ The short-term view in the new report is more cautious as Petrobras, the dominant player in the sector, seeks to implement an extensive reform agenda as a part of its US$236.5bn strategic plan for 2012-2016. The extent to which the company maintains a credible commitment to reform, however, will be an important bellwether for the next several quarters. Importantly, in terms of its financial health, Petrobras continues to be plagued by some critical factors largely outside of its control: a weakening real, the 'Custo Brasil', and an unsustainable domestic fuel pricing regime. That fuel pricing regime has improved considerably since June 2012, however, as the company and government have allowed fuel prices to increase substantially.

■ Rapid economic growth will continue to push domestic oil consumption higher, though the country's unique ability to alternate between ethanol and gasoline consumption in the transport sector - based on short-term price movements - makes forecasting difficult. Given that economic growth will be supported by surging oil production, oil demand is also expected to rise rapidly in the second half of the 10-year forecast period. Total oil consumption is to rise from 2.74mn b/d in 2013 to 3.07mn b/d by 2017 and 3.50mn b/d by 2022. Business Monitor are holding on to these forecasts despite a February 2013 increase in the ethanol blend to 25% and a commitment by Petrobras to increase biofuel production by 29% in 2014 based on their assessment of strong demand growth.

■ Brazil will continue to be dependent upon refined fuel imports throughout the forecast period. And although Business Monitor is forecasting an over 40% increase in refinery capacity through 2016, it will not surpass the growth in fuel consumption over the same time period. As such, Petrobras, the country's primary downstream player, will continue to purchase refined fuel products on the international market and sell them for a loss domestically. Rumours of a possible Petrobras-Sinopec collaboration to expand Brazilian refining capacity may pose some upside risks to Brazil's total refining capacity forecast, although the benefits of such a collaboration would be dependent upon the nature of the agreement between the two state-owned companies, primarily in terms of exactly what percentage of refined products output would be earmarked for export to China. At the time of writing, details of such a deal were scant and, as such, Business Monitor has not yet factored this investment into their forecasts.

Business Monitor is a leading, independent provider of proprietary data, analysis, ratings, rankings and forecasts covering 195 countries and 24 industry sectors. It offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities.

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Sarah Sutcliffe
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