Analysts see Brazil’s outlook as strong

Amid mounting obstacles to its operations in several South American countries, the overseas output of Brazil's state-run oil firm Petrobras fell in May.
But analysts expect that a further rise in domestic Brazilian production will more than compensate for the disappointment abroad.

The company's overseas crude oil output fell to an average 161,988 bpd in May from 175,702 bpd in April, the company said. The drop was caused mainly by gradual, but continuous production declines in Argentina and Venezuela, where Petrobras has its biggest foreign oil production. Its oil fields in both countries are becoming more mature.
At the same time, Petrobras has not invested much in exploration for new oil in recent years in either country. Not surprisingly, Petrobras' oil output in Argentina fell 9 % in the year to May 2005, and 7 % in Venezuela in the same period.

In 2003, Petrobras took over Argentine oil company Perez Companc. But due to high taxes and royalties on exploration and production activities in Argentina, it has been hesitating to spend large amounts to search for new oil in the country. Meanwhile, to just keep current output levels, the company has to re-inject increasing amounts of water into oil fields, a process that makes production more expensive.
Argentina's government in May announced measures designed to boost flagging oil and gas production in the country to avoid a potential energy crisis. So far, Petrobras has only said it remains interested in offshore exploration in Argentina, but hasn't yet revealed whether it considers the new government measures attractive enough.

In Venezuela, Petrobras faces an even more serious challenge. New legislation is forcing the company to migrate current operating contracts to joint-venture contracts in which Venezuelan state oil firm Petroleos de Venezuela will have a 51 % stake. As compensation, however, Petrobras reportedly will also be awarded a 49 % stake in promising new joint-exploration projects off Venezuela's coast.
"Theterms of the contracts aren't out yet. This may take until October. Until then, Petrobras is likely to wait with any new investment decisions in Venezuela," said Lucrecia Tam, an oil analyst at Deutsche Bank in New York.

In Bolivia, where Petrobras in May produced an average of 8,553 bpd, and 7.84 mm cm of gas a day, the company faces its biggest threat. Protesters earlier forced former President Carlos Mesa to resign are demanding an outright nationalization of the country's oil and gas industry. That could result in a total loss of Petrobras' assets there.
Yet, not all overseas developments are negative. Petrobras has a 16 % participation in a promising Nigerian offshore oil block that will start producing up to 225,000 boe a day of natural gas and condensate in 2008, with France's Total as lead operator.

Petrobras also has a participation in the Agbami field off the Nigerian coast that is operated by ChevronTexaco, and plans to draw from its expertise in deep water offshore drilling to expand in the Gulf of Mexico. Moreover, Petrobras' enjoys rosy domestic prospects.
"It always helps when international production is doing well, but its effect is really minor compared to domestic production," Deutsche Bank's Tam said.

The company in early June had said its average oil output from domestic Brazilian fields rose to a record daily average of 1.729 mm barrels in May from 1.704 mm bpd in April, due to a greater efficiency at offshore oil platforms and growing recovery rates in mature oil fields.
The company reached a new daily production record on May 12, when it pumped 1.82 mm barrels from domestic fields. The new record prompted analysts at Merrill Lynch to be upbeat about the firm's domestic output in June.
"Even, if there were no additional growth from end of May, this suggests June domestic oil production would rise 18 % year-on-year," Merrill Lynch said in a research report, adding that the rapid increase in domestic production makes the bank's expectations that domestic oil productionwill average 1.7 mm bpd in 2005 look conservative.

In 2004, Petrobras' domestic production averaged 1.493 mm bpd. The rise from an average daily domestic output of 1.51 mm bpd in the fourth quarter of 2004 to expectations of more than 1.8 mm bpd in the fourth quarter this year is "not something you typically see in a company the size of Petrobras," Merrill Lynch said.
In the next couple of years Petrobras plans to bring several new offshore oil rigs on stream, with a potential to increase its domestic oil output by another 500,000 bpd on average until 2008.