2013-03-29 04:04:22 - New Energy research report from Business Monitor International is now available from Fast Market Research
BMI View: We remain firmly bullish on the long-term outlook for the Brazilian energy sector, with production from the country's pre-salt reserves pushing production to new highs. New licensing rounds in 2013 also present strong upside risks, although at this point they may be outside the scope of our 10-year forecast period. The short-term outlook is more mixed, however, as ongoing regulatory challenges provide reason for some caution. Of these, the partially diffused saga between the Brazilian federal courts and Chevron and Transocean, as well as ongoing uncertainty regarding a new Royalty Law, underscore the weaknesses and inconsistencies in Brazil's regulatory environment. Over the long-term, achieving international fuel price parity will be critical to the health of Petrobras, the most
important player in the country.
The key trends and developments in the Brazilian oil & gas sector are:
* The long-term outlook for the Brazilian energy sector is decidedly bullish, with an average oil and gas production growth rate of 8.1% and 6.5%, respectively, over our forecast period. Included in our forecast is a total oil production increase from 2.88mn barrels of oil per day (b/d) in 2012 to 4.34mn b/d in 2017, largely driven by increased volumes coming from the country's vast pre-salt oil reserves. This is particularly true as state-owned Petrobras is placing increasing emphasis on increasing pre-salt production over the next few years.
* Our short-term view is more cautious as Petrobras, the dominant player in the sector, seeks to implement an extensive reform agenda as a part of their 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.
* Brazil will launch its first auction of oil exploration blocks in five years in May and November 2013. ANP, Brazil's oil and gas regulator, has identified 174 blocks to be auctioned in the '11th Round,' with an equal number of them located onshore and offshore. The first of auction will be for the 'equatorial margin' region, located in the north. The offshore pre-salt blocks will be auctioned off in November in a second licensing round. Importantly, the signing of a new Royalty Law by President Rousseff will be critical for the execution of these licensing rounds, although it is far from certain as she has expressed reservations regarding the new distribution of revenues to non-oil producing regions.
* The threatened damage to the Brazilian oil sector as a result of the Chevron-Transocean operating ban has been partially diffused, with the scope of the Transocean ban now restricted to just the Frade field where the 2011 spill occurred. Our positive outlook for Petrobras had been directly threatened by this injunction, as the loss of Transocean's rigs would have made it much harder for the company to hit its near-term production targets. Despite this partial resolution, the saga will continue, and, along the way, underscore the weaknesses and inconsistencies in Brazil's regulatory environment.
* 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 2.93mn b/d in 2012 to 3.83mn b/d by 2017 and 4.79mn b/d by 2021.
* Petrobras' new CEO continues to emphasize the importance of fuel price parity, even after successfully negotiating with the government diesel and gasoline price increases by 10% and 8% respectively in 2012, marking the first time that internal prices have increased since 2006. Despite this, prices are still well below international averages and therefore insufficient. This unsustainable domestic fuel pricing regime continues to render the company's downstream segment not only unprofitable, but also acts as a drag on Petrobras' overall fiscal health, therefore limiting its ability to invest in increasing oil production, especially in terms of monetising its subsalt resources.
* Brazil will continue to be dependent upon refined fuel imports throughout the forecast period. And although we are 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.
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