Petrobras to remain dominant in Brazil for a decade

Despite Petroleo Brasileiro SA's loss of its 40-year monopoly on Brazil's oil sector in 1997, the company's strength and critical mass still give Petrobras enough muscle to dominate Brazil's oil and gas industry for the next decade, allowing it to "effectively hold back the deregulation process in Brazil," says Edinburgh-based Wood Mackenzie Consultants Ltd.


Despite Petroleo Brasileiro SA's loss of its 40-year monopoly on Brazil's oil sector in 1997, the company's strength and critical mass still give Petrobras enough muscle to dominate Brazil's oil and gas industry for the next decade, allowing it to "effectively hold back the deregulation process in Brazil," says Edinburgh-based Wood Mackenzie Consultants Ltd.

In a recent report, Wood Mackenzie said Petrobras's ambitious growth targets�which include tripling of its production outside Brazil to 300,000 b/d by 2005; increasing refining capacity in Brazil to 1.8 million b/d from 1.5 million b/d by 2005; boosting gross annual revenues to $35 billion from the $22 billion recorded last year; and reinventing itself as commercially driven�are not indicative of a company "feeling under threat from the entrance of foreign players into its once-protected market."

The analyst said, "Various options are at the disposal of the Brazilian government and regulator to release, or at least ease, this dominance." It remains uncertain whether enough "political willingness" exists among government and regulators to do so.

Petrobras's strategy includes reducing average lifting costs to $2.80/bbl from the current level of $5.10/bbl and saving $270 million by 2005 through reductions in general overhead from the 1999 level of 8.8% of total operating costs to 5.2% by 2005.

Petrobras also is seeking to use more domestically produced oil in its refineries, thus reducing its dependence on imports, says Wood Mackenzie's Andrew Hill. It plans to make domestic oil comprise 83% of the oil being refined in Brazil by 2005, compared with around 68% currently. Petrobras will increase the use of domestic oil through its ongoing investment plan.

Brazil most likely will not experience a natural gas shortage with the Bolivia-Brazil pipeline now operating and other pipelines being proposed to supply Brazil's southern states, says Wood Mackenzie. The main issue is in what form that energy will be used in Brazil.

Due to a lack of gas infrastructure in Brazil, gas would be used best through generation of electricity, which will be in high demand over the next few years. Demand for gas to generate power has failed to grow as quickly as expected, says the analyst. But Brazil could face an electricity deficit in the next year if new power generation capacity isn't commissioned.

The fact that Brazil has historically relied on hydropower to serve its electricity needs is one reason the electricity market has failed to move towards using gas, according to the report. Gas-based power projects also face currency-rate exchange risk because electricity tariffs are fixed to the Brazilian real while gas prices are linked to the US dollar.

Other obstacles to increased use of gas in the power sector include a lack of electricity infrastructure in Brazil to support rapid growth and the shortage of gas turbines on the world market.

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