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Boston, MA -- (ReleaseWire) -- 05/02/2014 --Brazil's massive pre-salt fields, such as Lula, Iracema and Franco, suggest substantial growth potential over the long term, underpinning our view that crude, natural gas and other liquids output will rise from an estimated 2.4mn b/d in 2013 to 4.0mn barrels per day (b/d) by 2023. That said, this is a modest downward revision from previous quarters, reflecting our view that the above-ground environment remains a considerable obstacle to both the country's upstream and downstream sectors. Indeed, muted interest in the country's first pre-salt round, such that there was ultimately only one consortium that bid, underscores the potential impact of Brazil's unfavourable licensing terms and burdensome regulatory environment.

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Meanwhile, following the volte-face by the government on a new fuel pricing mechanism, imported fuel costs will likely continue to act as a significant burden on state-owned Petrobras' already weak financial position.

The key trends and developments in the Brazilian oil and gas sector are:

- We maintain our bullish long-term outlook for Brazil's crude production. While post-salt fields will support robust production in the short term, we believe that it will be pre-salt developments such as the massive Lula or Franco fields that drive the country's long-term production potential. We expect oil production to keep growing throughout the forecast period, from 2.4mn b/d in 2013 to nearly 4.0mn b/d in 2023.
- Our short-term view is more cautious for a variety of reasons, largely centring around problems of resource nationalism. First, the country's first pre-salt auction raised questions about Brazil's regulatory environment and the attractiveness of the contracts on offer. While the massive Libra field was ultimately successfully auctioned to a consortium of Shell, Total, PetroChina and China National Offshore Oil Corporation (CNOOC), interest was far below expectation. Indeed, only 11 companies agreed to pay the US$1mn fee required to place bids on the Libra field auction in November 2013 - far less than the 40 companies initially expected by ANP, leading to a situation wherein there was only one consortium bidding on the field. We believe that given the huge resource potential, this is telling.
- Further, state-owned Petrobras, the dominant player in the sector, faces significant financial burdens. The company continues to be plagued not only by the massive financial pressure of bringing online the country's pre-salt resource, but also by some critical factors largely outside of its control: a weakening real, the 'Custo Brasil', and an unsustainable domestic fuel pricing regime. While we have seen some attempts to improve the pricing regime, with modest increases to diesel and gasoline prices, the recent volte face in terms of releasing information of a new fuel pricing mechanism suggests we are going to see little further improvement ahead of the October 2014 election.

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