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Petrobras Shares Fall over Fuel-Subsidies

Brazil’s state-run Petrobras oil company hailed a small victory last week when the government allowed it to raise fuel prices, but this was tempered by a sharp drop in share prices with the government’s rejection of a request for a clear fuel-subsidy phase-out.

During 2 December trading, Petrobras experienced its sharpest drop in five years, with shares losing 9.2% on news of the government’s failure to provide a strategy for reducing fuel subsidies that have kept Petrobras burdened with debt.

Petrobras was allowed to raise gasoline prices by 4% and diesel prices by 8% on 30 November, following the government’s approval of a new fuel-pricing policy. The increase was less than expected, and Petrobras said prices would not automatically be adjusted to international levels.

"In regards to the application of the adjustments, these will not be automatic," the company said on Wednesday in a filing that responded to questions on the policy from Brazil's securities regulator.

Related article: Despite Reforms, Brazil and Mexico Lack Energy Investment

"The methodology establishes adjustment bands, giving the executive board discretionary power over the dynamics of domestic and international markets."

Petrobras is in deep debt largely because of government policy that has forced the company to continue borrowing to cover investments while it cannot recoup costs due to the fact that it is not allowed to charge its own consumers world prices.

Petrobras is the largest deep-water operator in the world, with 22%+ of its activity in the deep. Petrobras is the first company in the world to find and produce gas under a layer of salt on the continental shelf. Its pre-salt discoveries have the potential to position Brazil as one of the world’s largest oil reserves.

Petrobras has proven reserves of about 16 billion barrels of oil, which is forecast to double over the next 3-4 years with new discoveries, and is currently producing almost 350,000 barrels per day of oil equivalent in the pre-salt layer of the Santos and Campos Basins—beyond their expectations. By 2016, the company’s pre-salt production should reach 750,000 bpd, and the forecast for 2020 is nearly 2 million bpd.

By. Joao Peixe of Oilprice.com


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