Petrobras Hits Equipment Snags

Petrobras suspended EWT due to machinery malfunction

Early this week, Petroleo Brasileiro S.A., or Petrobras (PBR - Analyst Report), Brazil’s state-run oil giant, suspended the extended well test (EWT) in the Tupi Area (in the Santos Basins pre-salt cluster), due to malfunctioning of its machinery like the Wet Christmas Tree (a submarine well flow control device) at well 3-RJS-646 and the adaptor base.

The company has decided to replace the machinery, which is expected to take four months. PBR announced that EWT will continue after the replacement is completed.

The Brazilian government is expected to change the nation's oil law, which we believe is not going affect Petrobras. The building of five refineries through 2020 will continue even if the changes limit Petrobras' access to the sub-salt area.

The new law is not expected to hinder its ability to bid for exploration permits. Rather if production-sharing agreements are implemented for the sub-salt deep-water oil reserves, it will be a boon for PBR. However, a detailed assessment of possible changes to the oil law has yet to be analyzed by government officials.

The Brazilian government, in order to resolve fiscal problems in the country, decided an average price cut of 4.5% for gasoline and up to 15% for diesel in June 2009. Even worse, prices for final consumers of gasoline remain unchanged, since at the same time, the value-added tax on gasoline was raised.

However, the recent recovery of oil prices from US$34 per barrel to US$62 currently creates a positive environment for Petrobras in the very short-term. Moreover, the company’s robust portfolio of upstream assets gives it a positive production-growth profile.

We continue to be optimistic about the medium-term outlook of Petrobras based on its encouraging portfolio of investments, particularly in the so-called pre-salt layer.

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