Petrobras expects lifting costs to continue rise in 2005

Brazil's federal energy company Petrobras (NYSE: PBR) expects its lifting costs to continue rising in 2005 because of higher costs of services and prices of equipment, company CFO Sérgio Gabrielli told analysts in a conference call Tuesday. "The lifting costs will continue rising, but not as much as they did in 2004 because output will also increase," he said. The company's lifting costs rose to US$4.69 a barrel in the fourth quarter of 2004, up from US$3.98/b in 2003. Behind the increase were higher operating costs, driven by high costs of equipment and services, which were not offset by an increase in production. Not only did the increase in international oil prices inflate the cost of services and equipment, but world economic growth also raised prices of raw materials such as steel used to manufacture oil exploration and production equipment, Gabrielli said. "The increase will also depend on the conditions set in contracts that will be renewed," he added, The company's domestic oil output declined 3% in 2004 from 2003, which exacerbated the increase in lifting costs, he said. A natural decline in the output of maturing fields, delays in the startup of oil production units and stoppages in the 40,000 barrel-a-day (b/d) Marlim Sul field because of oil leaks from the seabed were behind the lower production. "The P-43 floating, production storage and offloading (FPSO) startup in December raised costs but didn't add to output in 2004," he said, referring to the 150,000b/d FPSO that started production in December at the Caratinga field as part of the US$2.5bn Barracuda-Caratinga project in the Campos basin. Average daily output in 2004 was about 1.49 million barrels of oil a day (Mb/d). Lifting costs were also affected by a stronger real, higher taxes and government charges as well as higher spending on salaries as the company raised wages and hired some 3,000 new employees in 2004, Gabrielli said. Operating and administrative costs in Petrobras' fuel retail business increased 34% last year from 2003 as higher domestic fuel demand and sales increased operating costs and drove spending on transport, telecommunications, logistics and information technology, Gabrielli said. The company's fuel sales rose 6%, led by a 9% increase in sales of diesel and a 6% rise in gasoline sales, Gabrielli said. Refining costs also rose to US$1.58/b in the fourth quarter of 2004 from US$1.53/b a year earlier, Gabrielli said. Programmed maintenance stoppages in 2004 and higher use of imported lighter crude as a raw material due the company's overall output decline led to the rise in refining costs. In 2005, however, higher oil and gas output should offset the higher cost of equipment and services, Gabrielli said. Petrobras expects to produce and average of 1.7Mb/d in 2005 peaking at 1.85Mb/d, driven by 15.9bn reais in investments in exploration and production in 2005, he added. Output will increase as new production units are expected to come online in the Campos basin. In March, the P-43 FPSO at the Caratinga field should reach full capacity, the 180,000b/d P-50 FPSO should start production in the third quarter and the 60,000b/d P-34 FPSO is expected to start operations in Q4. In addition, the company plans to drill new production wells at the Marlim Sul field to restart 40,000b/d production from the Marlim FPSO that has been stopped because of leaking oil from the seabed close to an existing well, Gabrielli said. POWER AND GAS A change of strategy in its gas and power department as well as higher demand for natural gas in the country led this business unit to post profits of 164mn reais (US$63mn) in 2004, turning around a loss of 1.8bn reais in 2003, Gabrielli said. In 2004, the company reduced costs of take-or-pay contracts by assuming control of the 350MW Eletrobolt gas-fired power plant from bankrupt Enron and the 56MW Fafen plant from Portugal's state power company EDP. Petrobras saw a 19% increase in gas sales and a 26% increase in power sales as the 690MW Ibirite and the 500MW Canoas gas-fired plants were ordered to supply power to the national grid by grid operator (ONS) and Canoas in southern Brazil sold power to Uruguay and Argentina. INVESTMENTS Petrobras will continue efforts to reduce expenses in its power and gas department in 2005, including efforts to take over two other power plants. Overall, Petrobras plans to invest 29.6bn reais in 2005, up 38% from 21.8bn reais in 2004. The company expects to detail investments for subsequent years in May when it concludes the annual revision of its US$53.9bn 2004-2010 strategic investment plan, Gabrielli said.