Frustrations for South American Oil

www.nytimes.com By TONY SMITH

SÃO PAULO, Brazil, Feb. 20 — With crude prices edging toward $40 a barrel and a shortfall looming in world production, South America's two main oil producers, Petrobras of Brazil and the Spanish-owned Repsol YPF of Argentina, might be forgiven for spotting a silver lining among the clouds of war gathering over Iraq.

Remote from the potential combat zone and convenient to the United States, both companies could find ready buyers for stepped-up oil exports and give the economies of their home countries a welcome injection of fresh petrodollars.

But in fact, analysts say, neither company can expect to reap a windfall, because of economic volatility, changing government regulations and growing political pressure to keep a lid on fuel prices at home.

Energy analysts say a war in Iraq and the continuing instability in Venezuela could combine to depress world daily oil production by 3.5 million barrels, to about 73 million barrels. Most OPEC nations are already running close to full capacity, so the shortfall would have to be made up by non-OPEC suppliers.

Increased output in Russia and Norway would probably fill part of the gap; the remainder is where the opportunity lies for Latin producers like Mexico, Brazil and Argentina.

"Anyone who is producing will benefit from higher prices," said George Beranek, an analyst at PFC Energy in Washington. "Petrobras and YPF will also benefit, provided they can get the world price."

That last proviso is crucial.

With the advent on Jan. 1 of a new left-leaning government in Brazil, Petróleo Brasileiro, as Petrobras is formally known, appears likely to lose some of the autonomy it has won over the last decade, especially regarding prices. The Brazilian state owns 56 percent of the voting shares in Petrobras and names its top management.

President Luiz Inácio Lula da Silva made two political appointments that will effectively tame Petrobras: a little-known senator, José Eduardo Dutra, will take over the company's presidency from the respected, market-friendly Francisco Gros; and Sérgio Gabrielli, an academic economist with little commercial experience, will become chief financial officer.

Petrobras's refinery prices for fuel are now 23 percent lower than those in the United States, a situation that the company cannot maintain indefinitely. To run its refineries efficiently, it must import some lighter oil to mix with its own heavy crude, and pay the going world rate for the imports.

Mr. Gabrielli said today that Petrobras would "alter prices as soon as possible" but that a recent surge in inflation might prevent the government from allowing any price increases for a while.

Despite its dependence on light-crude imports, Petrobras, Brazil's largest industrial company, has grown rapidly to become an aggressive player in global markets. Last year it was Brazil's top exporter, with much of its success coming in refined products rather than crude.

In January, it was able to double its exports of gasoline, mainly to the United States, after supplies from Venezuela all but ceased because of a nationwide strike against President Hugo Chávez.

Petrobras is producing more oil than ever — 1.62 million barrels a day early this month. According to Fabiana Fantoni, oil analyst at Tendencias, a São Paulo-based consultancy, and it has room to expand its exports of 235,000 barrels a day by about 8 percent.

Doing so might bring in $500,000 a day in extra profits, Ms. Fantoni estimated — "not an extraordinary increase, but it would certainly be good for Brazil's trade balance."

Still, she said, "Petrobras could increase its profits greatly if it kept its pricing at international levels." Though it stepped up production last year, Petrobras posted an 18 percent drop in net profit, to $2.25 billion for 2002.

After years of trade deficits, Brazil recorded a $13.2 billion surplus last year, offsetting a slide in foreign direct investment, which had financed past deficits.

At the moment, though, tackling inflation seems to be the government's prime concern. The central bank has raised interest rates twice this year, despite Mr. da Silva's campaign pledges for easier credit.

Unlike Brazil, Argentina is a net oil exporter. But it is still gingerly recovering from a four-year economic slump that broke the Argentine peso loose from its dollar-pegged moorings and upended the country's politics. And like his Brazilian counterpart, President Eduardo Duhalde has pressed his country's oil companies to limit their exports and hold the line on domestic prices to nurture the fragile domestic market.

So Repsol YPF "can only export a certain part of its production," said Ian Reid, oil analyst at UBS Warburg in London, "and there's a question mark over whether it can pass on price hikes to consumers."

What oil it can ship abroad does not earn the company what it might: there is a 20 percent tax on exports, and regulations saying that at least 30 percent of export revenue must be brought back to Argentina to be spent or invested.

At one point, the central bank thought the figure should be 100 percent. According to an official at another oil company in Buenos Aires, there is widespread concern in the industry that the economy minister, Roberto Lavagna, wants to increase the export tax rate now that world crude prices are above $35 a barrel.

In January, Argentine oil companies reached an agreement with the government to freeze prices for three months and to supply crude to Argentine refineries at $28.50 a barrel, well below the current world price. Repsol YPF has been leading the oil sector's negotiations with the government.