Latin oil giants might not reap war dividend

www.iht.com Tony Smith NYT Saturday, February 22, 2003   SAO PAULO With crude oil prices edging toward $40 a barrel and a shortfall looming in world production, the two main producers in South America - 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 members of the Organization of Petroleum Exporting Countries are already pumping oil at near-capacity rates, 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 American producers, principally 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." But that last proviso is crucial. With the advent Jan. 1 of a left-leaning government in Brazil, Petroleo Brasileiro SA, as Petrobras is formally known, appears likely to lose some of the autonomy it has won over the past decade, especially regarding prices. The Brazilian state owns 56 percent of the voting shares in Petrobras and names its top management. President Luiz Inacio da Silva has made two political appointments that will effectively tame Petrobras. A little-known senator, Jose Eduardo Dutra, will take over the company's presidency from the respected, market-friendly Francisco Gros, and Sergio 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. Gabrielli said Thursday 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 imports of light crude oil, Petrobras, the largest industrial company in Brazil, 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 doubled its exports of gasoline, mainly to the United States, after supplies from Venezuela all but ceased because of a nationwide strike against President Hugo Chavez. Petrobras is producing more oil than ever - 1.62 million barrels a day early this month. According to Fabiana Fantoni, an oil analyst at the Sao Paulo-based consultancy Tendencias, 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 profit, Fantoni estimated - "not an extraordinary increase, but it would certainly be good for Brazil's trade balance." Still, she said, "Petrobras could increase its profit 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 da Silva's campaign pledges of 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." And what oil it can ship abroad does not earn the company as much as it might. There is a 20 percent tax on exports, and government regulations say 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.