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2013 Oil & Gas Industry Perspectives


FEB, 2013

By Mark McHugh and Luiz Antonio Maneschy

Brazil is heralded as the largest and most significant new oil and gas prospect of the last few decades.Commodities However, there is still a long way to go to realize the promise of a new non-OPEC stable source of supply in the top 5 world oil producers by 2020. Progress toward this ambitious target has been slow in the last year, as project development, execution and political risks have taken their toll. Meanwhile, after 2 years of modest growth, the Brazilian economy is looking forward to a more positive business climate in 2013. In parallel there are plans to hold  new oil and gas exploration licensing rounds in May and November 2013, which should give the industry a much needed boost. Petrobras remains the key driver of the industry, as it still represents over 90% of production in Brazil. Yet the outlook for the next couple of years is challenging for Petrobras, with increasing demands placed upon it by government and the need to meet more realistic targets. The emphasis is now on the transition to field development and bringing new production on stream. While this process is ramping up in 2013, it has yet to achieve critical mass, notably for the deep-water pre-salt development. It will not be for another couple of years that the industry in general will start to capitalize on their exploration programs and contribute to a significant share of the projected 5.7 million boe/d production by 2020.

General Economic Outlook in Brazil

After the dramatic growth rates of 2010, the Brazilian economy continued its significant slowdown in 2012, with GDP growing at around 1% annually, versus an expected growth of 3.3% at the beginning of 2012.

Finance Minister Guido Mantega in a recent interview predicted a return to strong growth during 2013 after 2 years in the doldrums, and the market is anticipating a 3-4% increase in GDP.

The principal factors leading to poor global economic performance in 2012 were:

•General risk aversion in the world economy;

•Slow recovery of economic activity in the USA;

•High levels of European unemployment;

•The risk of default among European countries;

•Slowdown of the Chinese economy; and

•A fall in the price of commodities.

This in turn impacted the Brazilian economy with:

•Decreased performance of export manufacturing;

•Increase in manufactured imports;

•Drop in the exports of mineral commodities;

•Weak performance of the Brazilian stock market;

•Significant increases in salaries and a shortage of specialized labor;

•The end of strong consumer credit growth;

•Lower than anticipated investment levels; and

•Brazil losing its position as the world’s 6th economy to the UK.

The investment climate is expected to improve in 2013, partially catching up on the backlog and partially in advance of the World Cup in 2014 and in preparation for the Olympics in 2016. The government is planning to spend R$43 billion on infrastructure during 2013 and to stimulate the manufacturing industry. The cities of São Paulo and Rio de Janeiro alone anticipate investments of R$6.5 billion and R$3.9 billion, respectively.

Some leading financial indicators for 2013 are:

•After its weak performance in 2012, the stock market expects a volume of R$20 billion in IPOs in 2013.

•The level of direct foreign investment will remain high (above R$60 billion).

•The M&A market will be active (at about 800 operations a year).

•Private equity investment will be in the range of R$6 billion (Source: ABVCAP).

Other predictions for 2013 in the Brazilian market are: 

•The unemployment rate will continue to fall;

•Salary increases will continue;

•Retail price inflation will be impacted by higher food prices;

•A return to the IPI freeze on vehicle sales;

•Continued poor performance of Brazilian manufactured exports;

•A growth in the retail trade of 7.5% (Source: CNC);

•The implementation of the Basel III agreements will concern midsize banks; and

•Brazil will regain its position as the 6th largest world economy.

As the world's second-largest developing economy after China, Brazil is a key indicator for the economic health of the emerging world and a major source of growth, as Europe, the US and Japan wrestle with major debt problems. Inevitably, a number of uncertainties in global markets will remain during 2013, which can impact Brazilian business and the expectations for the year. During its slowdown, Brazil introduced a succession of measures, including a move to weaken its currency and one to cut what were once among the world's highest interest rates to a record low of 7.25%. With these changes in effect, the prospects of a stronger year for the Brazilian economy seem to be underpinned by the fundamentals.

Key Trends for Global Oil Markets

More than usual uncertainty about the economic drivers of energy markets complicates forecasts for oil demand and pricing in a year of continuing relocation of the growth of supply and demand. Global demand for energy in general and oil in particular remains strongly linked with economic performance — about which large questions loom and their answers dependent on actions by policymakers in the US and Europe. Recent resolution of the fiscal cliff is positive in that fears of a US recession are now fading, although further deadlock in Congress on US tax issues cannot be entirely ruled out.

The global benchmark Brent crude average ended 2012 at about $112 a barrel, adding 3.5% annually, down from the 13.3% jump in 2011. The American benchmark index, West Texas Intermediate (WTI) fell $7.01 per barrel, or 7.1% over the year.

It is expected that global economic uncertainties will continue to drive price volatility. Beginning in 2013, analysts remain doubtful about the oil price movements, as much of the previous year's concerns are expected to carry over this year. Credit Suisse slashed the price outlook of WTI by 5% to $102.75 from $106.00 per barrel while retaining the global benchmark Brent crude at $115. Barclay’s analysts are a bit more bullish, estimating Brent prices to reach up to $135 by year end. Economists at Capital Economics suggest that Brent crude could remain at $85 by the end of the current year, a sharp drop of $27 while WTI could reach $75.

The Oil & Gas Industry in Brazil

Against this backdrop Brazil's oil and gas industry in Brazil is seeking this year to rekindle its progress toward the ambitious goal of daily production of 5.7 million barrels by 2020.


Petrobras President Maria das Graças Foster at the beginning of 2012 put the company’s plans on more realistic footing. Under her leadership Petrobras now focuses heavily on delivery of one of the world’s most ambitious capital programs, targeting $236.5 billion expenditure during the period 2012-2016. However, Petrobras continues to be held hostage by its largest shareholder, the Brazilian government, and is used as an instrument of government policy rather than having the freedom to make fully commercial decisions. Moreover, it has suffered a number of setbacks on both production and project delivery, with high levels of technological complexity to develop the deep-water offshore resources in the pre-salt. Consequently, in mid-December, Moody's cut its credit outlook for Petrobras, providing some key reasons:

•Petrobras is significantly outspending cash flow and its production has fallen short of target, with crude production in Brazil averaging 2.59 million boe/d in the first 9 months of 2012, down about 0.5% relative to 2011.

•Petrobras continues to face a number of conflicting pressures. Rising oil product imports and government fuel price controls are resulting in large downstream losses, implementing a local content program against the background of a high “Brazil Cost” for local manufacturing and services.

•In 2013 Petrobras faces rising debt levels, increasing cost pressures and execution risks in keeping development projects and production targets on track and achieving cost savings.

The outlook for the next couple of years will be tough for Petrobras. It must avoid excessive political interference and deliver medium-term on profitable production and reserves growth, with a decline in its leverage profile to successfully meet the target it has set itself to become one of the world’s top 5 oil producers by 2020. Many industry observers are questioning whether Petrobras is up to the challenge. During 2013 Petrobras needs to create confidence that it is in control of its own destiny and demonstrate its ability to deliver. There are some encouraging signs: with entry into production of 3 new wells, Petrobras’ total pre-salt production was 2.72 million boe/day in November 2012, a 25.6% increase on the previous year, but still well below the potential. Brazilian self-sufficiency in oil production and refined products was lost in 2008 and is unlikely to be recovered before 2020, according to Petrobras itself.  

Brazilian Independents

Meanwhile, Brazilian independent exploration companies such as OGX, HRT and Queiroz Galvão have been hit particularly hard during 2012, as investors flee from the hype and uncertainties of the sector. With large exploration portfolios and low levels of production these companies must now consider farm-ins in order to obtain additional capital, operational capability and more importantly to offset some of the execution risk. Under the right conditions — with a successful realignment of strategy and further exploration success for companies like HRT — the independents’ share prices have the potential to rebound during 2013.


There are many international oil companies (IOCs) with activities in Brazil, including Shell, Exxon-Mobil, Statoil, BG, Chevron, BP, Maersk, Total, Sinochem, ENI, Anadarko, Repsol, Sinopec, Petra, El Paso, Galp Energia, Ecopetrol, Hess, Sonangol, among others.

The IOCs remain disappointed with the Brazilian government, primarily because of the new Petroleum Law introduced in 2009, which dictates that pre‐salt reserves are to be explored and developed in partnership with Petrobras, which has a minimum interest of 30% in any given consortia. In addition, the law declares that Petrobras can be awarded pre‐salt exploration contracts without a competitive bidding process. Yet Petrobras has been unable to meet their annual production targets, despite an 11% cut in the forecast for 2020.

With the IOCs are constantly seeking to improve their reserve replacement ratios on a worldwide basis, Brazil potentially has a tremendous role to be play, with some of the largest discoveries in recent decades. However, the lack of new bidding rounds from the Brazilian authorities over the last 4 years has impeded new exploration and has created an active secondary market with more than 50 farm-in and/or farm-out contracts negotiated between 2009 and 2012. Companies were complaining that they are running out of areas to explore, with concessions from the 10th round in 2008 starting to expire. The recently announced ANP rounds during 2013 are long overdue and are expected to create significant interest within the industry.

Some recent highlights of activity from the sector are:

•Shell is the leading producer other than Petrobras, with around 100 Mbpd today and this figure should increase by 30 to 40 Mbpd in 2013. 

•Although Statoil sold 40% of the Peregrino field to Sinochem, their midterm plans for Brazil are quite aggressive, with US$5 billion to $10 billion investment planned during the next 2 years. 

•BG is planning to invest US$25 billion in Brazil until 2020, with US$2 billion focused on Research & Development, according to their CTO, Olivier Wambersie in a recent interview.

•Chevron has been in a critical situation since the Frade oil spill incident in the Campos Basin.

•BP, which bought out Devon’s blocks in 2010 for $3.2 billion, is seeking to focus on its discoveries in the deep waters of the Campos Basin and exit its only producing asset, the Polvo field.

•Maersk has invested around US$3 billion during the last 5 years in their 6 blocks.

•Exxon/Mobil has already explored around 200 km and is still interested to explore more areas. 

•Meanwhile Anadarko has left after failing to find oil.

Government reactions to Chevron’s accident in 2011, and its political interference in Petrobras, continue to create suspicion among investors, according to Joao Carlos De Lucca, President of Brazilian Petroleum Institute (IBP). Despite this, it is anticipated that high levels of portfolio activity will continue into 2013 and there will be a fierce interest in the new bidding rounds from IOCs and independents alike.


Oil Field Services

In the oil field services sector, the local content program has been successful in encouraging equipment and service suppliers, be it local drillers, services or equipment companies, to invest to meet the big pre-salt needs. However, some of those providers are waking up with a slight hangover, as Petrobras, under Graças Foster’s new leadership, has toned down drilling and production targets to more realistic levels. Consequently, there is the potential for service overcapacity in Brazil that will likely give Petrobras the upper hand on service pricing in years to come. Equipment manufacturers appear in better shape with bottlenecks in both subsea trees and tubular (rigs are waiting extensively on both trees and casing).

Brazil rig demand is robust, despite likely near-term softness driven by equipment constraints. So, while Petrobras might release some mid-water rigs in 2013, the company appears fully committed to its portfolio of 40 ultra-deep water rigs, and we believe Petrobras’ total rig fleet could grow a quarter by 2016. See table with the comparison of offshore vessels/ equipment backlog orders.

Exploration drilling is currently starved, but resumption in Brazil’s bidding rounds should change this in 2014. Cost inflation is also finally easing up, while local rig construction remains challenged, so the midterm driller outlook still remains quite constructive.

Service majors are accepting lower margins to access Brazil’s long-term potential. The pricing battle among Big 3 remains intense, with Petrobras succeeding in knocking down prices on major service contracts.

New ANP Rounds

Brazil's President Dilma Rousseff on January 10th signed off on plans to hold a new oil and gas exploration licensing round, which will probably be held by May 2013, or earlier if possible, according to Mines and Energy Minister Edison Lobao. The minister said this 11th round, the first license auction to be held since 2008, will include some 164 blocks, of which half are offshore and half are onshore.

ANP, the regulatory body, expects a high level of interest in the 11th round of blocks, mainly due to the recent discoveries by Petrobras near to areas that will be auctioned. The appetite is also related to significant discoveries made by Petrobras in the equatorial margin and in Guyana, which is analogous to the coast of Africa, and has very similar geological structure. Companies like Shell will look with great interest on areas in the 11th Round, according to their President in Brazil, Andre Araujo.

The first round of licenses for the so-called sub-salt region, where massive oil reserves have been discovered in recent years, is on track to be held in November. The sub-salt round will be held under a new set of rules which determine a larger role for Petrobras. Meanwhile, it is not an easy task for Petrobras to be almost obliged to participate in all 10 previous rounds, but to now be required to have a minimum of 30% in all the pre-salt blocks, and also to become the operator of these areas. This will potentially stretch even further the capabilities of an already stretched Petrobras.

In the next rounds, the licensing procedure should be more streamlined due to an agreement between ANP and IBAMA, in which environmental licensing is now by area and not for each block.

Political barriers and the issue of distribution of royalties between the Brazilian states left the country without auctions for almost 5 years, awaiting a new regulatory framework, which is due to be voted on now in early 2013.

The lack of new exploration rounds has been a missed opportunity for Brazil and has undoubtedly led to investment in other regions. According to ONIP, oil companies like Exxon/Mobil, Shell, Statoil, Chevron and other producers were left outside the area of the pre-salt offshore, which contains at least US$5 trillion in oil.  Delays have also led companies to look elsewhere for new discoveries, such as Total and BP in West Africa, OGX in Colombia and HRT in Namibia.

Nevertheless, expect to see major international focus on Brazil during 2013 because of the new exploration rounds, not only from existing players, but also from new participants anxious to participate in a strategic new stable source of supply and in a strengthening economy, while global oil markets remain volatile. 2013 is a year for the oil and gas industry in Brazil to regain some of the momentum it has lost in the past couple of years.

Author Biography

Mark McHugh- is a Managing Director and Co-Founder of OFS Capital, LLC a boutique investment firm, with offices in Houston and Rio de Janeiro, focused on the oil and gas sector in Brazil and Latin America. Mark is actively involved in dealmaking and consulting in the energy business globally. He is based in Brazil and has an extensive international senior-level career in the oil industry in marketing, sales, strategy consulting, and general management, spending 26 years with Shell. During his distinguished career, Mark has held a variety of management team positions as VP Marketing Americas, GM Downstream International Consultancy, VP North Latin America and GM Shell Venezuela.

He has an exceptional track record in leading new business development, implementing global business strategies, M&A and managing startups. As an entrepreneur and investment advisor, he is currently working on a pipeline of over US$800 million of energy deals. He has undertaken a number of market-entry studies for international companies looking at the Brazilian market. Mark graduated as a mechanical engineer from Imperial College, London and has a postgraduate qualification in finance and business administration from the University of Westminster.

For further information on this article or OFS Capital, please contact:

Luiz Antonio Maneschy- Luiz is a Managing Director and Co-Founder of OFS Capital, LLC. He is an experienced senior oil industry executive and consultant, with emphasis on strategy development, design and improvement of processes, elaboration of procedures, norms and policies, personnel management and company training. He is equally at home in the operations and commercial areas.

Luiz has outstanding experience in both Brazilian and international roles and has worked in Europe, the United States, the Caribbean and Central America. In the latter he restructured and grew Shell’s aviation businesses, leveraging sales and profits, and improving operations with sustainable results.

With more than 30 years of experience in Brazilian and multinational companies (Fugro and Shell), he has held positions as General Manager, Finance & Administration Director, Director of Industrial Operations, Corporate Director of Health, Safety & the Environment, as well as positions in Sales, Operations, Supply Chain, Engineering and Quality. Among his recent clients are Petrobras and ABESPetro (Brazilian Oil Field Services Association).  He is a graduate in mechanical engineering from the University of the State of Rio de Janeiro (UERJ) and also has an MBA in Business Management from IBMEC in Rio de Janeiro, as well as having completed diverse courses with the Shell Group.

For further information on this article or OFS Capital, please contact:


Articles are provided for informational purposes only and do not constitute an offer to sell or a solicitation to buy any security or other financial instrument. The opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in the Articles are as of the date indicated and are subject to change at any time without prior notice. The stated price of any securities mentioned in the Articles is as of the date indicated and is not a representation that any transaction can be effected at that price.

Information has been obtained from sources believed to be reliable but OFS Capital, LLC its affiliates and/or subsidiaries do not warrant its completeness or accuracy. Neither OFS Capital, LLC, nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the Articles.

The Articles are not intended for private or retail customers in any jurisdiction in which distribution of information contained in the Articles to private or retail customers would require registration or licensing of the author or OFS Capital, LLC which the author or OFS Capital, LLC does not currently have.

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