Boston, MA -- (SBWIRE) -- 03/08/2013 -- BMI View: We remain firmly bullish on the long-term outlook for the Brazilian energy sector, with production from the country's pre-salt reserves pushing production to new highs. New licensing rounds in 2013 also present strong upside risks, although at this point they may be outside the scope of our 10-year forecast period. The short-term outlook is more mixed, however, as ongoing regulatory challenges provide reason for some caution. Of these, the partially diffused saga between the Brazilian federal courts and Chevron and Transocean, as well as ongoing uncertainty regarding a new Royalty Law, underscore the weaknesses and inconsistencies in Brazil's regulatory environment. Over the long-term, achieving international fuel price parity will be critical to the health of Petrobras, the most important player in the country.

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The key trends and developments in the Brazilian oil & gas sector are:

- The long-term outlook for the Brazilian energy sector is decidedly bullish, with an average oil and gas production growth rate of 8.1% and 6.5%, respectively, over our forecast period. Included in our forecast is a total oil production increase from 2.88mn barrels of oil per day (b/d) in 2012 to 4.34mn b/d in 2017, largely driven by increased volumes coming from the country's vast pre-salt oil reserves. This is particularly true as state-owned Petrobras is placing increasing emphasis on increasing pre-salt production over the next few years.
- Our short-term view is more cautious as Petrobras, the dominant player in the sector, seeks to implement an extensive reform agenda as a part of their US$236.5bn strategic plan for 2012-2016. The extent to which the company maintains a credible commitment to reform, however, will be an important bellwether for the next several quarters. Importantly, in terms of its financial health, Petrobras continues to be plagued by some critical factors largely outside of its control: a weakening real, the 'Custo Brasil', and an unsustainable domestic fuel pricing regime.
- Brazil will launch its first auction of oil exploration blocks in five years in May and November 2013. ANP, Brazil's oil and gas regulator, has identified 174 blocks to be auctioned in the '11th Round,' with an equal number of them located onshore and offshore. The first of auction will be for the 'equatorial margin' region, located in the north. The offshore pre-salt blocks will be auctioned off in November in a second licensing round. Importantly, the signing of a new Royalty Law by President Rousseff will be critical for the execution of these licensing rounds, although it is far from certain as she has expressed reservations regarding the new distribution of revenues to non-oil producing regions.

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