Brazil Nears Top Spot in Latin Oil Output

Brazil is poised to overtake longtime energy powerhouses Mexico and Venezuela as Latin America’s biggest oil producer, a result of both political flexibility and natural resources.

Trends suggest Brazil could rise to the top of the heap by 2011, as its ultra-deep offshore fields start producing in the months ahead.

Meanwhile, Mexico and Venezuela have seen crude-oil output drop dramatically in recent years. Traditionally high oil production in those countries made state-owned oil companies complacent, said David Shields, an independent energy analyst in Mexico City.

“Basically, the reason is that Brazil had a crisis to deal with in energy and Venezuela and Mexico never did,” said Mr. Shields.

Brazilian state-run energy giant Petroleo Brasileiro SA, or Petrobras, was forced to adapt to free-market pressures in the mid-1990s when former President Fernando Henrique Cardoso opened Brazil’s oil industry, a Petrobras monopoly, to private competition.

The result was a wave of exploration, with production surging by about 50% since 2000. Petrobras, responsible for more than 95% of Brazil’s output, produced just over two million barrels a day in November.

Petrobras’s daily output, including production of natural gas and operations outside of Brazil, amounts to about 2.6 million barrels of oil equivalent, up 5.5% from a year ago.

The trend is for Brazil’s crude-oil output to keep growing as the offshore “subsalt” fields — where oil is buried under more than four miles of water, rock, sand and salt — start producing. Petrobras has targeted domestic output of 2.25 million barrels a day for 2010, growing to 2.43 million in 2011.

On Thursday, U.S. companies Anadarko Petroleum Corp. and Devon Energy Corp. said their joint project struck oil for a second time in the subsalt region of Brazil’s Campos Basin.

Another offshore area, the Tupi field, is the Western Hemisphere’s largest discovery since Mexico’s Cantarell in 1976. Tupi is estimated to hold between five billion and eight billion barrels of oil equivalent, and pilot production is expected to yield about 120,000 barrels a day in little more than a year.

Things are headed in the other direction in Mexico, which has struggled with declining output and little new development. Mexico’s crude oil output has dropped from a peak of 3.4 million barrels a day in 2004 to an average of 2.6 million barrels a day in the first 10 months of 2009. Production will likely come in at 2.5 million barrels a day in 2010.

The key factor was a steep dropoff at Cantarell, for years the cash cow for state-owned Petróleos Mexicanos. Cantarell averaged just 639,000 barrels per day in October, down from 947,000 a year ago and 2.2 million in 2004. The decline is expected to continue into 2010, though Pemex is also making forays into the Gulf of Mexico, where other oil companies, including Petrobras with private partners, have had success.

Despite moderate overhauls in 2008 designed to increase the scope of oil-services deals, Pemex has been unable to follow the lead of Petrobras and increase foreign cooperation — including entering the kind of deep-water, shared-risk contracts that have helped Brazilian production.

Pemex also has to fund more than a third of Mexico’s federal budget, limiting its own ability to invest in itself. Efforts to loosen the reins have been hampered by political gridlock.

The production decline in Venezuela, which holds enough reserves to put the country into the same league as Saudi Arabia, has been primarily self-inflicted.

President Hugo Chávez has diverted billions of dollars of profits from state-run Petroleos de Venezuela SA, also known as PdVSA, to welfare programs, hurting the company’s ability to invest. That has led to Venezuela’s crude-oil output sliding more than 700,000 barrels a day over the past decade.

As a member of the Organization of Petroleum Exporting Countries, Venezuela is also subject to the group’s quota restrictions. The International Energy Agency says Venezuela produced 2.22 million barrels a day in November, and OPEC offers a similar estimate. Venezuela, disputes that figure, saying daily output is closer to 3.1 million barrels.

Brazil has been invited to join OPEC, but declined.

PdVSA’s 2009 investment budget amounts to around 20% of Petrobras’s, suggesting Venezuelan output will continue to sink while Brazil rises.