(PBR) Petroleo Brasileiro S.A. Start Extended Well Test at Aruana

Brazilian state-run Petroleo Brasileiro S.A. or Petrobras (PBR) has commenced production of oil at the Aruana area, following the start-up of extended well test (EWT). The Aruana area is in the post-salt layer of the southern area of the Campos Basin offshore Brazil.

Petrobras expects EWT at 1-RJS-661 well — through which the oil flows — to run for about six months. The well is located in exploratory block C-M-401 that is between Pampo and Espardarte fields at water depth of 50 meters to 1500 meters.

The well test forms part of the Discovery Assessment Plan (PAD) that was granted by National Petroleum Agency (ANP) for the consequent expansion of the region. The formation tests, conducted in March 2009, after the drilling of the well, show the presence of 27 degree oil and recoverable volumes of approximately 280 million barrels of oil.

Restricted by the capacity of equipment applied, the floating production, storage and offloading (FPSO) unit –– Cidade de Rio das Ostras –– operating in the area can produce up to 12 thousand barrels of oil per day.

Headquartered in Rio de Janeiro, Petrobras dominates Brazil’s oil and gas sector and accounts for most of the country’s crude oil and natural gas production and refining capacity.

We remain positive on Petrobras in the medium to long term, thanks to its encouraging portfolio of investments and impressive exploration successes. The company produces substantially all of Brazil’s crude oil and natural gas, and is building the country’s energy infrastructure. It also enjoys a strong market share in petroleum products and liquefied petroleum gas marketing businesses.

Despite these positives, we are apprehensive about the company’s huge investment requirements, operational risks typical to an exploration and production company and tough competition from peers, such as BP Plc (BP) and Royal Dutch Shell plc (RDSA). Unpredictable energy prices and government control also add to the negative sentiment.

We are maintaining our long-term Neutral recommendation on the stock.

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