Petroleo Brasileiro officials expect to fall short of the government’s goals to slash natural-gas prices by 40 per cent because of the high cost of extraction in ultra-deep waters, according to people familiar with the matter. 

Company executives believe a price cut of that magnitude is unfeasible given that Petrobras extracts gas 300 kilometres (187 miles) off the coast and faces much higher production costs compared to onshore shale gas drillers abroad, said people familiar with the matter who asked not to be named because they are not authorised to speak publicly.

The state oil giant is under mounting pressure to tame energy prices as President Luiz Inacio Lula da Silva tries to steer the economy in a more populist direction, leading to increased market concerns about political interference. Lula has promised to reinvigorate Brazil’s industrial activity, which relies on the fuel for power generation. The Mines and Energy Ministry has said Petrobras devotes too much gas to aiding crude production and could lower the price to US$7-8 per MMBtu (metric million British thermal unit)from the current US$12 if it managed the resource differently.  

Petrobras argues that using gas to increase well pressure brings more oil to the surface and raises the recoverable volume from pre-salt fields by as much as 30 per cent. The company has countered government requests to reduce gas injection by noting that producing less oil diminishes the amount of taxes generated for state coffers, the people said. 

The oil firm expects gas supplies to grow by 50 million cubic metres a day by 2028 as several projects come online. Additional production combined with an effort to boost long-term supply contracts should eventually make gas cheaper. BLOOMBERG