Can anything stop Brazil’s massive oil boom?
The Covid-19 pandemic had a sharp impact on oil prices, creating considerable uncertainty over the outlook for energy demand around the globe. The ongoing global crude oil supply glut and claims that peak oil demand could occur sooner than anticipated are also weighing on energy prices. Those headwinds have done little to impede Brazil’s massive oil boom.
Growing demand for lighter sweeter crude oil grades from Asia, coupled with stronger than expected domestic demand for gasoline are buoying Brazil’s oil industry. China’s insatiable demand for lighter sweeter crude oil grades, sparked by the introduction of IMO2020 on 1 January 2020 which significantly limits the sulfur content of maritime fuels, is an important driver of Brazil’s offshore oil boom. For November 2020, China, the world’s second-largest economy, imported on average just over 11 million barrels of crude oil daily, representing a 10.1 percent increase over the previous month, although it was still almost one percent lower than a year earlier. Brazil has become a key supplier of crude oil for Asian refiners. By the end of October 2020, Latin America’s largest oil producer had become the third-largest supplier of petroleum to China. This was because of the rapidly growing popularity of its sweet medium grade Búzios and Lula crudes, which because of their low sulfur content are cheaper and easier to refine into IMO2020 compliant fuels. The introduction of IMO2020 is having a notable effect on demand and pricing for low sulfur content medium and light crude oil grades, with maritime fuel expected to grow by almost one percent this year from 2019 when it was a $149 billion market that accounted for around five percent of crude oil consumed globally. Seaborne trade accounts for around 90 percent of total world trade volumes, highlighting its importance to the functioning of the global economy. This explains why IMO2020 had such a significant effect on demand for sweeter crude oil varieties and was responsible for causing Brazil’s Búzios and Lula grades to sell at a premium to the international Brent benchmark price.Also on rt.com Brazil is emerging as the world’s leading offshore oil producer
According to Oilprice.com data Lula is trading at a 5 percent or $2.78 per barrel premium to Brent. While prices are not readily available for Búzios, according to Petrobras it sells at a premium to Brent in Asia.
Growing demand for the sweet crude oil grades produced by Brazil’s pre-salt oilfields sees Petrobras focused on developing its pre-salt operations. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less. Petrobras has earmarked 70 percent of that budget for its pre-salt oilfields, notably Búzios where 36 percent of the total amount will be spent. The premium price paid for Búzios crude oil is a key reason for Petrobras’ focus on expanding operations at the deep-water Búzios oilfield. The state-controlled oil company plans to deploy four new FPSOs in Búzios between 2022 and 2025 as well as boost the number of producing wells to 29. Petrobras recently reported it had completed the drilling of a new well at the Búzios field where it found what it described as "oil of excellent quality.” That will give Petrobras’ and Brazil’s pre-salt oil production a solid lift. The integrated energy major is also racing ahead with developing its wholly-owned Itapu field which is expected to produce first oil next year, three years earlier than originally planned. That oilfield will pump crude oil of a similar grade to Búzios, meaning it should also sell for a premium to Brent.
The Lula and Búzios fields feature low breakeven prices which, along with the oil produced trading at a premium to Brent, enhances their profitability. According to Petrobras, the ultra-deepwater Búzios and Lula fields are pumping crude oil with a breakeven price of less than $35 per barrel. With Brent trading at $51 per barrel and Lula selling for $53 a barrel, there is considerable incentive for Petrobras to bolster production from those fields. Aside from strong demand from Asia refiners for Brazil’s pre-salt crude oil, stronger than expected domestic fuel demand is also driving the Latin American country’s massive offshore oil boom. According to Bloomberg fuel consumption in Latin America’s largest economy recently surged past pre-pandemic levels and will continue to strengthen going into 2021. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce sulfur emissions.
These developments were responsible for Brazil’s October 2020 pre-salt oil output (Portuguese) ratcheting up by a notable six percent compared to a year earlier, to average just over 2.5 million barrels daily. This sees offshore pre-salt oil production responsible for 85.5 percent of Brazil’s total oil production compared to 81 percent for the equivalent period during 2019. Nevertheless, spending cuts by energy majors including Petrobras and the shut-in of uneconomic wells because of the pandemic, were responsible for Brazil’s overall October hydrocarbon production falling 2.6 percent year over year to an average of just under 3.7 million barrels of oil equivalent daily.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins it appears to have done no material long-term damage. There are signs that pre-salt oil production will keep growing at a solid clip fueled by demand from Asian refiners. That will be further boosted by stronger demand for crude oil and refined products as vaccines are rolled out, the pandemic eases and the global economy returns growth. It has been estimated by the US EIA that world oil consumption will rise by six percent year over year during 2021 to 98 million barrels daily. For these reasons Brazil’s oil production will grow significantly with Petrobras, which for October was responsible for 73 percent of the country’s oil output, targeting oil production of 2.7 million barrels daily by 2025.