The chances of success for any concerted effort to curb global oil supply are getting slimmer by the day, it seems. OPEC members are arguing among themselves who will need to cut how much; Iran and Iraq both want to be excused from the party for reasons of market share necessity; and Russia – the world’s top non-OPEC producer – is turning vague remarks into an art form.
Then there’s Brazil, whose Oil and Gas Secretary this weekend delivered yet another blow to the cartel that once held the reins to the global oil price trends. Over the week, Marcio Felix told media in Vienna that “Yes, the Brazilian production is increasing… I do not have the exact figures, but the production in Brazil will grow in the next few years, we have such plans.”
Felix attended a meeting between OPEC and a number of non-OPEC producers, but as the minister noted, only “as observers”. This wasn’t OPEC’s goal, however. OPEC wanted to convince external producers to take part in the freeze/cut, to make it more meaningful. That effort failed.
Brazil, like Kazakhstan, Azerbaijan, Colombia, and other significant non-OPEC producers, is dependent on oil revenues. Perhaps the South American producer is not as heavily dependent as Saudi Arabia, for instance, but oil is still a major revenue contributor. This is particularly true at the moment, with the Brazilian economy in shambles after years of mismanagement, which came to light with the Operation Carwash graft investigation.
Brazil needs the oil money, and it also needs external help to get it. To this end, the country’s Congress early this month approved a fundamental amendment to how its oil and gas deposits are developed, removing a requirement for state energy giant Petrobras to be the operator of every single new exploration and production project.
Under the new legislation, Petrobras will be allowed to claim some assets for itself, but will not be required to bid on all auctions, allowing foreign companies to be operators on pre-salt projects as well. One day after the approval of the amendment, Brazil’s foreign ministry office in Houston was approached by seven large energy companies with expressions of interest, according to Petrobras CEO Pedro Parente.
This pre-salt layer is where the higher production will come from. Oil and gas deposits there tend to yield higher amounts of hydrocarbons, despite the fact that they are at greater depths. This makes pre-salt projects quite capital-intensive, which is why the greater participation of international oil companies is so welcomed: they simply have more money than Petrobras, which has managed to saddle itself with debts of over US$124 billion and is now on an asset-selling spree to shrink this load.
Brazil has been pumping crude at record-high levels this year, with production hitting 2.6 million barrels per day in August. Supermajors such as Shell and BP have an established presence in the country. Norway’s Statoil earlier this year spent US$2.5 billion on 66 percent in an offshore license block in the Santos Basin, one of the most prolific pre-salt deposits off the Brazilian coast.
In this context, any call from OPEC – or even a plea for help – is likely to fall on deaf ears, regardless of appearances and general statements of understanding. True, Brazil could do with higher prices, but now that its state oil company is not obliged to take a 30-percent stake in every new development and provide proportionate funds for its development, most of the financial burden will fall on the foreign operators.
It seems Brazil has chosen the lower-but-surer-revenues option amid the current dilemma faced by all oil producers: continue pumping at low prices or cut output to make them higher. Exactly the opposite of what OPEC is trying to do.
By Irina Slav for Oilprice.com
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