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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Brazil’s Coming Oil Boom Will Weigh On Oil Prices


It has been an appalling few years for Brazil’s energy patch. Weaker oil prices, sweeping corruption scandals and the worst economic downturn ever have sharply impacted the nation’s oil industry — but improvement might finally be in sight.

The aforementioned factors triggered a steep decline in investment, notably from foreign energy majors, preventing Brazil from fully exploiting its sizable oil reserves of 13 billion barrels.

The key problem is that a large portion of those reserves are held in its offshore deep-water pre-salt oilfields; that means they can be complex and costly to fully exploit.

However, the potential held by the pre-salt belt is tremendous. Its basins have some of the highest drilling success rates globally, and the national petroleum agency, the ANP, believes that if effectively exploited, the pre-salt area could easily double Brazil’s oil reserves.

Industry insiders estimate that the largest oil field in the pre-salt acreage, the Libra field, alone, has recoverable oil resources of up to 15 billion barrels. For these reasons, during 2017, pre-salt production became a major driver of Brazil’s growing oil output. And for the first time ever, in December 2017, it was responsible for over half of the nation’s total oil output.

Despite 2017 oil production rising by 4% year over year, offshore drilling activity and the number of discoveries declined significantly. This occurred due to the near-collapse of Petrobras (NYSE:PBR), which was mandated as the sole operator in the pre-salt belt. After gorging itself on debt and becoming embroiled in a far-reaching corruption scandal, it slashed spending on exploration as well as drilling activities as it focused on shoring up its balance sheet and resolving costly litigation. Related: Why Commodity Coins Are Gaining Popularity

Other factors which deterred investment were high operating costs created by local content rules, costly logistics and overbearing regulation. These, in conjunction with substantially lower oil prices, made Brazil’s pre-salt fields an unattractive investment for foreign energy companies. By December 2017, the volume of active rigs was less than half of what it was two years earlier, while the number of development wells completed during 2017 was a seventh of what it was in 2015.

Nonetheless, after years of mismanagement, there are signs that this is about to change, and the world is on the cusp of witnessing the emergence of a Latin American petroleum superpower.

A combination of reforms, including a formalized bidding process, relaxed local content rules, and the elimination of Petrobras’ exclusive rights to operate in the pre-salt area have made it far more appealing for foreign oil companies to invest in Brazil’s energy sector. This, in conjunction with firmer oil prices, falling lifting costs, and high demand for the commercially appealing light sweet crude produced from the pre-salt area has stimulated considerable interest among foreign businesses.

The first pre-salt auction in four years and under the new regulatory regime occurred in October 2017. Six of the eight exploratory blocks on offer received bids. More promising, many foreign energy majors including Statoil (NYSE:STO), Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS-A) and BP (NYSE:BP) participated. The next auction is slated to occur in March 2018, with 70 blocks in the offshore Ceará, Potiguar, Sergipe-Alagoas, Campos and Santos basins and on-shore basins of Parnaíba and Paraná on offer.

One of the earliest pioneers of investing in Brazil’s pre-salt fields, Chevron (NYSE:CVX), which didn’t participate in the October 2017 auction, is considering taking part in March 2018. The energy major previously stated that it intends to ramp up activity in Brazil, having reached a preliminary agreement with Schlumberger (NYSE:SLB) to drill six wells in the Frade field in 2019. Related: Offshore Oil Is Poised For Significant Growth

Let’s not forget about Petrobras, which owns and operates around 30% of all the pre-salt projects. There are signs that the Brazilian state-controlled energy major is on the cusp of emerging from the maelstrom of crises that swept across the company over the previous two years. This will free it up to focus on boosting its drilling activity and production. Petrobras says it intends to invest over $60 billion between 2018 and 2022 to target production growth through a combination of exploration, well development and infrastructure improvements.

The appreciable level of interest — as well as investment — coming online for the pre-salt area will drive material increases in oil reserves and production over the coming years. Because of their low operating costs, the pre-salt oil fields are extremely appealing to oil companies in an operating environment where Brent is trading at less than $70 a barrel.

Shell is confident that it can produce oil for as low as $40 per barrel from its pre-salt holdings, while the Libra field, which commenced production in November 2017, is estimated to have breakeven costs of a mere $20 per barrel.

The tremendous scale of the potential production increases is highlighted by ANP estimates that oil output from the Libra field alone will reach 1.4 million barrels daily.


With the pre-salt region measuring 800 km by 200 km and containing three oil basins, there is considerable scope for the area’s oil output to grow. That means as the pre-salt acreage is developed, Brazil’s oil production will undergo enormous growth, further expanding global oil supplies in a market battling an existing supply glut.

While that will weigh on oil prices, it will be boon for Brazil’s economy — and see it become a major player among petroleum-producing nations.

Matthew D. Smith for Oilprice.com

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Leave a comment
  • Bill Simpson on February 20 2018 said:
    Let's hope they can spread the wealth around a bit.
    That find makes me wonder what other South American coastal areas might contain undiscovered oil or gas deposits. Argentina comes to mind. It has a long Atlantic coast.
  • Mamdouh G Salameh on February 21 2018 said:
    No it will not. Whatever crude oil Brazil is producing now and in the future will be consumed domestically so it will not add to the global oil supplies but it could make Brazil self-sufficient in oil.

    In 2017 Brazil produced an estimated 2.65 million barrels a day (mbd) but consumed 3.02 mbd creating a deficit of 370,000 barrels a day (b/d) which had to be imported.

    With proven oil reserves estimated at 15 billion barrels, there could be an oil boom in Brazil in coming years but virtually all oil production will be used domestically. Consequently, it will not Brazil weigh on oil prices. On the contrary it will support oil prices by increasing volumes of imports to satisfy domestic demand.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Mike on February 21 2018 said:
    Author writing under a rock, the oil glut is over.

Leave a comment

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