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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 Pre-Salt Oil Gains Unprecedented Global Popularity

  • Petrobras plans to focus on developing its deepwater and ultra-deepwater pre-salt assets, with $41 billion of its capital expenditure allocated for this purpose, aiming to boost oil production by 19% by 2027.
  • Brazil’s Lula and Buzios oil grades are gaining international attention, especially in Asia, due to their low sulfur content and easier refinement into high-grade fuels.
  • While the international community raises concerns about Petrobras’ plans to drill near ecologically sensitive areas, such as the mouth of the Amazon River, Brazil’s oil production and investment continue to grow, supported by President Lula.
Brazil Oil

Despite financial markets being roiled by leftist Luiz Inácio Lula da Silva’s, known as Lula, October 2022 electoral victory, there are signs that Brazil’s president will continue to support the country’s burgeoning oil boom. Even after Lula railed against what he described as the national oil company Petrobras’ excessive dividend and implemented a shock temporary oil export tax, the government continues to support Brazil’s economically crucial hydrocarbon sector. In a recent development, Lula backed Petrobras’ plan to drill in an offshore ecologically sensitive location near the mouth of the Amazon River. This has triggered a backlash around the globe, with deforestation of the Amazon rainforest accelerating under Lula’s predecessor, Jair Bolsonaro.

There are signs, despite Lula’s push to increase the state’s take from Brazil’s oil industry, that the country possesses the potential to become the world's fourth-largest oil producer. Since the first major offshore pre-salt oil discovery, the hydrocarbon output from Latin America’s largest economy has grown at a steady clip annually. Brazil’s petroleum industry regulator, The Brazilian National Agency for Petroleum, Natural Gas and Biofuels (ANP – Portuguese initials), recently reported record production for July 2023.

Source: ANP.

According to the agency, Brazil pumped an average of 3.5 million barrels of crude oil daily, which was 4.3% higher than a month prior and an impressive 18.6% greater than the same period a year earlier. Total hydrocarbon output also hit a record high for July 2023 of nearly 4.5 million barrels of oil equivalent, which is a 3.6% increase compared to a month prior and a whopping 17.5% higher year over year. Pre-salt petroleum production for July 2023 was responsible for 75% of Brazil’s total oil output compared to 75.5% for the equivalent period a year earlier. Those numbers attest to the considerable potential held by Brazil’s offshore ultra-deepwater pre-salt oil basins, which are responsible for driving such impressive and consistent production growth.

Output from Brazil’s prolific offshore pre-salt oil fields will continue to grow at a steady clip. State-controlled Petrobras, where Brasilia owns nearly 37% of the company, as part of its 2023 to 2027 strategic plan intends to focus on developing its deepwater and ultra deepwater pre-salt assets. Brazil’s national oil company has budgeted spending of $78 billion between 2023 and 2027, with 83% of that amount earmarked for investment in exploration and development activities. Petrobras plans to allocate $41 billion of its total capital expenditure over that period to developing pre-salt assets. This Petrobras claims will boost oil production to 2.5 million barrels per day by 2027, a 19% increase over 2023, with 78% of that volume comprised of petroleum lifted from pre-salt fields.

The growing popularity of Brazil’s pre-salt oil in global energy markets is part of the reason Petrobras is focused on developing those assets. The rising need for lighter and sweeter forms of crude oil with low levels of contaminants such as vanadium saw the popularity of Brazil’s pre-salt Lula and Buzios grades soar in Asia. Lula has an API gravity of 29 degrees, making it a medium crude oil with 0.27% sulfur content, which means it is particularly sweet. Buzios, with an API of 28 degrees and 0.31% sulfur content, possesses similar characteristics. Those attributes make Lula and Buzios cheaper as well as less complex to refine into higher grade fuels than heavier crude with high sulfur content, which is typical of the petroleum produced in onshore South America.

Those reasons, along with ever stricter emission requirements around the world, triggered a sizable spike in demand for Brazil’s Lula and Buzios oil grades, especially from Asia, with Latin America’s largest petroleum producer a top-10 supplier to China. There was even a brief period, some years ago, when Lula and Buzios oil grades traded at a premium to the international Brent benchmark because of rapidly rising demand. Petrobras is focused on further developing the Buzios field, which is the second largest field responsible for 18.5% of Brazil’s total production, to the point where it will be the key driver of production growth for the state-controlled integrated energy giant and Brazil. Between now and 2027, Petrobras intends to install six additional Floating Production Storage and Offloading (FPSO) vessels in the Buzios field.

For the duration of the strategic plan, Petrobras plans to drill a total of 42 exploration wells comprised of two in Colombia, 24 in the Southeast Basins and 16 in the Equatorial Margin. It is that last drilling location that sparked considerable consternation in Brazil as well as globally and even provoked protests against the national oil company. Petrobras proposed exploring the offshore Foz do Amazons Basin near the mouth of the Amazon River. The integrated energy major’s plans were rejected by Brazil’s environmental protection agency IBAMA, but President Lula and the attorney general’s office are supportive of the company’s plans despite Environment Minister Marina Silva’s opposition. 

This has sparked considerable international controversy. Colombia’s leftist President Gustavo Petro, who plans to ban oil exploration in his country, slammed the decision. Those events have triggered considerable consternation across the world regarding the potential for oil to damage nearby ecologically sensitive reefs and the biodiverse mouth of the Amazon River, which is already being impacted by the accelerating deforestation of the Amazon Basin. Even without Petrobras drilling in the Foz de Amazonas Basin, Brazil possesses considerable offshore petroleum resources, which will allow the country to expand its petroleum production. 

Foreign energy companies are investing heavily in offshore Brazil. Shell and TotalEnergies, which are the second and fourth largest oil producers, respectively, commenced an exploration drilling campaign in June 2023. Industry low breakeven costs, which Petrobras claims average $33 per barrel for its operations, are attracting considerable interest from foreign energy majors. Those breakeven costs, which are among the lowest in South America, along with Brazil’s pre-salt oil having low sulfur and being cheaper as well as easier to refine into high quality low, emission fuels. Despite the fallout from Lula’s attempts to boost the government’s share of revenue from Brazil’s oil industry, there has been little to no material impact on petroleum investment in the country. For these reasons, Brazil, which is the ninth-largest oil producer globally, is on track to overtake Canada and become the world’s fourth-largest producer.

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By Matthew Smith for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on September 01 2023 said:
    Brazil and its Petrobras oil company have had plenty of time to develop the ultra-deepwater pre-salt oil assets since their discovery in 2006 at the Tupi field, which is estimated to hold 8 billion barrels of oil. But hardly anything materialized since then.

    Now we hear that Petrobras which is world's most indebted oil producer to the tune of %127.5 bn plans to spend $41 bn of its capital expenditures on developing pre-salt assets with the aim of boosting oil production by 19% by 2027.

    I will only believe it when I happens.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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