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Low Oil Prices Haven’t Derailed Brazil’s Offshore Boom

Activity in Brazil’s energy patch keeps ratcheting ever higher. During January 2020, Latin America’s largest economy saw its all-important petroleum industry achieve a new milestone pumping on average a record 3.168 million barrels of crude daily. The COVID-19 pandemic and March 2020 oil price collapse did little to slow the oil boom underway in Latin America’s largest economy. Brazil’s national oil company Petrobras, in March 2020, slashed planned annual spending by 29% and shuttered its shallow water platforms in response to the pandemic and oil price collapse. This did little to stymie production growth. Petrobras’s second quarter 2020 commercial oil output grew 4.1% year over year to almost 2.5 million barrels daily. That was driven primarily by the significant expansion of the national oil company’s presence in the pre-salt fields, where production expanded almost 31% to 1.5 million barrels daily. There are signs that even the ongoing impact of the COVID-19 pandemic, softer oil demand and weaker prices will not deter Petrobras’ growing petroleum production. Petrobras is in the process of ramping up activities at its offshore operations, notably in the prolific pre-salt fields, as the threat of the pandemic declines. Brazil’s national oil company plans to recommence connecting new wells, conducting maintenance and commissioning new operations this month. That will give both the national oil company’s and Brazil’s hydrocarbon output a solid lift. 

The measures taken to curb the spread of the COVID-19 pandemic by suspending non-essential operations, as well as the shuttering of non-economic oil production because of the price crash, have had little impact on Brazil’s hydrocarbon output. Data from the National Petroleum Agency (ANP – Portuguese acronym) shows Brazil’s August 2020 oil and natural gas production averaged just over 3.9 million barrels of oil equivalent daily, almost 1% greater than July and 2.6% higher than the same period a year earlier. 

Source: Brazil National Petroleum Agency (ANP) & U.S. EIA.

It is the Santos and Campos Basins which are responsible for producing most of Brazil’s petroleum and natural gas, pumping 68% and almost 26% respectively of July’s hydrocarbon output. Petrobras is the key producer, pumping almost 95% of Brazil’s total August oil output.

Related: China’s Crude Oil Imports Are Slowing Down

Brazil’s August 2020 production, according to industry consultancy IHS Markit, remained strong as indicated by export volumes, only declining marginally compared to a month earlier. In fact, petroleum exports have grown significantly since the start of 2020, with China now a key market for Brazilian oil. The March 2020 oil price collapse saw Chinese oil imports expand, despite waning demand, as Beijing seized the opportunity to take advantage of lower prices to fill strategic oil reserves. That has been an important driver of activity in Brazil’s offshore oil fields. 

The importance of oil exports to the world’s most populated country for Brazil’s economy and its oil industry cannot be emphasized enough. By the end of July 2020, China accounted for a notable 70% of Brazil’s oil exports.  That will keep growing despite the economic fallout from the pandemic and sharply weaker oil prices. Recent data, however, indicates that Brazil’s August 2020 oil cargoes destined for China fell by 5% compared to May and June. That is attributed by consultancy IHS Markit to severe congestion at several ports in China. The August decline in oil exports to China, which appeared to worsen during early-September, was offset by increased shipments to South East Asia and India, which have been steadily rising.

It is anticipated that Brazil’s oil production will keep expanding at a solid clip as major offshore projects are developed and come on-line. The International Energy Agency believes that the Latin American country will deliver one of the largest increases in global petroleum supply from countries outside of the OPEC cartel by 2025. If Brazil’s rig count is used as an indicator of industry activity it is possible to see that the tempo of operations is rising. By the end of August 2020, Baker Hughes data shows there were 10 operational rigs, two greater than July and one higher than for the same month in 2020. The volume of operational rigs is trending higher after reaching its lowest number for the last year in July.

Related: Oil Bulls Return As OPEC+ Reassures Markets

Source: Baker Hughes & U.S. EIA.

The attractiveness of Brazil’s prolific pre-salt oil fields is easy to understand. They produce a light, low sulfur crude which is particularly desirable for Asian refiners as the push to reduce maritime carbon emissions grows. Pre-salt fields also have low breakeven prices which are pegged at $35 to $45 per barrel, while Petrobras claims it is breaking even at $21 a barrel for the crude it pumps. That makes Brazil’s deep-water pre-salt fields especially attractive in the current environment where sharply softer oil prices, which sees the international Brent benchmark trading at around $43 per barrel, weighs on investment and activity.

Nonetheless, before the COVID-19 pandemic, Brazil’s economically crucial hydrocarbon sector was facing headwinds. Global energy majors snubbed two of Brazil’s 2019 oil auctions because of a renewed focus on profitability and the preferential rights of the national oil company. There is also considerable downside risk to exploration and development activity because of significantly lower oil prices. Petrobras, like many other global energy majors, had based projected capital expenditures for 2020 to 2024 on $50 a barrel, or higher, Brent. As a result, Brazil’s national oil company sharply reduced 2020 spending and shuttered uneconomic production, negatively affecting the Latin American country’s petroleum output. In a recent statement, Petrobras said as a result 2021 to 2025 capital spending would total $40 billion compared to an initial estimate of $64 billion for 2020 to 2024. The ongoing oil price slump means that global energy majors will keep the brakes on investment in exploration and new projects for the foreseeable future.

However, with the international benchmark still hovering at around $40 per barrel, oil companies including Petrobras will continue to keep capital spending low as they focus on protecting balance sheets and preserving capital. That will continue to impact exploration activities and the development of new projects. Offshore, Brazil’s low breakeven prices, however, makes it an attractive proposition for international energy majors seeking to build oil reserves and production.

By Matthew Smith for Oilprice.com

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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… More