A massive surge in inflation is threatening Brazil’s post-pandemic economic recovery. Latin America’s largest economy was savaged by the coronavirus with Brazil suffering the third most COVID-19 cases and second-highest deaths globally. As a result, Brazil’s 2020 gross domestic product shrank by just over 4%. Since the economy began recovering inflation has surged to over 10%, on an annualized basis, causing the fiscal outlook for Latin America’s largest economy to deteriorate. This forced Brazil’s central bank to hike the benchmark Selic rate by 1.5% to 7.75%, the sixth increase this year. Brazil’s soaring inflation can be blamed on the surge in oil prices since the start of 2021 which has caused domestic fuel prices to spiral upwards. This is threatening Brazil’s crucial economic upswing and creating considerable hardship for Brazilians, sparking significant political pressure for embattled populist right-wing president Jair Bolsonaro.
In response to the inflationary crisis, Bolsonaro floated the idea of privatizing Brazil’s national oil company Petrobras. As of September 2021, the national government in Brasilia, through a series of entities, owns a controlling 36.75% interest in Petrobras. The remaining 63.25% of the company is owned by retail and institutional investors with 19.77% being comprised of New York Stock Exchange American Depositary Receipts. Bolsonaro’s latest statements are in stark contrast to earlier statements during his administration where he opposed privatizing Petrobras because of its strategic value to Brazil and importance in driving the country’s epic offshore oil boom. The president also took a heavy-handed interventionist approach to managing Petrobras earlier this year when he dismissed the company’s experienced president Roberto Castello Branco in a spat over higher fuel prices. Bolsonaro replaced Branco with army general and former defense minister Joaquim Silva e Luna who, ironically, has refused to artificially control fuel prices despite being a Bolsonaro appointee. Lawmakers in Bolsonaro’s administration have indicated that the privatization of Petrobras could occur through a share sale, although such a move is not as simple as Brasilia has portrayed.
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There are considerable impediments to any sale of the government’s share of Petrobras. Such a move would be political suicide for any lawmakers backing the energy company’s privatization. Petrobras is regarded as a key symbol of Brazil’s economic success and is an important public asset that generates considerable fiscal revenue for Brasilia. Oil industry unions are opposed to such a move with the Federation of Oil Workers Union (FUP – Portuguese initials) threatening strike action (Portuguese) if Bolsonaro’s government proceeds with privatizing Petrobras. There is potentially the need for Bolsonaro’s administration to present a constitutional amendment, because of Petrobras’ strategic importance to the state, which would require the support of two-thirds of congress if the company is to be successfully privatized.
Privatizing Petrobras will do nothing to alleviate the political fallout sparked by higher fuel prices which are fueling Brazil’s soaring inflation rate. The integrated energy major is being forced to hike gasoline and diesel prices because of the crude oil price rally which saw the international Brent benchmark soar by around 65% since the start of 2021. It will also do nothing to alleviate the inflationary pressures faced by Latin America’s largest economy other than reducing the political pressure on Bolsonaro’s administration triggered by its failure to keep fuel prices low. Such a move, however, will free Petrobras from the yoke of government intervention, which has seen successive administrations over the last decade destroy hundreds of billions of dollars of shareholder value.
It is Petrobras that has become the key driver of Brazil’s stunning decade-long offshore oil boom, which has catapulted Latin America’s largest economy into the realms of the world’s top-10 oil producers. Data from Brazil’s petroleum regulator shows that for September 2021 the country’s hydrocarbon output reached an average of 3.8 million barrels per day of which 78%, or three million barrels, was crude oil. This was unchanged from a month earlier and 4% greater than for the same period during 2020, while crude oil production was 3.3% higher. Petrobras was responsible for 92.6% or nearly 3.6 million barrels per day of Brazil’s total September 2021 hydrocarbon output and 93.3% or 2.8 million barrels of its crude oil production. The rapid growth in Petrobras’ operations saw industry consultancy Rystad Energy predict in late-2019 that Petrobras would become the world’s largest publicly listed oil-producing company by 2030. It is the 210,000-acre Buzios oilfield, the world’s largest ultra-deep-water field, which is the key growth driver for Petrobras’ and Brazil’s epic offshore hydrocarbon boom. The oilfield is situated in the prolific offshore Santos Basin which contains the Tupi field, previously known as Lula, Brazil’s largest and most important producing oilfield. Petrobras is the operator of Tupi and owns a 65% interest with 25% held by Shell and the remaining 10% by Galp. Production from Tupi, which during September 2021 averaged 948,000 barrels daily from nine FPSOs, is believed to have peaked highlighting the importance of developing the Buzios field if Petrobras and Brazil are to expand petroleum production at the desired rate.
Petrobras which owns a 90% interest in Buzios and is the operator with the remaining 10% split equally between China National Offshore Oil Company and China National Petroleum Corp. During September 2021, the oilfield pumped an average of 566,196 barrels of crude oil per day from four FPSOs which amounted to 19% of Brazil’s total monthly output of three million barrels per day. Petrobras plans to aggressively expand Buzios budgeting $17 billion for developing the field between 2021 and 2025. That includes adding eight more FPSOs which will lift crude oil production to over two million barrels per day. The growing popularity of Brazil’s medium sweet crude oil grades among Asian refiners, notably in China after the introduction of IMO 2020 during January last year, is an important motor of the Latin American country’s oil boom. While Brazil’s September 2021 petroleum exports to China slumped to a near four-year low, seeing Latin America’s largest oil producer’s imports ranked eighth behind Malaysia and ahead of Colombia, demand for Buzios from the world’s largest refiner is growing.
The medium crude oil, which has an API gravity of 28 degrees, is especially sweet with a 0.3% sulfur content and low in metals as well as other contaminants making it ideal for blending with lower quality crude oil feedstock to produce low emission maritime fuels. Demand for crude oil grades with Buzios’ qualities will keep expanding in Asia because it is a global shipping hub with Singapore the world’s largest bunkering port having its position challenged by China. Buzios’ latest surge in popularity sees the Brazilian crude oil grade selling at a higher price than the international Brent benchmark in Asia. According to S&P Global Platts Buzios, which trades at a slight discount to Brazil’s Tupi grade which possesses similar characteristics, was selling at a $3 per barrel premium to Brent. That is a powerful incentive for Petrobras to focus on investing in the development of the Buzios ultra deep-water oilfield.
Privatizing Petrobras may reduce the political fallout for the Bolsonaro administration caused by rising fuel and other energy prices, but it appears unachievable at this time. This makes the latest events a worrying distraction for an integrated energy company that is responsible for driving Brazil’s massive offshore oil boom and has the potential to become the largest oil producer among publicly listed petroleum companies and lift Brazil to the world’s fifth-largest petroleum exporter by 2030.
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By Matthew Smith for Oilprice.com
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