This September, Brazil saw record oil and gas production in addition to more promising discoveries being made this year. State-owned oil firm Petrobras appears to be going from strength to strength. However, there are concerns about what the recent change in presidency will mean for the future of the country’s fossil fuels, as incumbent president Lula looks to shift policies on energy and deforestation. These fears could be seen in the Petrobras stock price which sunk to its lowest level in a month on the news that Lula had won the election.
In September, Brazilian oil and gas output reached 4 million bpd of oil equivalent and 143.1 million cubic meters per day of natural gas. This marked an increase of 2.04 percent from August, breaking the previous record set in January 2020. Most of this production came from the pre-salt province, around 74 percent of the total, with the Tupi and Buzios oilfields providing the most at 1.16 million bpd and 676,600 bpd.
In October, state-owned Petrobras announced it had made a new discovery in the Sépia offshore field. The find was made 250 km south of Rio de Janeiro at 2,197 meters under the sea and is currently being assessed. Petrobras released a statement saying that the net oil column is “one of the thickest ever recorded in Brazil.” Three other international energy companies also have a stake in the field, TotalEnergies (28 percent), QatarEnergy (21 percent), and Petronas (21 percent), alongside Petrobras, which has a 30 percent stake. Petrobras made another discovery in the pre-salt Campos Basin and carried out a full analysis in July this year.
Meanwhile, TotalEnergies announced the discovery of the Pedunculo well in the Sépia co-participated area. The Sépia shared reservoir is operated by Petrobras, which has a 51.9 percent stake in the field that produces around 170,000 bpd at present. David Mendelson, Senior Vice President, Americas Region at TotalEnergies Exploration & Production stated “The resources confirmed by the Pedunculo well appear to exceed pre-drill expectations and add to the potential for future development of the area. Thanks to their exceptional productivity and the innovative technologies used in their developments, these resources fully fit in TotalEnergies’ low-cost, low-emission oil portfolio.”
There are high hopes for Petrobras, which already dominates Brazil’s oil and gas industry. The firm’s shares are cheap and were viewed as having the potential to rise following last week’s presidential election. If the international price parity policy remains in place, local hedge fund Legacy Capital believes that Petrobras stocks will rise, even if Lula interferes more in the oil company’s business. Petrobras currently has a policy of tracking international fuel prices, requiring the government to compensate the firm if it has to sell fuel at less than market value. So, while there is room to maneuver, a change in this policy could be detrimental to Petrobras’ shares.
Last month, Petrobras announced a tender for the charter of three oil rigs to carry out development operations in the Buzios pre-salt field in the Santos basin. Contractors were asked to submit proposals by 28th October, with Petrobras offering charters of 1,065 days, with the project expected to start in late 2023 or early 2024. This follows the Petrobras qualification, earlier this month, of seven bids in a tender for several more drilling rigs for the Transocean, Diamond, Ocyan, and Constellation offshore developments at a cost of $3 billion.
But while Petrobras and Brazil’s fossil fuel industry appear strong, the recent change in president could have a dramatic effect on the country’s energy outlook. This week, German-listed shares in Petrobras fell by over 7 percent following the election of leftist President Lula. He takes over from far-right President Jair Bolsonaro, who strongly backed the ongoing development of Brazil’s oil and gas resources. Lula returns as president, having previously served as leader between 2003 and 2010.
Lula has repeatedly pledged to protect the Amazon Rainforest, unlike his predecessor, which could have a knock-on effect on the country’s energy industry. An oil and gas analyst at Fitch Solutions, Dominika Rzechorzek, explained that Lula’s win could affect the “functioning of national oil company Petrobras,” and “as a key implication, we expect Lula to strengthen government control over Petrobras. During his campaign, Lula has been vocal about the benefit of state ownership of strategic energy assets. Hence, in our view, his government would likely attempt to slow, suspend or fully reverse the sale of strategic downstream and natural gas assets pursued by Petrobras in the framework of the divestment programme.”
The new president has extensive experience in oil and gas, overseeing the development of the country’s offshore pre-salt layer during his first presidency. Yet, Lula is expected to respond to international pressures to combat climate change and eventually shift away from fossil fuels to renewable alternatives. However, he currently lacks the congressional majority to make any major immediate reform changes. In addition, he has significant centrist and right-wing opposition that are bound to make it difficult to change Brazil’s energy legislation.
Brazil’s oil and gas industry has seen strong results this year, with record production levels and the announcement of several new discoveries by both state-owned Petrobras and international operators. There is great optimism around the future of Petrobras, which has been provided with favorable policies to ensure its success. However, the recent change in presidency could lead to an eventual shift in energy policies, responding to international pressures to shift away from oil and gas to renewable alternatives as President Lula also acts to curb deforestation.
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By Felicity Bradstock for Oilprice.com
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