Short Term Uncertainty Won’t Kill Brazil’s Oil Boom

Since Brazil’s socialist leader, Luiz Inácio Lula da Silva – known as Lula, came into power in January this year, the country’s oil and gas industry has faced uncertainty. Many wondered if he would move away from fossil fuels in support of his election campaign pledge to bring an end to deforestation. But Brazil still relies heavily on its oil revenues, as one of the biggest oil and gas powers in Latin America. And, Brazil has the potential to further develop its fossil fuels if Lula approves new exploration and production projects. 

Under the previous president, Jair Bolsonaro, Brazil introduced a wide range of investor-friendly policies for its oil and gas industry. And Lula’s inauguration made many worry that he might go back on many of these policies, which drove down the market value of state-owned Petrobras by almost 37 percent. Although Lula assured the public that he would not be making major changes to the sector, many remain sceptical. During his first term in office, between 1990 and 1994, Lula used Petrobras as a tool to achieve government policy goals, which left the company almost bankrupt. This happened once again under the leadership of Lula’s protégé Dilma Rousseff, leading Petrobras to become the most indebted oil company in the world. So, it’s no wonder that the energy sector is sceptical about Lula’s promises on oil and gas. 

Despite the uncertainty, there is still significant potential for Brazil’s oil and gas industry if Lula approves new exploration and production projects. Brazil, Latin America’s largest producer of crude, is expected to add 300,000 bpd to its output in 2023, to hit a record 3.4 million bpd. Five new platforms will come into operation in some of Brazil’s most prolific offshore fields. Output from the oil-rich South American state is expected to keep rising for several years to reach 4.6 million bpd by the end of the decade.  Related: Analysts See Oil Prices Rising To $90 By End-2023

However, as Brazil has seen no significant discoveries over the last decade, its crude production levels are expected to begin falling from 2030. Without new exploration activities, Brazil’s oil power is expected to diminish after this decade. But geologists believe there could be considerably more oil offshore in the northernmost part of Brazil. Exxon is currently developing new oil fields in Guyana’s water territories and there could be significant potential for development in Brazil’s waters. 

Jean Paul Prates, the Lula-appointed boss of Petrobras, stated in March “We came out very late to this game as a big producer, but we have to keep the ball rolling.” Prates made clear Petrobras’s intention to support exploration and production activities to ensure the longevity of Brazil’s oil and gas industry. Although many companies have looked elsewhere for their exploration operations in recent years, with significant development seen in the Caribbean countries of Guyana and Suriname. 

While Brazil remains a major oil power at present, the development of oil fields in Guyana and Suriname has allowed oil and gas companies to develop a new oil region, with the potential for decades of more oil production. In addition, oil majors operating in the region can pump more low-cost and low-carbon oil than in traditional areas. To remain competitive, Brazil will likely have to appeal to investors looking to develop their low-carbon oil sectors, which would also be attractive to Lula who sees the oil industry as key to economic growth but is also an environmental champion. 

This month, Exxon decided to quit its major Brazil project after failing to find hydrocarbons in several wells over five years. It began developing the offshore $4 billion acreage in 2017 but has slowly begun to send its workers to Guyana, Angola, and Canada to develop its more reliable oil regions. Exxon stated in a letter that its initial exploration drilling programme in Brazil is now complete and that it is “still engaged in Brazil and continues to pursue exploration activity in the country”.

But there have been greater successes seen in the Equinor-operated $8 billion Bacalhau field project. Equinor and partner Exxon expect to pump 220,000 bpd of oil from Bacalhau once in operation. Although the start date has been repeatedly delayed production is now expected to begin in 2025. 

And a new programme from the Brazilian Ministry of Mines and Energy (MME) could support the development of new oil projects. The Potencializa E&P programme is aimed at attracting greater investment in the oil and gas industry to make Brazil the fourth-biggest oil producer in the world. As well as attracting foreign investors, the programme will encourage regional, independent oil and gas producers to develop projects. The MME says it has established the initiative in line with Lula’s aim to develop Brazil with “common sense and respect for the environment.” 

While there is still uncertainty around the future of Brazil’s oil and gas, and it has faced several challenges in recent years, there is significant potential for ongoing development. Brazil will have to compete with the low-cost, low-carbon oil of neighbouring Caribbean countries but if it can attract greater investment in exploration and development it could thrive for decades to come. 

By Felicity Bradstock for Oilprice.com

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