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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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Why Petrobras Is One Of 2021’s Most Exciting Oil Companies

Sharply weaker oil prices and the global COIVD-19 pandemic had little material impact on Brazil’s massive offshore oil boom. Even the fact that the oil rich Latin American country is among the countries most severely impacted by the pandemic, with Brazil ranked second for cumulative deaths and third by cases globally, has done little to impede its rapidly growing oil production. Brazil’s national oil company Petrobras last week announced record 2020 hydrocarbon production. Oil output hit a new record of 2.28 million barrels daily while total hydrocarbon output reached a record 2.84 million barrels of oil equivalent per day. Those solid numbers represent an impressive 5% and 2.5% year over year increase, respectively. Petrobras’ focus on developing its pre-salt oil assets was responsible for this impressive growth. During 2020 Brazil’s national oil company pumped 1.86 million barrels of oil equivalent from its pre-salt oilfield, which was a 46% increased over 2019 and comprised 66% of Petrobras’ total annual production. Surprisingly, Petrobas was able to deliver such strong production growth despite slashing capital spending in early 2020 in response to the pandemic and plunging oil prices. During March 2020, the integrated energy company announced it had slashed spending for 2020 by 29%, from a previously announced $12 billion to $8.5 billion. The fact annual oil production grew to hit a new record in such a difficult operating environment is impressive. That bodes well for further production growth despite Petrobras cutting investment for its latest five-year strategic plan by 27% to $55 billion. This includes slashing exploration and production spending from $64 billion to $46 billion. Still, Petrobras expects to pump an average of 2.75 million barrels of oil equivalent daily during 2021, which is only 3% lower than the production record hit in 2020.

Related: India Oil Demand Falls For First Time In 20 Years Due To COVID

Key to Petrobras’ success has been its focus on developing Brazil’s offshore pre-salt oilfields. For this reason, Brazil’s state-controlled oil company intends to spend 70% or $32 billion of the capital budgeted for exploration and production on its pre-salt assets. Petrobras’ pre-salt oilfields are responsible for around 63% of Brazil’s total crude oil production. Data from the national oil regulator, National Agency of Petroleum, Natural Gas and Biofuels (ANP – Portuguese initials) shows Petrobras is responsible (in Portuguese) for almost 75% of Brazil’s petroleum output. ANP data indicates that Brazil, Latin America’s largest oil producer, pumped on average just under 2.96 million barrels daily for the first 11 months of 2020, which was 6% greater than for the equivalent period a year earlier. Importantly, pre-salt oil production for that period shot-up by an impressive 18% year over year to an average of almost 2.6 million barrels daily to now make-up roughly 69% of Brazil’s total hydrocarbon output compared to 61% for 2019. The Tupi and then Búzios oilfields, for the first 11 months of 2020, were responsible for almost 73% of Brazil’s total pre-salt oil production.

Brazil 2020 Pre-salt Oil Production By Field

 

Source: ANP.

This is particularly important to note because of the growing popularity of the Lula and Búzios crude oil grades. Their sweetness and other favorable characteristics make them especially suitable for refining into high quality low sulfur content fuels. That along with the introduction of IMO2020 at the start of January 2020, which sharply limits the sulfur content of maritime bunker fuel, saw their popularity among Asian refiners’ soar, causing Lula and Búzios to trade at a premium to Brent. That trend will remain firm with China being a major global shipping hub and poised to overtake the U.S. as the world’s largest refiner during 2021.

Petrobras claims its pre-salt oilfields have an extremely low prospective breakeven price of $19 per barrel, and $20 a barrel for its total upstream operations, which is less than half current Brent price. This illustrates the considerable profitability of Brazil’s pre-salt oilfields, particularly when it is considered that Lula and Búzios crude oil grades are selling at a premium to Brent. Petrobras, as well as being the operator of Tupi and Búzios has a 65% and 90% ownership stake in each oilfield respectively, placing it in an ideal position to benefit from their growing production. For November 2020, Tupi pumped almost 1.1 million barrels daily, which was a 19% year over year decreased caused by maintenance outages, while Búzios produced 587,619 barrels daily, a 7% year over year increase. As the tempo of operations at both oilfields rises crude oil production will expand. It is the Búzios field which will drive Petrobras and Brazil’s production growth for the immediate future. The integrated energy Petrobras plans to add 13 FPSOs between 2021 and 2025, with four of those destined for the Búzios oilfield which will receive 36% of capital expenditures destined for exploration and development activities. Brazil’s national oil company expects this will drive production growth with crude oil output reaching 2.7 million barrels of oil equivalent daily by the end of 2024, once planned divestments are completed.

The pre-salt oil boom is an economic boon for Brazil. The volume and quality of oil discoveries, as well as hydrocarbon production, now far exceeds expectations when compared to the first major pre-salt discoveries made nearly two decades ago in the Santos and Campos basins. During 2014 it was estimated that Brazil’s pre-salt oil fields had breakeven costs of more than $60 per barrel. Industry consultancy Wood Mackenzie claimed the massive multi-billion-barrel Libra oilfield had a $69 per barrel breakeven price in 2014 and by May 2019 that had fallen to $38 per barrel. It is estimated that the Búzios oilfield is pumping crude oil with a breakeven price of $39 per barrel while Petrobras’ wholly owned Itapu field has a projected breakeven price of $38 a barrel. Those breakeven prices will keep falling as technology, knowledge and expertise improve and further efficiencies are implemented driving expenses lower.

By Matthew Smith for Oilprice.com

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