Can Brazil help close the supply gap left by the US ban on Russian oil?

Ever since President Joe Biden floated the idea of ​​banning oil imports from Russia in response to President Vladimir Putin’s invasion of Ukraine, there has been much speculation about which countries might fill the supply gap. In early March 2022, Washington sent an official mission to Caracas to open negotiations with the pariah authoritarian regime of President Nicolas Maduro. The trip raised fears that the Biden administration could ease the penalties against Venezuela in a cynical attempt to increase US oil supplies, thereby driving down domestic gasoline prices. Guyana, Ecuador, and Colombia were also seen by analysts as well as industry insiders as potential sources of additional crude oil needed to close the supply gap. The three South American countries, although they have booming hydrocarbon sectors, lack the capacity to rapidly increase production to meet growing US supply needs. Brazil, Latin America’s largest oil producer, is a different story, however.

The Brazilian hydrocarbon sector has shown resilience to the COVID-19 pandemic, which has had a significant impact on oil operations in other jurisdictions in the region, including Colombia, Ecuador and Argentina. Latin America’s biggest oil producer was the only South American country to report an increase in oil production in 2020, as the graph of the US EIA shows.

Source: US EIA.

In March 2022, data from Brazil’s hydrocarbon regulator, the National Petroleum, Natural Gas and Biofuels Agency (ANP – Portuguese initials), showed that total hydrocarbon production had reached a daily average of 3.8 million barrels of oil equivalent, 78% weighted by crude oil. This number was 1.9% higher month over month and 5% higher than the equivalent period a year earlier. Oil production for this period of 2.98 million barrels per day was 2.2% higher than February 2022 and 4.8% higher than Match 2021. This production growth was driven by Brazil’s vast deepwater pre-salt oilfields with pre-salt production for March 2022 increasing 8% year-on-year to 2.88 million barrels or nearly 87% of production of crude oil for this period.

Greater production growth is expected as state oil company Petrobras, which is responsible for 94% of Brazil’s hydrocarbon production, steps up investment in response to the significant rise in oil prices. At the end of 2021, Petrobras announced its Strategic plan 2022 to 2026 which included a 24% increase in investments, compared to the previous plan, to 68 billion dollars. Of this figure, $57.3 billion will be devoted to exploration and production activities, of which 63% will be allocated to pre-salt operations. Petrobras has estimated that the investment will allow the company to increase its oil production by 18% compared to 2021, to 2.6 billion barrels per day by 2026, with 79% of this volume being made up of pre-production. -saliferous.

The planned investment by Brazil’s national oil company is based on an assumed average Brent price of $61 per barrel over this period. Considering that the international benchmark price of Brent is trading at over $106 per barrel and has averaged $101.55 since the start of 2022, it is likely that Petrobras will consider increasing the allocated capital to its strategic plan. If Petrobras increases its capital expenditure further, production growth will accelerate, which bodes well for an increase in oil supply in a world suffering from energy constraints and shocks. This will reduce inflationary pressure, with the sharp rise in oil prices since October 2020 being a key driver of soaring prices around the world, which is weighing heavily on the post-pandemic global economic recovery.

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Brazil’s massive offshore oil boom is not only driven by Petrobras, the quantity and quality of discoveries coupled with the desirability of the light and medium grades of crude oil produced are attracting considerable international attention. World Oil Supermajors TotalEnergies and Royal Dutch Shell recently paid $947 million and $1.1 billion, respectively, to increase their stakes in the Petrobras-operated deepwater Atapu offshore oil field. Following the transactions, Petrobras now holds a 52.5% stake in Atapu, of which 25% is held by Shell and the remaining 22.5% by TotalEnergies. The Atapu field is located near the Buzios field, which is one of Petrobras’ development priorities.

The medium-grade low-sulphur crude oil pumped from Buzios is particularly popular in Asia. China is now a principal recipient of Brazilian crude oil exports, with Latin America’s largest oil producer supplying 6% of the country’s oil imports in 2021. Recent global oil shortages are pushing India, the fastest growing major economy in the world to enter into long-term crude oil deals with Brazil, although long shipping times and excessive costs remain an obstacle. It is Brazil’s proximity to the United States, particularly the Gulf Coast, that makes it an ideal supplier of additional crude oil to offset the shortfall caused by the Russian oil import ban. Many refineries on the Gulf Coast are set up to process heavy grades of crude oil and Venezuela was a key source of raw materials before the Trump administration passed tough sanctions blocking the country’s oil exports. Latin America. A significant proportion of Brazil’s oil production is made up of heavier grade crude oil, although it is the production of medium grade pre-salt crude oil that is expected to increase significantly.

For the reasons described, Brazil’s crude production will increase at a steady rate between 2022 and 2026. Brazil’s Energy Minister announced in March 2022 that Latin America’s largest oil producer will increase production by 300,000 barrels per day during the year, representing a 10% increase from the 2.9 million barrels pumped daily in 2021. This practical increase couldn’t come at a more crucial time for global energy markets and an increasingly volatile global economy. It also offers US refiners an opportunity to fill the supply gap left by the loss of Russian crude oil imports.

By Matthew Smith for Oilprice.com

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