Is Brazil A Threat To OPEC?

As far back as the early 1980s, Brazil’s national oil company Petrobras as well as the government were aware of the vast untapped oil wealth trapped under the pre-salt layers in the Atlantic Ocean. The considerable technological and operational hurdles associated with ultra-deep-water petroleum extraction and tapping the thick pre-salt crust prevented those oil resources from being commercially exploited. By 2005, Petrobas had renewed its focus on Brazil’s pre-salt offshore oil basins and started making significant oil discoveries in the Santos Basin. Even then, the technical difficulties and high operating expenses made many analysts doubt the pre-salt discoveries would eventually drive the flourishing oil boom now being witnessed.

Brazil’s emergence as a major global petroleum-producing nation is another challenge for an OPEC oil cartel, which since the 1980s has watched its influence over oil prices and geopolitical power steadily decline. OPEC’s market share has declined substantially in recent years, despite global petroleum production expanding at a solid clip and Saudi Arabia is no longer the world’s preeminent oil producer. The U.S. assumed that mantel in 2018 as onshore oil production exploded because of the shale oil boom. Brazil’s massive pre-salt oil discoveries substantially boosted its oil reserves and production while allowing Latin America’s largest economy to declare energy self-sufficiency in 2006. Since then, despite the naysayers, Brazil’s thriving oil boom continues to steadily expand. The Latin American country is now the region’s leading oil producer and the eighth largest globally behind Iraq and the United Arab Emirates but ahead of Iran and Kuwait. Brazil pumped on average (Portuguese) over 2.9 million barrels of crude oil daily during 2020 of which 69%, or roughly 2.6 million barrels, came from its offshore ultra-deep-water pre-salt oilfields.

The International Energy Agency in its March 2020 report projected global crude oil production capacity will expand by 5.9 million barrels of oil equivalent daily by 2025, with 76% of that coming from non-OPEC countries. The most prominent is the U.S. because of the shale oil boom, followed by Brazil and Guyana. In fact, the IEA expects Brazil to deliver “impressive gains” over the next four years. Those numbers illustrate just how significantly OPEC’s market share is expected to decline, further eroding its ability to control oil prices and hence geopolitical power. The sharp decline in the cartel’s ability to manipulate oil prices is highlighted by the increasing influence exerted by the White House over OPEC and crude oil prices, notably since 2018.

It appears that there is little that can stop Brazil’s petroleum boom. The COVID-19 pandemic has had little if any material impact on production nor has sharply weaker oil prices. This is underscored by national oil company Petrobras reporting record oil output of 2.28 million barrels daily for 2020. A key reason is the favorable economics of Brazil’s pre-salt oilfields. Breakeven prices, despite the significant technological and operational hurdles associated with ultra-deep-water drilling, are lower than for U.S. shale, which the Federal Reserve Bank of Dallas estimates average $46 to $52 per barrel.

Some analysts have projected that operations in offshore Brazil break even at below $35 per barrel, while Petrobras claims its pre-salt operations have a prospective breakeven price of an extremely low $19 a barrel. This makes those assets profitable even with Brent trading at around $55 per barrel, bolstering their attractiveness for Petrobras and other global energy majors. That is further enhanced by the growing popularity of the sweet medium grade crude oil produced from Brazil’s pre-salt oilfields.

Surging demand from Asian refiners saw Brazil’s market share in China soar, to the detriment of several OPEC members. From January to November 2020, Brazil’s oil exports to China grew 8% year over year to just over 40 million tonnes of crude oil, making Latin America’s largest oil producer the fourth-largest crude oil supplier behind Iraq and ahead of Angola. Soaring demand from China for Brazil’s sweet medium grade pre-salt crude oil grades, Lula and Búzios, saw them sell at a premium to Brent in Asia. China is responsible for accepting 70% of Brazil’s oil exports, and those numbers will keep growing.

The impact of IMO2020, which substantially limits the sulfur content of marine bunker fuel, coupled with China’s position as a global shipping hub and the world’s largest exporter means demand for low sulfur Brazilian crude oil will remain strong. The global push to extremely low sulfur content fuels will weigh on demand for Saudi crude oil. The Arab light variety, which according to the U.S. EIA makes up roughly 70% of Saudi oil production is, like most of the Kingdom’s crude oil grades, particularly sour with a high sulfur content of 1.77%. That makes it more costly and difficult to process into high quality extremely low sulfur content fuels than Brazil’s Lula and Búzios crude oil varieties.

Riyadh’s decision to slash export prices, as part of its campaign to regain market share, was responsible for a November 2020 surge in oil exports to China which saw Saudi Arabia regain the top spot as China’s largest supplier of crude oil. Riyadh’s surprise one million barrels per day production cut is creating a hole in the market that has forced Asian refiners to scramble for other supply sources. It is Brazil, because of its growing IMO compatible sweet crude oil production, which is ideally placed to fill the gap thereby providing further momentum to its burgeoning oil boom.

The latest OPEC Plus meeting highlighted the mounting rifts between members and allies Russia and Kazakhstan over cutting oil production. As a gesture of goodwill, Saudi Arabia elected to shoulder most of the burden by slashing one million barrels a day from its oil output to offset higher production from Russian and Kazakhstan to buoy oil prices. Those developments underscore OPEC’s mounting impotence to control crude oil prices without losing market share in face of rapidly growing non-OPEC oil supply.

By Matthew Smith for Oilprice.com