Brazil’s output slows as political risk grows

1 October 2018
25 September 2018, Week 38, Issue 732

Brazil has produced less oil this year as the impending election sows disarray, reports Ciara Long from Rio de Janeiro

WHAT: Brazil was forecast to add over 200,000 bpd this year but output is only up by around 30,000 bpd. 

WHY: Scheduled maintenance and lower returns from post-salt and onshore fields. 

WHAT NEXT: Output growth is forecast to rebound next year. 

Brazil’s oil production this year has not grown as fast as forecast, with pre-salt gains being held back by lower returns from post-salt and onshore fields.

The IEA had originally anticipated that Brazil’s oil production would grow by an average 260,000 bpd of crude production in 2018. But in its latest report on September 13 the agency said Brazil would only add 30,000 bpd this year.

“Heavier than expected declines in production from onshore and post-salt Campos Basin fields, delayed delivery and start-up of new production units and heavier than expected maintenance stoppages at producing fields underpin the lower forecast number,” an IEA spokesperson told NewsBase Intelligence (NBI).

The IEA still expects strong growth in 2019 however, as delayed projects come online. With Petrobras starting up seven new production platforms this year, and two more in 2019, the IEA now forecasts Brazil’s production to rise by 350,000 bpd in 2019.

The delayed start up of new production units has been exacerbated by Petrobras and its partners concentrating their investment in the pre-salt at the expense of post-salt and onshore fields. 

The ANP said onshore production was down 12.2% year on year in the first half of 2018. Total output during the six-month period was down 1.2% year on year at 2.589 million bpd, compared to 2.607 million bpd in H1-2017.

“Post-salt is growing at a slightly slower pace than forecast, with delays and problems with platforms resulting in normal shortfalls,” Edson Almeida, an energy economics professor at Rio de Janeiro’s federal university, told NBI.

Nonetheless, Petrobras’ investment focus over medium term remains firmly on pre-salt development. The company intends to spend 50% of its upstream capex on pre-salt projects between 2018 and 2022.

“The little investment that Brazil is making is being thrown in the direction of pre-salt,” Cloviomar Cararine, an economist at the Federation of Petroleum Workers’ (FUP) told NBI. “There has been a strategic choice to reduce investment since 2015, and the few investments that were made were cast in the direction of the pre-salt.”

Political risk

One possible risk to pre-salt gains in the short to medium term is the political disarray caused by the upcoming presidential election. 

Brazil has postponed a mega-tender of up to 15 billion barrels of pre-salt oil from its so-called transfer of rights area until next year. The auction will now not be held until after a new president has been chosen in the October election and has taken office on January 1.

Two leading leftist candidates have said they would reverse the policy towards the oil industry introduced by incumbent president Michel Temer’s business-friendly government since 2016, which could create a very different political environment.

“It’s going to depend on who gets elected whether they do this in 2019,” David Fleischer, an emeritus professor of political science at the University of Brasilia, told NBI earlier in September.

The transfer of rights area was delineated in an unusual deal between Petrobras and the government in 2010. In it, Petrobras was given rights to explore up to 5 billion barrels from a selected area of pre-salt blocks in the Santos Basin and in return the government received around US$42 billion worth of Petrobras stock. Last year the ANP said there could be 6-15 billion more barrels in the area, which sparked disagreement over who owes what to whom. 

The government has been promising a tender to sell off the excess oil since January, but it depended on a deal being struck between Petrobras – which thinks it is owed more money because oil prices were higher in 2010 – and the government. 

The tender could raise as much as US$25 billion (at current rates) for Brazil’s cash-strapped government. But after expressing confidence on several occasions that the auction could go ahead this year, Marcio Felix, the executive-secretary at Brazil’s Energy Ministry, told reporters on September 11 that the government had pushed it to 2019.

“The electoral situation is very confused right now, and we don’t know what the next government will do with regard to the transfer of rights,” said Almeida. But he also dismissed the populist rhetoric espoused by the leftist presidential candidates, saying he was confident the industry would remain robust and production would continue to grow as scheduled auctions go ahead and new projects are sanctioned. 

A spokesperson for Petrobras reinforced this view telling NBI that the company’s forecast for next year “is one of growth”. They predicted that output would increase to 2.9 million bpd from early 2019 until 2022. The Brazilian Energy Ministry anticipates that if agreement is reached over the transfer of rights area then overall production could increase to 4 million bpd by 2024.

Almeida said the key drivers for production stagnation this year, such as scheduled maintenance, were “nothing exceptional”, and that he remained optimistic growth would rebound in 2019.

“We haven’t heard there will be further delays, so for now the projection for next year is one of an important warm-up period,” he said, as the industry prepares for more pre-salt production to flow.

Edited by

Ryan Stevenson

Managing Editor

Any questions? Please get in touch