In deep: Brazilian oil

Brazil is poised to become one of the world’s largest oil producers. But the elation caused by the discovery of two massive oil fields is tempered by access difficulties and high cost of extraction. Still, the discoveries have thrust Brazil centre stage in the global energy grab. 

Brazil has abundant natural resources and husbands them carefully. Fortune has now bestowed on the country another boon: the largest reserve of oil to be discovered in over a decade, which could put Brazil among the world’s biggest oil producers.

Brazil’s difficulty is accessing its reserves. Over 90% of Brazil’s oil reserves lie offshore, according to the International Energy Agency (IEA), and most of these are classified as “deep water”. They are not only vast, but deep: 7 km beneath the ocean surface, including 5 km of solid rock beneath the seabed and 2 km of salt deposited during the Cretaceous period, which seals in the crude. The Lula and Libra “pre-salt” fields, as they are called, were discovered in 2007 in the Santos Basin off Brazil’s southeastern coast. The smaller of the two, Lula, contains an estimated 6.5 billion barrels of oil; Libra, which spans 1,548 square kilometres, has up to 12 billion. Tapping into these reserves will be a fearsome task, requiring massive investment and the deployment of state-of-theart deep-water technology. With the spigot fully open, the Libra field will top up Brazil’s current production of 2 million barrels per day by another 1.4 million.

Brazil is also a leading user of renewable energy, and is likely to remain so, with renewable energies furnishing 43% of the domestic energy mix in 2035. The IEA notes that domestically grown cane-based ethanol has provided about 15% of the fuel for road transport since the 1990s. But the demand for fossil fuel is rising fast.

The agency says that primary energy demand in Brazil is expected to increase 80%. The sectors with the heartiest appetites are industry (80%) and transport (77%). These appetites are largely satisfied by some US$90 billion invested each year, two-thirds of which go to the oil sector. That’s not enough for Lula and Libra, which estimates say will cost $186 billion to develop.

In May, Brazil auctioned rights to develop the Lula field. The auction, which included the sale of both oil and natural gas rights, was Brazil’s first in five years; a second auction was held in October for the Libra field. Aside from Petrobras, bidders included Royal Dutch Shell, Total, China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC). Companies from Colombia, India, Japan and Malaysia, among others, also put in bids.

Despite estimates that Libra holds even larger reserves than Lula, the October round was a disappointment. Brazil’s National Petroleum and Gas Agency, the ANP, said that of the 40 companies expected at the auction, only about a quarter showed. There are several reasons for this. Not only are companies wary of the notorious custo brasil–the high costs of bureaucratic red tape, tax snares, and limitations imposed by infrastructure and logistics– but Libra, for all its potential, is a risky bet. Flow rates, and thus returns, are far from certain.

Foreign companies are also disgruntled by the government’s decision to give the state-owned Petrobras a bigger stake in the operations. But while there is a lot of grumbling about the terms, the fields are simply too big to ignore. Countries in need of raw materials are not about to walk away. Take China, which between 2005 and 2013 invested US$18.2 billion in Brazil’s energy sector–70% of its total investments in the country. Interest has focused on deep-water technology and expertise, which China’s state-owned companies lack. Although China normally prefers to invest in production, paying a little more rather than running the risks inherent in exploration and drilling, it has demonstrated a new boldness to get its hands dirty in the early stages of operations, and for good reason: Libra holds enough oil to meet three years of Chinese demand.

China’s trade relationship with Brazil gives it an edge. The IEA says that from 2000 to 2011, bilateral trade between the countries reached $77 billion, a 33-fold increase. Today, China is Brazil’s biggest trading partner. The partnership has upended the balance of Brazil’s exports away from manufactured products to primary goods, 50% of which are bought by China. This shift in exports has led to concerns that the decline in Brazil’s industrial activity leaves it vulnerable to shifts in international commodity prices.

The government may also be pressing its luck in its eagerness to develop the Libra field. Petrobras has pledged to pay 40% of the $100 billion needed, even though the company’s debts have risen sharply. Part of the financial strain comes from having to abandon dry and unprofitable wells; another comes from the harrowing costs of exploration. The decision to grant concessions to foreign companies brought protests from Brazilian unions. They fear that Brazil is selling off its national assets. In fact, Petrobras came out even better than expected, winning a 40% stake, according to the IEA. Analysts were surprised, however, by China. While Shell and Total were each awarded a 20% share, CNOOC and CNPC received a mere 10% share each.

Under new legislation passed earlier this year, royalties from the fields will be funnelled into education. If Brazil’s luck holds out to 2035, Lula and Libra could make it the world’s sixth-leading oil producer.

Lyndon Thompson

References

International Energy Agency (IEA) (2013), World Energy Outlook, OECD Publishing.

Mourougane, Annabelle (2011), “Managing the resource boom”, in OECD Observer No 287, Q4.  

De Oliveira Neto, Claire (2013), “Chinese oil firms, Europe’s giants win Brazil auction”, 21 October, Agence France-Presse.

© OECD Observer No 297, Q4 2013




Economic data

GDP : +0.5%, Q4 2014
Employment rate: 65.9%, Q4 2014
Annual inflation : 0.60% Mar 2015
Trade : -3.0% exp, -3.7 imp, Q4 2014
Unemployment : 6.993% Feb 2015
More moderate expansion ahead? Composite leading indicators
Updated: 12 May 2015

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