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Can Brazil Help Fill The Supply Gap Left By The U.S. Ban On Russian Oil?

·5-min read

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 considerable speculation as to which countries can fill the supply gap. In early March 2022 Washington sent an official mission to Caracas to open negotiations with President Nicolas Maduro’s pariah authoritarian regime. The trip sparked fears that Biden’s administration would ease sanctions against Venezuela in a cynical attempt to boost U.S. petroleum supplies thereby easing domestic gasoline prices. Guyana, Ecuador, and Colombia have also been considered by analysts as well as industry insiders as potential sources of the additional crude oil needed to fill the supply gap. All three South American nations despite possessing burgeoning hydrocarbon sectors lack the capacity to rapidly ramp-up output to meet growing U.S. supply needs. Latin America’s largest petroleum producer Brazil, however, is a different story.

Brazil’s hydrocarbon sector proved resilient to the COVID-19 pandemic which sharply impacted petroleum operations in other jurisdictions in the region including Colombia, Ecuador, and Argentina. Latin America’s largest oil producer was the only country in South America to report an increase in petroleum production during 2020, as the chart from the U.S. EIA shows.

Source: U.S. EIA.

By March 2022, data from Brazil’s hydrocarbon regulator, National Agency for Petroleum, Natural Gas and Biofuels (ANP – Portuguese initials), showed total hydrocarbon output had reached a daily average of 3.8 million barrels of petroleum equivalent, 78% weighted to crude oil. That number was 1.9% higher month over month and a notable 5% greater than the equivalent period a year earlier. Oil output for that period of 2.98 million barrels daily was 2.2% higher than February 2022 and a notable 4.8% higher than Match 2021. That production growth was driven by Brazil’s vast deep-water pre-salt oilfields with pre-salt production for March 2022 rising by an impressive 8% year over year to 2.88 million barrels or almost 87% of crude oil output for that period.

Greater production growth is expected as national oil company Petrobras, which is responsible for 94% of Brazil’s hydrocarbon production, ramps-up investment in response to significantly higher oil prices. In late-2021 Petrobras announced its 2022 to 2026 Strategic Plan which included lifting investment by 24%, compared to the previous plan, to $68 billion. Of that figure, $57.3 billion will be spent on exploration and production activities with 63% of that amount allocated to pre-salt operations. Petrobras estimated that investment will allow the company to grow its oil output by 18%, compared to 2021, to 2.6 billion barrels daily by 2026 with 79% of that volume comprised of pre-salt production.

The investment earmarked by Brazil’s national oil company is predicated on an assumed average Brent price of $61 per barrel over that period. When it is considered that the international Brent benchmark price 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 capital allocated to its strategic plan. If Petrobras further ramps-up capital spending, then production growth will accelerate boding well for increased oil supply in a world suffering from energy supply constraints and shocks. That will reduce inflationary pressure, with the sharp rally in oil prices since October 2020 a key driver of surging prices around the globe, which is weighing heavily on the post-pandemic global economic recovery.

Related: Is It Fair To Blame Oil Companies For High Prices?

Brazil’s massive offshore oil boom is not only being driven by Petrobras, the quantity and quality of the discoveries coupled with the desirability of the light and medium crude oil grades produced are attracting considerable attention internationally. Global oil supermajors TotalEnergies and Royal Dutch Shell recently shelled out $947 million and $1.1 billion respectively to increase their stakes in the Petrobras-operated Atapu offshore deep-water oilfield. On completion of the deals, Petrobras now owns a 52.5% stake in Atapu with 25% held by Shell and the remaining 22.5% by TotalEnergies. The Atapu field is located near the Buzios field which is one of Petrobras’ priorities for development.

The medium grade low sulfur content crude oil pumped from Buzios is particularly popular in Asia. China is now a leading recipient of Brazilian crude oil exports with Latin America’s largest oil producer supplying 6% of the country’s 2021 petroleum imports. Recent global oil supply shortages see the world’s fastest-growing major economy India looking to ink long-term crude oil deals with Brazil, although long shipment times and excessive costs remain an impediment. It is Brazil’s proximity to the U.S., particularly the Gulf Coast, which makes it an ideal supplier of additional crude oil to make up for the shortfall triggered by the ban on Russian oil imports. Many refineries located on the Gulf Coast are configured to process heavy crude oil grades and Venezuela was a key source of feedstock before the Trump administration enacted strict sanctions blocking the Latin American country’s oil exports. A sizable proportion of Brazil’s oil production is comprised of heavier crude oil grades, although it is the production of medium-grade pre-salt crude oil grades that are expected to grow significantly.

For the reasons outlined Brazil’s crude output will expand at a steady clip between 2022 and 2026. Brazil’s energy minister announced in March 2022 that Latin America’s largest oil producer will boost production by 300,000 barrels per day during the year, which amounts to a 10% increase over the 2.9 million barrels daily pumped during 2021. This handy increase could not come at a more crucial time for global energy markets and an increasingly volatile world economy. It also provides the opportunity for U.S. refiners to fill the supply gap left by the loss of Russian crude oil imports.

By Matthew Smith for Oilprice.com

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