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Brazil’s needs to invest $1 trillion to realise deep-water plans

The country has drawn up plans to transform its energy sector, but serious investment is needed, says the IEA

Brazil will need to invest more than $1 trillion over the next 20 years to realise its hugely ambitious deep-water oil development plans, the International Energy Agency (IEA) said in it latest World Energy Outlook.

The country has drawn up plans to remake the whole of its energy sector, developing its vast deep-water oil deposits, expanding access to electricity, bringing new hydro-power on stream, ramping up biofuels production and increasing the role of natural gas in the energy mix. All of which are needed to fuel an economy that is expected to double in size over the coming decades.

Realising those ambitions will not come cheap. Brazil will need investment of $90 billion a year from 2013 to 2035, $2.1 trillion over the next two decades, across its energy sector, according to IEA calculations.

A staggering $1.34 trillion, nearly two-thirds, of that investment will go towards developing the country’s oil resources, particularly in its deep-water pre-salt province.

Brazil’s success or failure will have wide-ranging ramifications, both at home and globally. The country is expected to add 3.8 million barrels a day of new production by 2035, easily outpacing the growth of shale oil in the US and beyond, and second only to Iraq. Combined, Brazil and Iraq will contribute around 80% of the total increase in global oil production over the next two decades, according to the IEA.

The country is expected to turn from a modest oil importer to one of the world’s most important exporters over the next 20 years. That would provide a huge windfall for the government. The IEA estimates export revenues will be around $50bn by 2020, rising to $120bn by 2035. Much of that revenue has been earmarked for education and healthcare.

At the same time, demand for equipment and services from Brazil will fuel rapid growth in the multi-billion dollar global deep-water business. For example, half of all deep-water subsea trees, production units installed at offshore wells, built between now and the end of the decade will be installed offshore Brazil, the IEA said. And one in three floating production, storage and offloading (FPSO) vessels brought into service by 2020 will find a home in Brazilian waters.

The IEA’s estimates may not even capture the whole of Brazil’s deep-water potential. The projections take into account the activity required to bring on stream resources already discovered and expected to be discovered based on exploration results, mostly off the coast of Rio de Janeiro. Further major discoveries could yet be made off the northeast coast, where international majors snapped up acreage in a bid round earlier this year. Those companies are betting that the geology there mirrors that of the prolific deep-water plays off West Africa.

As the IEA points out, the burden for realising this ambition will fall to a large degree on one company – state-run Petrobras. “Growth of the magnitude projected for Brazil is not unprecedented for a single oil province. What makes this case stand out is the extent to which this growth relies on the performance of a single player,” said the IEA. International majors and independents will play an increasingly important role in Brazil, but fields operated by Petrobras will still account for 75% of Brazil’s total output by 2035, the IEA estimates.

The company has struggled to meet its production targets in the past, and the expectations placed on it to finally start delivering are only going to grow.

The government’s energy policy will also come under the spotlight. The government has promoted stringent local content policies for oil projects aimed at building domestic industrial capacity, but over the short term the measures have stressed the local supply chain, pushed costs higher and led to project delays. The government has also forced Petrobras to sell imported fuel at a loss in the domestic market in a bid to keep inflation low. That has put Petrobras under increased financial pressure at the same time it faces rising development costs.  

And while Brazil’s deep-water riches present a huge opportunity for the country, it is also relatively expensive and comes with the ever-present risk of a major accident or spill derailing the sector, which will account for nearly all production growth. “[Deep-water] oil production, it should not be forgotten, is consistently pushing at the frontiers of what the industry can undertake, and represents a relatively expensive source of oil. The repercussions of any serious accident or spill would be felt in Brazil, regardless of where it took place,” the IEA said.

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