After the car wash
A modest oil-price rise, and pro-investor reforms, should spark a recovery for Brazilian energy and Petrobras in 2017
For Brazil's oil industry, 2017 will be all about trying to escape the shadow of scandal and disappointment, and reclaiming some of the verve and momentum that drove the industry just a few years ago.
How does it plan to do that? Under President Michel Temer, in office thanks to Dilma Rousseff's impeachment and then departure in September 2016, the country is pushing a wide range of pro-investment oil reforms that aim to reverse parts of the 2010 oil laws widely blamed for stifling investment and growth in the industry.
The biggest step in this direction came in October 2016, when Congress overturned legislation that required state-controlled Petrobras to hold a minimum 30% operating stake in all pre-salt projects. Many international oil companies were reluctant to invest in these megaprojects with cash-strapped Petrobras at the helm. Even Petrobras itself had started to realise that it wouldn't be able to lead the whole pre-salt campaign on its own. Under the new rules, Brazil should see an uptick in interest in 2017 in the pre-salt, the largest untapped deep-water province in the world.
Regulators are looking at other ways to lure investment in 2017. Along with the pre-salt investment restrictions, foreign investors have long bristled at Brazil's onerous local-content rules, which force projects to source most of their kit and people from within Brazil, driving up costs and causing delays. It appears regulators have been listening. Temer's administration says it plans to ease those rules in 2017, giving companies more leeway to ship in equipment and workers from abroad. Regulators also plan to cut hundreds of rules from the country's notoriously bloated regulatory regime to make doing business in the country easier.
Brazil will hope the measures drum up interest in two planned licensing rounds in 2017, the first since 2015's disappointing auction. Details of the rounds will be revealed in 2017, but the first will offer blocks in frontier basins, onshore and offshore. The second will be the more hotly anticipated as it is expected to put pre-salt acreage up for bidding, marking foreign firms' first-ever chance to bid for operating stakes in the play. A successful bid round would lay the foundation for a competitive and efficient development of the pre-salt, the main source of growth for Brazilian oil.
Petrobras, still the centre of the industry and accounting for more than 90% of Brazil's total production, hopes to start moving past the Lava Jato (Carwash) corruption scandal and rehabilitate its image, not to mention balance sheet, in 2017. The company's new chief executive, Pedro Parente, has put the firm's financial health over chasing barrels at any cost. So 2017 will see Petrobras focus on cutting its world-beating debt at least as much as pumping up output. Central to that is an ambitious plan to sell close to $20bn in assets during 2017 and 2018. For-sale signs will be propped atop the company's biofuels, liquefied petroleum gas, fertiliser and petrochemicals businesses. Petrobras will almost certainly also have to sell some of its prized upstream assets to hit its divestment target.
On the production front, the company has three major offshore projects in the offing for 2017 - the pre-salt Lula North and Lula South projects and the Campos basin's Tartaruga Verde field. Petrobras expects its Brazilian production to be 2.07m barrels a day in 2017, which would be a slight decline from 2016.
Can Petrobras turn things around? Brazil's place in the post-shale oil landscape is much less certain than it was in the years after the country's first deep-water discoveries, largely because the broader deep-water industry is struggling. While most international majors insist that deep-water oil will be needed to meet future demand growth, few are placing big bets on deep-water projects at $50 oil. If prices remain around that level, expect weak interest in what Brazil offers in 2017.
But if prices tick up, and interest in deep-water projects returns, Brazil will be near the top of the list for investors. The pre-salt wells that have come into production have proved to be the most productive in the world - many pumping more than 30,000 b/d each - which has made returns from the early deep-water projects better than expected. If prices head towards $60/b and the government puts forward convincing pro-investor reforms, 2017 would be the start of Brazil's and Petrobras's recovery.
This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here