Brazil may reap geopolitical uncertainty reward
Investor interest in the country’s oil sector should grow, particularly given challenges elsewhere
There can be no argument that Brazil’s pre-salt oil province is a world class asset—the play has the best deep-water reservoirs in the world in terms of well productivity, high success rates and scalability.
Production out of the pre-salt has risen fast. In August, state-owned oil and gas firm Petrobras achieved daily and monthly production records of over 3mn bl/d. Today, the pre-salt is responsible for around 60pc of total Brazilian crude production.
Petrobras is also aiming to improve its attractiveness to investors—with an aggressive divestment strategy to exit non-core activities and reduce its monumental debt profile.
Nor do the results of the country’s dual pre-salt bidding rounds held in November—including the highly anticipated Transfer of Rights surplus auction—mean that interest in Brazil’s upstream has necessarily diminished. Two-thirds of the government’s signing bonus target was achieved, raising a total of $17.5bn. And the state can re-offer areas that failed to attract bids in the future, under the same or modified conditions.
Brazil also has the advantage of being one of the only investment sows in Latin America. Mexico has turned inward again, while the mess in Venezuela looks unlikely to be solved any time soon. In other smaller hydrocarbon provinces, Ecuador, Chile and Bolivia—where stalwart president Evo Morales was unseated—have been wracked with protests.
Political instability deters investment, particularly in the hydrocarbon sector. And, globally, investment options have narrowed in recent times. But, on the other hand, the combination of political authoritarianism and free market economics is hardly new in Latin America.
The development of the US shale oil industry has had a seismic impact on the global market, ushering in an extended period of lower oil prices and hoovering up a significant portion of investment dollars. Investor appetite may now be waning—potentially good news for Brazil—but another legacy of the shale boom will be longer-lasting, namely the removal of 5mn bl/d of US import demand and the reshaping of the global oil import order.
China is now the second largest consumer of crude and the hungriest for international supply—importing around 60pc of global seaborne barrels. The volume of oil imported by China now influences the crude price at least as much as Opec+ decisions on production cuts, and is structurally more important than one-off shocks such as the drone attacks on Saudi Arabian oil infrastructure.
China’s desire to ensure greater supply security of supply was evident in Brazil’s November bidding rounds. Two of China’s state-owned ‘big three’, Cnooc and CNPC, through its CNODC subsidiary, both took a 5pc stake each in the Buzios field—the largest available in the Transfer of Rights surplus auction. CNODC also won a 20pc share in the pre-salt Aram block—which holds 73pc of the total estimated potential reserves in the 6th pre-salt bidding round.
China has been increasingly growing its strategic position in Brazil. Prior to the auction, CNPC and Cnooc each held 10pc stakes in the Libra/Mero fields, while CNPC is also a 20pc shareholder in the $14bn Comperj refining project in Rio de Janeiro.
And there are not that many alternative options for China to secure access to substantial volumes of crude in a relatively stable political environment. In Europe, Norway is expensive to enter, prohibitively so for most players without deep in-country experience, and, while there may still be sizeable discoveries to make, there are also plenty of dry holes.
The UK continental shelf (UKCS) is enjoying something of a renaissance, and both Cnooc and fellow ‘big three’ firm Sinopec have presences there. But, while there is more affordable access to assets, most new UKCS finds are small incremental discoveries close to existing infrastructure.
China has been looking to increase its influence in the Middle East, from where it buys substantial volumes of crude. But no Middle Eastern nation with international-scale reserves is keen to give third-party nations ownership of barrels. Even international ambitions for Saudi Aramco’s record-breaking IPO were substantially scaled back. And geopolitical tensions also wrack the region, exacerbated by the US’ more hands-off approach in recent years.
Therefore, Brazil can be seen as one of the better global options for stability and transparency and an attractive option for international investors—particularly the deep-water assets in the Santos basin.
The Brazilian government’s liberal agenda is a further positive. For now, its upstream policy remains focused on the Transfer of Rights surplus crude, but there are planned initiatives to capitalise on other promising areas, such as the country’s onshore potential.
Fernanda Delgado is a senior researcher at Brazilian think-tank FGV Energia