While the Brazilian economy struggles to get back on track after an extremely difficult decade, its hydrocarbon wealth continues to attract international interest. State owned Petrobras dominates the upstream and refining sectors but has been forced to sanction foreign investment because of its own financial difficulties. At the same time, Brazil’s engineering giants have been blocked from bidding for some contracts, providing opportunities that may previously have been closed off.
China National Offshore Oil Corporation (CNOOC) was one of the winners in Brazil’s latest oil and gas licensing round, the results of which were announced on 28 September. BP was awarded the Pau Brasil block in the Santos basin with a 50% stake, alongside partners CNOOC (30%) and Colombia’s Ecopetrol (20%). The world’s biggest listed oil companies were heavily involved in the auction, with BP, Shell, Chevron and ExxonMobil all securing acreage. The four blocks raised 6.82 billion reais ($1.71 billion) for the government in signature fees and other payments, although much more will be paid in royalties through actual production.
Chinese companies have been near the front of the queue of those interested in entering what is the second biggest energy sector in the Western Hemisphere. Brazil is now the fifth biggest oil exporter to China, with average shipments of 657,000 b/d in the first quarter of 2018. Total Brazilian liquid hydrocarbon production is expected to rise from 3.3 million b/d this year to 3.5 million b/d by the second half of next year, although condensates and natural gas liquids make a big contribution to this figure. Government officials have suggested that 5 million b/d could be possible by 2027.
Brazil is keen to take advantage of the growing US-Chinese trade war, including the imposition of tariffs on each other’s crude oil exports. Petrobras hopes to begin marketing medium-sweet crude from its new Buzios field in the Santos Basin to China in the near future. It contains relatively little sulphur and so will require less refining. First oil came in April but production is due to be steadily ramped up to 750,000 b/d within three years.
This could provide additional supplies for those buyers that prefer to import crude over refined petroleum products, as Petrobras has opted to refine more of its crude production over the past two years. The company produced 2.03 million b/d in June, but crude exports were just 696,000 b/d, down a massive 53.8% on the same month in 2017.
A Petrobras spokesperson said: “Petrobras’ oil export curve is increasing and China is currently the company’s main market. With [Chinese] refineries’ growing interest in buying oil directly from producers … Petrobras will grow its presence with these refiners.” As a result of deregulation, Chinese private sector refineries, most of which are located in Shandong Province, are now allowed to import their own crude oil. Brazil overtook Angola as the biggest exporter of crude oil to independent Chinese refineries in August, shipping 1.21 million tonnes to 36 customers over the month.
China National Petroleum Corporation (CNPC) sign with Petrobras an agreement over completing the development of one of the refineries at the Rio de Janeiro Petrochemical Complex (Comperj). Work on the project as a whole was suspended in 2015 as it became caught up in the corruption hurricane that hit the country. Contractors on the project have been accused of bribing Petrobras officials to gain contracts but then submitting inflated bids and expenses claims. The venture risks becoming Brazil’s biggest ever white elephant if at least the most advanced elements of it are not completed.
Comperj comprise seven separate plants, including two refineries. The reasoning behind the scheme was sound enough. While Brazil was an oil producer of global importance, particularly since improvements in deepwater technology had enabled the commercial development of reserves in the Campos Basin, it was felt that the country was not adding enough value to its production. Even if domestic processing would generate little profit, it could create hundreds of thousands of jobs, while bringing oil, gas and gas liquids onshore that could be used in a variety of other industrial processes.
Petrobras appears to have spent $14 billion on the project to date and has – apparently permanently – shelved some of the project’s elements, but has been keen find a foreign partner to complete one of the refineries. The refinery in question would have production capacity of 165,000 b/d and in 2016 the parastatal estimated that it would take at least another $2 billion to complete its construction. It is estimated to be 80% complete.
The two companies have already signed a preliminary deal on Chinese investment but it is proving more difficult to secure a binding agreement. Some reports suggest that CNPC will invest in the project in return for a production share from the refinery or equity in offshore fields. The refinery could be used to process the heavy oil produced on the Marlim, Voador, Marlim Leste and Marlim Sul fields, on which production has halved over the past eight years.
CNPC and Petrobras signed a wide ranging cooperation agreement last year and already work together in operating Brazil’s biggest oil field, the offshore Libra structure. In addition, in 2016 Petronas renewed its $10 billion credit line with China Development Bank, which is guaranteed by Brazilian oil exports.
Petrobras had hoped to sell off four of its older refineries but its plans were blocked by the Supreme Court in July on the grounds that Congress needs to approve the privatisation of any parastatals. The policy position of the incoming president could decide whether the privatisation plans are accepted. Petrobras currently enjoys a virtual monopoly of the Brazilian refining industry, so selling off the plants could inject some much needed competition into the market.
The refining sell-offs are part of Petrobras’ wider divestiture plans as it seeks to rebalance its finances and concentrate on its core operations, following the twin crises of Operation Carwash and the recession. The company had hoped to raise $21 billion through its divestiture programme in financial year 2017-18 but actually raised just $4.8 billion.
Chinese companies have begun to secure a wide variety of sophisticated engineering contracts from the Brazilian oil industry. In May, CNOOC delivered the first floating production storage and offloading (FPSO) vessel ever completely assembled in China to Petrobras. FPSOs are used to produce oil in offshore areas where the water is too deep to allow traditional platforms fixed to the seabed to operate. Production from a number of different wells can be tied back to the giant vessels, which store oil and gas for offloading to tankers.
The FPSO, named P67, is being deployed in the Santos Basin and has processing capacity of 150,000 b/d plus a relatively small volume of gas. Equity in blocks in the basin is now held by Chinese firms including CNOOC, China Petrochemical Corporation and CNPC.
In March, Shandong Kerui Petroleum Equipment and Brazilian engineering company Metodo Potencial signed a deal with Petrobras to build a gas treatment plant at Itaboraí, 30km outside Rio, at a cost of $600 million. The contract to build the plant, which will process associated gas produced on new fields in the Santos Basin, was awarded under the first Petrobras tender to be completed since 2014 because of the corruption crisis. Brazilian firms implicated in Operation Carwash were blocked from bidding. China’s ambassador in Brazil, Li Jinzhang, praised the private Chinese company’s “enterprising spirit and relentless efforts in Brazil and represents the important achievements of Chinese know-how entering Brazil”.
It remains to be seen what impact the 7 October Brazilian presidential election will have on the domestic oil and gas industry. The country is still mired in its worst ever recession, with unemployment standing at 13 million, so whoever wins the poll is likely to promote greater investment. Moreover, given the role of corruption within state owned companies in the economic downturn, it seems unlikely that foreign investors will be deterred, whatever the rhetoric from some of the candidates.
Some left wing candidates have proposed slowing down the process of awarding upstream concessions for offshore acreage, while the right wing favourite, Jair Bolsonaro, has suggested that Petrobras should be privatised to allow greater competition. The state owned company still enjoys many privileges, including a minimum 30% stake in any block in which it is interested. Possibly the most likely left wing candidate to contest a run-off with Bolsonaro scheduled for 28 October, Fernando Haddad, has promised to “recover the pre-salt to serve the future of the Brazilian people, not the interests of international companies”.
The four pre-salt blocks on offer in the September auction were the first on which Petrobras had not exercised its right to take a 30% stake. Petrobras began exploration of the pre-salt oil reserves, which lie below a 2km thick layer of salt, in 2006 and originally enjoyed a production monopoly on them. However, foreign firms were invited to take part when it became clear that the experience gained by the oil majors in developing similar fields elsewhere in the world would be crucial.
Whatever the outcome of the election, it seems likely that the role of Chinese companies in the Brazilian oil and gas sector will increase over the next few years. Speaking at the Rio Oil & Gas conference in September, Fareed Mohamedi, managing director at Chinese consultancy SIA Energy, said: “China needs stable and reliable oil supply, and Brazil has rising and reliable oil supplies over the long term horizon. In addition, it is not a failing oil producing state and it is outside the Middle East.”