BIG HIT IN BRAZIL?
Oil giants are betting on exploration in South American waters.
If an energy transition is underway around the world, it hasn’t reached the streets of Ilha da Conceicao, the working-class district at the heart of Rio de Janeiro’s oil revival.
There, buses and trucks are piling into Baker Hughes Co.’s shipyard, where the energy services giant is churning out hundreds of kilometers of oil and gas piping. One street over, Exxon Mobil Corp. is loading supplies to explore the country's biggest offshore oil fields. Royal Dutch Shell and TotalEnergies have similar plans for later this year.
The scene points to an uncomfortable truth: First-world politicians may be trying to wean the globe off fossil fuels, but in cash-starved, resourcerich nations like Brazil, oil remains king. Outside of the U.S. and OPEC, Brazil is set to add more crude production through 2026 than any other country. Last year, while the rest of the world was throttling back on oil production in the throes of the pandemic, Brazil was one of the few that raised output, adding more than any other non-OPEC country apart from Norway.
It wants to double crude output by 2030 to become the world’s fifth-largest exporter, and even if it doesn't hit that target, low-cost oil plays have positioned the country well to emerge as one of the world's last holdouts in the energy transition.
In 10 years time, oil majors may stop pursuing massive expansion projects, said Schreiner Parker, the vice president for Latin America at consultancy Rystad Energy.
But in the meantime they need to secure supplies that can last into the 2040s with consumption still climbing, especially in China.
So to see what’s happening in Brazil now: “It’s almost like the last hurrah,” Parker said.
Brazil is the most recent place on Earth where oil majors spent billions on exploration licenses before COVID crippled the world economy and sent prices crashing. The cash already committed means that even European giants TotalEnergies, Equinor and Shell, which have aggressive carbon reduction plans, are proceeding with drilling.
On top of that, offshore fields in Brazil, unlike U.S. shale, have a longer production life, making them more cost effective. Output per well also dwarfs deep-water fields in Nigeria, the Gulf of Mexico and the North Sea, adding to resiliency in times of lower prices.
President Jair Bolsonaro, a former military man who favors industry and has been dismissive of climate concerns, is opening Brazil's oil industry even wider to outside capital. The government is offering additional offshore licenses later this year under more attractive terms than before the pandemic.
All this makes the South Atlantic a safe haven of sorts for an industry increasingly on the run from weakening economics and more aggressive climate policies elsewhere.
“All the major companies are getting ready to drill,” said Roberto Monteiro, the chief executive officer of Petro Rio SA, the Brazilian oil independent that sold $600 million in bonds in June to finance an offshore drilling program.
“The action is here.”
To be sure, Brazil’s oil industry is nothing like a decade ago when expats from Houston to Oslo filled Rio’s exclusive clubs and beachfront highrises. Investments from Petroleo Brasileiro, or Petrobras as the Brazilian state oil company is known, are only a fraction of the $40 billion a year it spent during the boom years.
It’s an interesting twist to see this fossil fuel push in a nation that was once a leader in green energy. Brazil had built a hydroelectric industry before it even started tapping offshore fields in the 1970s, and dams still provide more than 60 percent of the country’s electricity. But this has left the entire economy exposed to dam-crippling droughts, which have become more intense and prolonged in recent years amid climate change. That’s pushed the country to expand thermal power plants to provide greater security to the grid.
Meanwhile, an expansion of crude production will spur more exports to hungry consumers in Asia.
Latin America has traditionally relied on commodity exports to help boost local economies, and Brazil is no exception. That’s part of why crude expansion doesn’t get met with the same negative view that can be encountered in other parts of the world.
For Bento Albuquerque, Brazil's energy minister, the energy transition is a wake up call to find as much oil as possible before it starts getting phased out, even though the country will simultaneously pursue biofuels and look to reduce emissions from oil and gas operations to meet its climate targets. “There is no date for when oil loses its importance, but evidently within 30 years, oil won't have the importance it has today,” Albuquerque said. adding that's why it’s important for Brazil to take advantage of its position now while it still can.
“The realities are different when you talk about the United States, Europe and other developed countries,” he said. “Brazil is still a developing country with a large abundance of natural resources.”
Even if ongoing exploration efforts fail, Petrobras has already found enough oil to keep growing for most of this decade. A giant floating oil factory currently en route to one of those fields, Sepia, is set to start pumping in August. As many as 15 floating, production, storage and offloading vessels, including the Carioca that just left a shipyard in Rio state, will come on line in the next five years, according to Rystad.
“There are more new hires all the time,” said Brenda Siqueira, a 25-year-old contractor wearing the tell-tale uniform of an oil industry worker. “2020 and 2021 have been excellent years for us,”