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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Oil Investors Are Skeptical Of Brazil’s New President

  • Investors are worried that Brazilian President Luis Inacio Lula da Silva could upend the country’s oil industry. 
  • A December vote by Brazil’s congress approving a plan to make it easier for politicians to take roles at state-run businesses caused the shares of Petrobras to plunge.
  • While the fears are justified, there are no signs that President Lula has any major changes up his sleeve, at least for now. 

Former president and leftist candidate Luis Inacio Lula da Silva emerged victorious from Brazil’s hotly contested October 2022 presidential election. Populist hard-right president Jair Bolsonaro’s tenure as the leader of Latin America’s largest democracy and oil producer, which was mired in controversy, ended after a single term. The return of Lula and his leftist Workers Party, known by its initials in Portuguese as PT, potentially ushers in another era of increased state involvement in Brazil’s oil industry and exploitation of natural resources in Latin America’s largest economy. It was wide-ranging corruption within state-controlled oil company Petrobras at the core, which brought down Lula’s handpicked successor, president Dilma Rousseff, who was impeached by Brazil’s senate in 2016 and removed from office. There are fears Lula’s return to office will see heavy-handed government intervention in the hydrocarbon sector and a return to the policies that led to cost overruns, mismanagement and endemic corruption at the national oil company Petrobras. 

It was a series of pro-business administrations after Rousseff’s removal from office which was responsible for rebuilding a shattered Petrobas, with the company emerging as a leading global energy supermajor. That, coupled with major regulatory reform, gave private oil companies a greater share of energy projects and was responsible for reinvigorating Brazil’s massive offshore oil boom. There are fears Lula will increase taxes and state control of the hydrocarbon sector. A December 2022 vote by Brazil’s congress approving a plan to make it easier for politicians to take roles at state run businesses roiled financial markets, causing the shares of Petrobras to plunge. It once again raises the specter of the potential for heavy-handed government intervention in various Brazilian government firms impacting corporate governance and business strategy. A return to the politicized and heavily regulated operating environment that existed prior to Rousseff’s dismissal from office will once again allow corruption to flourish while deterring foreign energy investment, thereby roiling Brazil’s offshore oil boom. 

There are some analysts, however, who believe that despite the risks posed by Lula’s leftist administration little will likely change with his government expected to honor existing contracts and the greater role now played by private energy companies in Brazil’s offshore oil industry. Even the uncertainties created by former president Bolsonaro’s intervention in Petrobras’ operations and the elections have had little long-lasting material impact on Brazil’s hydrocarbon sector. If that is the eventual outcome then energy investment and production, which has become an important economic driver, will continue to grow. 


Recent data from Brazil’s industry regulator (Portuguese) the Agency for Petroleum, Natural Gas and Biofuels (ANP-Portuguese initials) shows hydrocarbon production for October 2022 hit a new record of 4.18 million barrels of oil equivalent per day. That is just over 3% greater than the previous record of 4.05 million barrels daily recorded for September 2022 and a notable 16% higher compared to the same period a year earlier. All-important oil output for the month was 3.2 million barrels per day or 77% of the total hydrocarbon production. That volume was 3% higher than a month earlier and a very impressive 17% greater than in October 2021, when oil also comprised 77% of Brazil’s hydrocarbon output. 

It is growing investment in Brazil’s vast pre-salt oilfields which is driving that growth. For October 2022, pre-salt output reached 3.14 million barrels daily, thereby accounting for 75% of total hydrocarbon production, which is a healthy 4.8% increase month over month and a whopping 19% higher than a year earlier. The development of Brazil’s offshore pre-salt oilfields is key to higher petroleum production. While the country’s three main pre-salt fields, Tupi, Iracema and Sapinhoá, have matured and now entered their decline phase, there is still considerable volumes of oil to be extracted. According to industry consultancy Wood Mackenzie the three fields have a combined volume of original oil in place of 24 billion barrels with only around 10% of that recovered thus far, highlighting that there is still considerable value to be extracted. It is the national oil company Petrobras, 37% owned by the federal government in Brasilia, which is ideally positioned to continue developing Brazil’s pre-salt oil basins, the most important of which is the Santos Basin. 

Petrobras plans to invest $78 billion from 2023 to 2027 in its operations, with 83% of that budget earmarked for spending on exploration and production activities. The company’s pre-salt assets in the Santos Basin will receive capital expenditures of $38 billion over that period. As a result of that considerable investment, Petrobras anticipates total hydrocarbon output will hit 3.1 million barrels of oil equivalent per day by 2026, with oil production being 2.5 million barrels per day. The Buzios oilfield, in the Santos Basin, is an important driver of pre-salt production growth. The field came online in April 2018 with oil production steadily rising. While October 2022 output declined since hitting a record 611,806 barrels per day for June 2022, it was still a respectable 574,105 barrels per day that month. This represents a healthy 7% increase month over month and is an impressive 23% greater than for October 2021. 

Substantial capital is being invested in the Buzios field, which will continue to drive significant production growth. This is especially important because the medium sweet oil produced from Brazil’s pre-salt fields has become popular in China, which is the world’s second-largest oil consumer. Petrobras, the operator of Buzios, has four floating production storage and offloading (FPSO) vessels running in the field, with another four under construction and two more contracted to be built. The final 10th vessel to arrive in Buzios is expected to be complete and come online during 2026. As those six additional FPSOs commence operations, Buzios’ oil production will expand at a notable clip. A subsidiary of Chinese government-controlled China National Offshore Oil Corp, known as CNOOC, paid Petrobras $1.9 billion in November 2022 to double its stake in the field to 10%. This leaves Brazil’s national oil company with an 85% stake and the remaining 5% is held by another Beijing-controlled entity China National Oil and Gas Exploration and Development Corp.

Despite very real fears that Lula’s election as president could upend reforms undertaken to Brazil’s oil industry, there are unlikely to be any major material changes. The oil boom underway in Latin America’s largest economy is an important growth driver for a country that is expected to experience some of the strongest oil production growth among non-OPEC countries. It is anticipated that Brazil will become a top-5 oil exporter pumping an average of 5.3 million barrels of oil equivalent per day by 2030. This makes Brazil’s hydrocarbon sector an important economic driver, with the country experiencing tepid GDP growth over the last decade, with it only rising above 3% during 2021, when the economy was recovering from the pandemic, for the first time since 2013. Various Brazilian lawmakers and ministers have made it clear that Lula is not seeking to change the existing State-owned Enterprise Law. He is not expected to make any radical changes to existing contracts and legislation, and Lula’s commitment to fiscal responsibility makes it imperative that Brazil’s hydrocarbon sector is not upended. 

By Matthew Smith for Oilprice.com


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