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Brazil Emerges As A Threat To OPEC, But Must Reform Its Oil Development Model

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Includes: PBR
by: Robert Boslego
Robert Boslego
Portfolio strategy, oil & gas, medium-term horizon
Summary

Production of crude + liquids up 480,000 b/d year-over-year.

Another increase of 460,000 b/d projected by end of 2021.

Saudi Arabia + OPEC has invited Brazil to join.

But its commitment to free markets rules that out.

TOR auction a disaster, must reform if want IOCs to develop offshore fields.

After years of disappointments, Brazil’s offshore production potential is scaling-up. Production has climbed about 300,000 b/d and total liquids have increased by 480,000 b/d year-over-year in August to a record 3.1 million barrels per day ((mmbd)), an all-time high, with crude oil rising by 220,000 b/d in August. The IEA expects Brazilian output to rise to 3.22 million b/d by the end of 2019, and the South American country is expected to increase output by another 460,000 b/d by the end of 2021.

Brazil Mines and Energy Minister Bento Albuquerque said on Wednesday that the country could produce 7 mmbd. Pre-salt reserves are forecast to drive oil production to that level by 2030.

OPEC’s Invitation

First oil is expected from offshore Guyana in December. And PDVSA, the national oil company of Venezuela, has recently budgeted a rebound in its oil production to 1.2 mmbd in 2020. That is almost double recent production estimates.

These developments in South America come at a time when the demand for OPEC oil in 2020 is expected to drop further. And so it comes as no surprise that Saudi Arabia invited Brazil to join OPEC when President Bolsonaro recently attended the Future Investment Initiative Conference in Riyadh.

Bolsonaro said, “I personally would like Brazil to be a member of OPEC, the potential is there.”

OPEC's Mohammad Barkindo said Brazil would be "most welcome" in the producer group. "Brazil is a very important producer. They deserve to have a seat within OPEC as a major producer and exporter," Barkindo said at a press briefing in Vienna.

Bolsonaro reportedly surprised local oil industry officials. He has a history of making off-the-cuff comments in public appearances that have caused rifts with members of his own administration.

Economy Minister Paulo Guedes, who leads a plan to open Brazil’s economy, said, “We believe in democracy, market economies, cooperation and global integration. Our concepts as a part of Western, liberal democracies would never be to use cartels or strengthen cartels as a way to corner democracies that depend on oil.”

Offshore Auctions

The massive transfer-of-rights (TOR) auction was held on November 6 and the 6th production sharing round took place on November 7. The results were a total disaster.

According to Guedes, “We undertook an enormous challenge to, in the end, sell to ourselves. We spent five years talking about it. We made a spectacular effort, studying, debating — and in the end it was a no-show.”

State-run Petroleo Brasileiro SA (NYSE: PBR), also known as Petrobras, has long dominated Brazil’s upstream oil sector, having been founded in 1953. It had a privileged position in the bidding system and won rights to produce in fields in which it already operates.

Conclusions

Brazil is starting to live up to its potential in the offshore production. And its recent and projected growth is a negative for Aramco’s IPO and the OPEC+ efforts to limit world supplies. But the country is committed to free markets, and there is little risk that it will suddenly join OPEC and limit its production.

The TOR auction should have taught the country its lesson. It does have attractive offshore “pre-salt” fields, but if it wants to attract the international oil companies to develop them, it must reform its model for development. If it makes its oil industry more competitive, it should see its production growth significantly in the future, another headache for OPEC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.