Brazil Country Market
Insights and Opportunities
Oil & Gas Sector
Overview: Brazil ranks 17th in world in terms of proven oil reserves. It is not part of the Organization of Petroleum Exporting Countries (OPEC). The new large oil and gas discoveries (Tupi and Jupiter) that Petrobras made in late 2007 under the pre-salt layer could turn Brazil into a net oil and gas exporter.
Since state-owned Petrobras’ monopoly ended in 1998, over 50 international firms have entered Brazil, with 819 oil blocks awarded during ten oil concession offerings, most recently in December 2008. Petrobras was awarded the majority of these concessions, so most opportunities for US firms are servicing/supplying Petrobras (interested suppliers must register at www.petrobras.com.br - “Suppliers Channel Guide”).
The 2009 estimate for Brazil’s oil and gas equipment and services market is US$ 40 billion with US$ 10.5 billion in globally sourced imported equipment and US$ 6.3 billion coming from the United States.
Opportunities: Importance of Petrobras. Petrobras is Brazil’s largest company with net revenues of US$ 85.3 billion is a publicly traded state-owned energy company ranked among the top 15 oil companies in the world. Currently, Petrobras maintains 109 oil production platforms in Brazil. During 2009 – 2013 timeframe, Petrobras plans to invest US$ 174.4 billion (90% of which is slated for Brazil) to increase production capacity to 3.6 million barrels of oil per day (bpd). The investment breakdown includes: E&P (US$ 104.6 bn, US$ 92 bn of which is dedicated to Brazil E&P); Downstream (US$ 43.4 bn); Gas and energy (US$ 11.8 bn); Petrochemicals (US$ 5.6 bn); Corporate (US$ 3.2 bn); Distribution (US$ 3 bn) and Biofuels (US$ 2.8 bn).
Petrobras and the U.S. Eximbank (ExIm) have been discussing possible increase in Eximbank’s financing of Petrobras’ projects and equipment purchases. U.S. companies can find more information on Eximbank supported projects at http://www.exim.gov/.
In 2008 (January - November), Brazil produced 1.9 million bpd of oil of which 1,855 million bpd originated from Petrobras. About 140,000 barrels of oil equivalent (boe) were exported since Brazilian refineries are not capable of processing all of the heavy oil produced in the country. During the same period, Brazil refined about 1.7 million bpd, 133,000 boe of which were light oil imported to mix with Brazil’s predominantly heavy oil.
Recent Brazilian Petroleum Institute’s estimates show that Brazil has probable reserves of 60 – 80 billion barrels and possible reserves of 20 to 30 billion. Such figures take into account the recent discoveries in Brazil’s pre-salt layer (Tupi, Jupiter, and others). According to 2007 OPEC statistics, Brazil’s proven crude oil reserves reached 12.2 billion barrels.
Petrobras plans to put 11 new oil platforms in operation in 2009. By 2012 another 22 units will explore for oil in Brazil. In 2009, Petrobras plans to tender six new oil production platforms. Petrobras also plans to add 175 vessels to their fleet, including 122 supply ships and 44 very large crude-oil carriers (VLCCs). The tender for the first 24 supply vessels estimated, at US$ 4.5 billion, is currently in progress.
December 2008 statistics show that Brazil has 90 active onshore and offshore drilling rigs, mostly operated by Petrobras. Opportunities in offshore equipment and services include flexible pipes, oil well completion systems, pumps, valves, drill pipes, and undersea services. Onshore E&P best prospects include progressive cavity and sucker rod pumps, polish rods, tri-cone drill bits, packer systems, flow control equipment, compressors, heat exchangers, plant automation, well stimulation, sand control completions, and others.
Devon, Shell, Petrosynergy, Queiroz Galvão, W. Washington, and others produce oil in Brazil, while El Paso, Chevron, Exxon, Statoil/Andarko, Hess, and Repsol YPF are developing offshore and onshore oil production projects. Combined investment by these and other oil players, other than Petrobras, are expected to exceed US$ 20 billion through 2011.
Downstream Overview: Petrobras’ refining capabilities have historically focused on light crude, but offshore production shifts have dramatically increased heavy crude production. Petrobras has reached its heavy crude refining capacity and must now swap heavy crude for light crude abroad. Petrobras has plans to build five refineries in Brazil, one that will also function as a petrochemical unit, and by 2013 they plan to disburse US$ 43.4 billion to the entire refining and supply segments to improve oil product quality, double heavy oil refining capacity, and implement safety and environmental upgrades. Specifically, Petrobras is investing US$ 4.5 billion to produce cleaner 50 ppm diesel. Petrobras is building 12 diesel treatment units to reduce the level of Sulfur. By January 2013, the goal is to produce a more efficient diesel known as S-10 with only 10 ppm of Sulfur. To make the transition to S-10 from S-50, Petrobras will invest US$ 2 billion.
Natural Gas Overview: Natural gas currently accounts for 11% of Brazil’s energy matrix. Natural gas production averaged 19.8 million cubic meters per day from January to November 2008 (only about 11.7 million of which were available for consumption. Petrobras consumes the remaining gas at its refineries, re-injects a portion in its own oil wells to increase their production, and flares about two million cubic meters a year.) New fields are currently under development, and ones in the pre-salt layer that are yet to be developed, are expected to significantly increase Brazil’s natural gas production thus reducing the need to import gas from Bolivia. From January to November 2008, Brazil imported 10.6 million cubic meters from Bolivia.
Additionally, Petrobras has been investing to reduce natural gas flaring at oil platforms and in two liquefied natural gas (LNG) plants in Brazil. To expand the gas pipeline network, Petrobras will build about 4,000 km of new gas pipelines by 2013 with a US$ 3.8 billion investment.
Petrobras, federal and state governments increasingly favor local firms or firms with significant local content. Because local content in Petrobras’ purchases varies from 51% in E&P to 92% downstream, US companies are encouraged to seek local supplier partnerships.
The latest available information on Petrobras’ 2007 procurement shows that about 75% of Petrobras’ direct purchases of goods, equipment, and services, in the amount of US$ 19.4 billion were procured from domestic suppliers.
Possible regulatory changes: Brazil is considering regulatory changes to its oil sector for the purpose of capturing more revenue from the country's significant newfound pre-salt oil reserves. There are two competing proposals under consideration: 1) maintain the current concession model and increase royalties, or 2) nationalize petroleum reserves and use production sharing agreements (PSA) to partner with oil companies to develop them. Both options would yield similar revenues for the government, but political factors will be the driving force behind the decision.
Current concession system and taxation: In the current concession system, foreign companies have rights to the oil in the ground and compensate the government for taking the resources via royalties. Companies that produce oil and gas in Brazil pay a ten percent fixed royalty rate. On top of that, they pay an additional "special participation rate" for large fields ranging between 10-40% of revenue depending on the volume, location, depth and age of the field. State governments levy even more taxes (rates vary by state). In total, Brazil collects between a maximum of 57-62% in oil royalties for large fields. In comparison, in Russia and Kazakhstan the government take is around 70%. Some governments require as much as 80% in royalty fees.
Regardless of the outcome, the global oil industry sees oil exploration in Brazil as a lucrative venture and is eager to get into the pre-salt game; however, many companies fear that they may have to wait two or three years before getting the opportunity to bid on new exploration opportunities since offshore oil lease auctions have been suspended since the pre-salt discoveries were initially confirmed in November 2007.