Brazil's oil potential with Opec+ hinges on decision of future players

State-controlled Petrobras operates about 90 per cent of all its output

Capuava oil refinery in Sao Paulo. Brazil is engaging with Opec+ but not committing to output limits. AP

Brazil is the Schrödinger’s Cat of Opec+ – it is both in the group and out of it at the same time. Last week, the South American giant did announce that it had joined. But how exactly it is a member awaits the test of reality.

Brazil is by far the largest oil producer that might realistically have joined the exporters’ expanded group. It pumped 3.5 million barrels per day (bpd) last year. Only the US, Canada, China, Russia and four Opec states did more.

A keen sense of resource nationalism, a history of pushing back against colonial exploitation, and its alignment in the Brics grouping, might dispose Brasilia favourably to Opec+. Its relatively high-cost offshore oil production, and its more limited reserves, would favour joint action to restrain production and prop up prices.

Nevertheless, while announcing the adherence to Opec+, the minister of mines and energy, Alexandre Silveira, told reporters that the country would not be bound by production cuts. The former chief executive of state-controlled Petrobras, which dominates national oil output, Jean Paul Prates, confirmed that, “We would never be part of an organisation that imposes (production) quotas to Brazil, Petrobras is a publicly-traded company and we cannot have quotas.”

In a subtle distinction, Brazil has joined the Charter of Co-operation, providing for dialogue on the market, but not the Declaration of Co-operation, which co-ordinates production levels.

Consultancy Rystad thinks that Brazil will produce about 5 million bpd by the end of the decade, and peak at 5.5 million bpd by 2032, putting it in the global top five. The national energy ministry has a similar view. But both recognise that a relatively modest reserves base will mean a decline after that, unless there are new exploration successes.

Brazil’s oil success came from deepwater finds in the south, first in the Campos Basin, and then in the early 2000s, the famous “pre-salt” in the Santos Basin lying offshore from Rio de Janeiro. But exploration success in recent years has been limited.

Petrobras now pins its longer-term hopes on the north-eastern coast, where the Foz do Amazonas Basin lies along the coast from Guyana and Suriname, site of spectacular oil finds in recent years. But activities here are hampered by environmental opposition. The mouth of the Amazon River has some of the world’s richest biodiversity, and Brazil hosts the UN climate conference, Cop30, in the Amazon rainforest this year.

However, the little-tested Pelotas Basin, to the south of the Santos and running to the maritime border with Uruguay, is the geological twin of exploration hotspot Namibia in south-west Africa. Shell, which is present in Namibia, is looking in the Pelotas Basin too, as are Petrobras, Chevron and China National Offshore Oil Corporation, a major player in Guyana. Pelotas faces less environmental contestation than the north-western basins, and Brazilian geologists think it could hold from 10 to 15 billion barrels, which would almost double national reserves.

So it is understandable that Brazil would pursue a wait-and-see approach to its membership of Opec+. It can benefit from a seat at the table, but not commit to production restrictions before it has a better idea of its future production outlook.

However, Brazil’s production has disappointed before. In 2010, the International Energy Agency (IEA) thought its production would reach 4.4 million bpd by 2020; the reality was barely more than 3 million.

In that year, Petrobras said that its output alone would reach 5.4 million bpd of oil and gas equivalent within a decade, as it raised $70 billion in a share offering. Instead, the level this year will be about 2.8 million barrels of oil equivalent.

Brazilian fields are increasingly mature and require growing efforts to sustain production levels. Petrobras will spend $76 billion over the next five years on its exploration and production business to add gross production of 2.6 million bpd, mostly from its giant Búzios field. But net output will rise by only 0.4 million bpd, after subtracting declines in older fields.

While production last year was expected to rise by 200-300,000 bpd, it eventually declined slightly. Output was hampered by maintenance shutdowns of Búzios, declines of mature fields, and a strike at the environment agency which delayed permits for drilling.

The IEA expects Brazilian output to rise by 190,000 bpd this year, the national petroleum regulator expects growth of 380,000 bpd, while others think output will be about flat. That would in itself make a significant difference to any decisions Opec+ makes this year about relaxing its production cuts.

If Brazil wants to realise its full oil potential, it will need to lean more on players beyond Petrobras, which operates about 90 per cent of all its output. Norway’s state oil company Equinor is leading development of the Bacalhau field this year, while Brazilian independent companies such as Brava Energia and Prio are also growing.

Brasilia will also need to smooth regulation, with its bureaucracy badly understaffed and unable to keep up with the workload. The government is considering new environmental taxes and restricting reinjection of unwanted gas at offshore fields, which could deter investment.

And the membership of Opec+ introduces further uncertainty. For now, it does not seem that Brazilian output will be curbed. But private companies might be concerned about being asked to cut back in future.

However, if Brazil thinks that its output growth will falter anyway, adhering to the Opec+ Declaration of Cooperation could be a smart move. It could secure a generous production target, that does not practically constrain it in the near term. And its membership might help others sustain their production cuts, keeping prices higher and allowing Brazil to gain market share.

The South American country’s both in-and-out status serves it well for now. If it turns up another bonanza like the pre-salt, it will not want Opec+ to hold it back. But eventually it will have to resolve its Opec+ quantum state.