RCEM: Views on Energy News

There is a great hype about Brazil's pre-salt oil potential and the impact it will eventually have on the global oil market. Some sources say that it could vault Brazil to seventh place in the world rankings in terms of proven oil reserves behind Saudi Arabia, Venezuela, Iran, Iraq, Kuwait and United Arab Emirates. Others claim that Brazil could emerge as a major oil producer and exporter and that will certainly change the balance of oil distribution in the world. Others, in contrast, see Brazil as an overstated high-risk oil province whose pre-salt oil is extremely challenging and very costly to produce. The reality, as always, is somewhere in between. The author argues that even with Brazil's growing oil reserves and accelerating production, the country could never become a major oil exporter as all the incremental oil production will be needed to fuel the country's economic growth. At best, Brazil could only aspire to remain self-sufficient if its current economic growth continues its surge into the future. And while Brazil's oil wealth will certainly accelerate the country's ascent into the top ranks of the world's economic powers, it will hardly make a dent in the global oil market and the price of oil.

Brazilis the ninth largest energy consumer in the world and the third largest in the Western Hemisphere, behind the United States and Canada.  In 2011 Brazil emerged as the world's sixth largest economy and the sixth largest consumer of oil.  Already the South American continent's powerhouse, Brazil alone accounts for over 40% of the continent's GDP. At a time when economies around the world are struggling, Brazil's economy is forecasted to continue its remarkable growth driven in part by its oil and gas sector which, if realized, would allow it to emerge as a major oil producer.   

In 2007 Brazilian engineers probing some 7,000 metres below the ocean's surface on Brazil's continental shelf, discovered staggering quantities of crude oil estimated at 9 billion barrels (bb) to 15 bb. After drilling scores of test wells, the experts now reckon that the so-called pre-salt reserves could contain an estimated 50 bb-80 bb of oil. 

If all the discovered reserves are proven and added to Brazil's current 14.2 bb reserves, they could vault Brazil to seventh place in the world rankings in terms of proven oil reserves behind Saudi Arabia, Venezuela, Iran, Iraq, Kuwait and United Arab Emirates. This will certainly change the balance of oil distribution in the world. By 2020, Brazil could emerge as the fifth-largest oil producer after Russia, Saudi Arabia, the United States and Iraq.  

In 2009, Brazil became self-sufficient in oil for the first time in its history. By 2020 Brazil's oil production could increase from just above 2 million barrels a day (mbd) today to a projected 3.9 mbd by 2020.  However, if the Brazilian economy continues to grow as fast as is now projected, all the extra 2 mbd of oil expected to be coming from the pre-salt fields by about 2020 will be needed inBrazil.

Still, considerable challenges must still be overcome in order to bring these reserves to fruition. Corrosion will be a serious problem, as the oil contains an average of 12% Carbon dioxide (CO2). When this comes into contact with water, as it inevitably will during the lifetime of wells, it becomes an extremely corrosive acid.

As well as corrosion, ensuring that water crystals contained in the hot crude oil don't freeze and interrupt the flow of oil when it encounters very cold conditions on the sea bed, various insulation materials are being tested to prevent problems there should this occur. The fact that the pre-salt crude contains an above average proportion of paraffin may also prove a problem.

Another challenge is the cost of producing pre-salt oil. It is estimated that production cost from the pre-salt reserves could range from $20-$30 a barrel in comparison with $12-$15/b in the Caspian Sea and $2.0-$2.5 in the Arab Gulf. 

In 2010, Brazilwas the largest oil producer in South America. Brazil's oil production (including ethanol) has risen steadily in recent years from 2.61 mbd in 2009 to an estimated 2.82 mbd in 2012 and is projected to reach 3.00 mbd by 2013 rising to 3.90 mbd by 2020. This could make Brazil one of the largest sources of new, non-OPEC oil supply growth.

But with estimated ultimate reserves of 50bb-80bb, Brazil does not pose a major challenge to the supremacy of the Arab Gulf as a pivotal supplier of oil to world markets. Apart from the limited size of the reserves, Brazil's pre-salt oil is very costly to produce.  

Incremental production from the pre-salt reserves can at the margin contribute to a slight weakening of oil price levels. It is estimated that without the extra oil production from Brazil, oil prices could be as much as $5-$6/b higher by 2020. But with Brazilian oil production, oil prices could be $2-$5/b lower by 2020.

Moreover, with oil demand in Brazil currently growing at 5% per annum and projected to continue growing at this rate well into the 2020s, Brazil may be able to save only 340,000 b/d for export (including ethanol) by 2017 but by 2020 it will revert to being self-sufficient only. Therefore, the country could never become a major oil exporter and could only aspire to remain self-sufficient as its economy continues its surge into the future. 

Nevertheless, Brazil's pre-salt reserves will certainly change the balance of oil distribution in the world and its geopolitics. Thus a two-forked global oil market will emerge whereby oil supplies from the Middle East gravitating to the Asia-Pacific region, while supplies to the Atlantic region projected to come mainly from Canada, Brazil, Russia and Central Asia. This shift will have strategic geopolitical and commercial consequences that could be reflected in the lessening of potential tensions between the two biggest oil importers in the world: the United States andChina.

References

1      Based on author's calculations of the comparative costs of production in theArabGulfarea, the Caspian, the North Sea & theGulf of Mexico.

2      BP Statistical Review of World Energy, June 2011.

3     Brazil's Oil Rush, Newsweek, October 12, 2009, 46-47.

4      Data from the International Energy Agency (IEA).

5      Knight, Patrick, 2010.Brazil's Pre-salt Challenges, Petroleum Review, June issue, 16-17.

6      Malhotra, Aditya, 2012.Brazil's Oil Future: The New Big Kid on the Block, Journal of Energy Security, April issue.

7      Margolis, Mac, 2010. Petrobras's Deepwater Gambit, Newsweek, September issue.

8      Romero, Simon, 2011. Offshore Oil Helps Brazil-lead Boom, New York Times, October, B1-B8.

9      Mitchell, John, 2010. New Oil Axis, the World Today, March.

10    Smith, Michael R, 2008. Deepwater Drilling & Global Oil Production, Petroleum Review, June, p.34.

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