Background

Brazil is the largest oil producer in South America, the eighth largest global oil producer, eighth largest oil consumer, and has the largest recoverable ultra-deep oil reserves in the world. Brazil’s oil production is predominantly offshore (96.7%), with the National Oil Company (NOC) Petrobras accounting for 73% of Brazil’s oil and gas production.

The oil and gas market has, for years, accounted for most investments in the Brazilian economy, with about 10% of the country’s GDP. Brazil is placed in a leading position for the exploration and production of offshore oil due to owning the prolific pre-salt province, whose oil is of high quality, with equally high productivity of the fields. The International Energy Agency (IEA) highlights the relevance of Brazil, which will become responsible for the production of about 50% of the world’s offshore oil in 2040, or about 5.2 million barrels per day.

Significant energy reforms, frequent oil finds, along with recent and future oil bidding rounds have been attracting International Oil Companies (IOCs) from around the world to bid on opportunities in Brazil. Furthermore, some international companies have also started to show interest and invest in the Brazilian downstream subsector through the acquisition of gas pipeline networks and the construction of Liquified Natural Gas (LNG) terminals. There is an increased potential for international exports of equipment and services, with lower local content requirements.

Brazil´s 2021-2030 Energy Expansion Plan (PDE) forecasts that oil and gas exploration and production (E&P) investments will range from USD $415 billion to USD $454 billion during this period. These figures reflect an evaluation of aggregated investments of all E&P in Brazil, including those from NOC Petrobras.

A survey by Bloomberg New Energy Finance points out that Brazil is expected to attract USD $300 billion in infrastructure investments in the energy sector by 2040, an increase of 189% of its current capacity. Of this total, 90% will come from renewable sources: small and large hydroelectric plants, wind, solar and biomass capture. Many industries are already adapting to this scenario in order to reduce operating costs and generate the least possible environmental impact.

Still, according to Bloomberg New Energy Finance, Brazil, the second largest economy in the Americas, is expected to double its current installed capacity from 157GW to 316GW by 2040. Low-carbon energy sources currently represent 84% of installed capacity, and hydropower, with a total of 102GW is by far the biggest contributor. Although hydropower will remain a critical source until 2040, with 111GW in operation, other technologies may take the lead in terms of growth: solar energy is forecasted to grow by 116GW of installed capacity and wind energy by 16GW. An average of nearly 6GW of renewable energy capacity will be added per year until 2040, more than doubling the share of non-hydro renewables to nearly 50% of installed capacity. In addition, another 52GW of batteries and flexible capacity will be installed by 2050.

The survey also shows that most of the large-scale PV investment will be made before 2035. Small-scale PV dominates investment prospects from the mid-2020s to 2040, where USD $77 billion of investment from homes and businesses will help install more than 100GW of capacity across the country.

Current oil and gas market needs and trends

Upstream

Oil E&P: Brazil is Latin America´s top oil producer, and has surpassed Mexico and Venezuela. The 2020 average oil production was 2.94 million barrels per day according to the Brazilian National Oil and Gas (ANP) data. Brazil’s 2020 natural gas production amounted to 127 million cubic metres per day, up 4.1% in relation to 2019. The domestic oil production growth, especially since 2013, was mainly due to the pre-salt Santos Basin’s high productivity, which relied on oil outputs per well above the global oil industry’s average. This high reservoir productivity has required fewer wells per production system, reducing budgeted costs.

Pre-salt continues to attract most investments, and its production already accounts for more than 60% of the national production. The rapid rise in production was enabled by the aforementioned productivity, but was also supported by high drilling success rates. Likewise, continued investments in new technologies have improved well construction efficiencies, which reduced drilling and completion times. The combination of these factors allowed a 61% fall in well lifting costs from 2014 to 2021 from USD $ 15.3 per barrel to USD $6.66, for non-pre-salt fields, and to about USD $4.35 for pre-salt ones.

The 2020 ANP data shows that Brazil’s proven natural gas reserves reached 338 billion cubic metres, making Brazil rank 33rd in world proven gas reserves. Associated gas currently represents approximately 80% of Brazil’s natural gas production, which is expected to reach its peak production of 183 million cubic metres per day by 2028.

In 2020, on the supply side, domestic gas production accounted for 58%, while imports from Bolivia represented 23%, followed by LNG imports (20%). Common challenges facing the Brazilian gas market include high carbon dioxide content, distances from the offshore gas fields to the coast, limited gas pipeline infrastructure, and the need to boost domestic demand. However, a new Gas Law, approved in April 2021, is expected to gradually unbundle the market thus generating more competition among players and investment in new pipelines.

LNG exports to Brazil: to complement the average domestic natural gas demand of 72.08 million cubic metres per day in 2020, Brazil imported an average of 17.8 million cubic metres per day from Bolivia, and 8.38 million cubic metres per day from LNG through the 5 LNG regasification terminals in operation.

According to the Foreign Trade Office of the Brazilian Ministry of Industry Development, LNG suppliers to Brazil in 2020 included the United States, Angola, Argentina, Nigeria, and Trinidad Tobago. Until Brazil solves its pipeline infrastructure bottlenecks to bring all the pre-salt gas to the market, industry contacts believe there are opportunities for continuous LNG exports to Brazil. The main LNG offtakers will be the existing and new gas fired power plants that provide base load to complement Brazil’s renewable energy supply.

Downstream

Brazilian Constitutional Amendment Number 9 of 1995 broke Petrobras’s monopoly over the downstream sector in favor of a more competitive and open regime. However, refining, import, and export activities have remained almost a monopoly, due mainly to Petrobras’s hold on the Brazilian fuel logistics infrastructure. Competition has been more effectively introduced on the wholesale of oil products, with companies competing with BR Distribuidora’s market share; BR is a former Petrobras subsidiary. In July 2019, and more recently, in mid 2021, in line with the ongoing Petrobras divestment plan, Petrobras sold its shares in BR, hence it is no longer a shareholder; BR has been renamed as VIBRA.

ANP data shows that there are 300 fuel distribution logistics bases spread throughout Brazil.  Data also notes an increase in the number of fuel distributors and resellers in 2020.

In an April 2021 presentation, ANP summarized Brazil´s downstream supplier profile as follows:

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ANP also noted that total domestic sales of oil by-products (gasoline, fuel oil, LPG, aviation gasoline, diesel oil, etc.) amounted to 131.76 billion litres (34.8 billion gallons), a 5.97% decrease from the previous year due to the pandemic. Sales of diesel B (contains 12% of biodiesel) represented 44% of total fuel sold.

ANP data lists 41,673 gas stations in operation in Brazil in 2020. Main resellers of gasoline, diesel oil, ethanol, and vehicular natural gas are VIBRA (holds 27.49% of Brazil´s fuel distribution market);  Raízen;  Ipiranga, and several other smaller fuel distributors.

The sale of lubricants reached 1,323 billion litres (349.5 million gallons)  in 2020. ICONIC (Texaco and Ipiranga) has the largest lubricant market share, followed by VIBRA Energia, COSAN Lubrificantes, Shell, Petronas, and several others.

In 2020, Brazil manufactured a total of 2,020,229 vehicles, a 32% decrease from 2019 due to the pandemic. Brazil´s vehicle matrix in 2020 comprised diesel oil (43.2%); gasoline (22.2%); hydrated ethanol (16.36%); anhydrous ethanol (8.22%); biodiesel (5.61%); and GNV (vehicular natural gas 4.37%). Conversion of gasoline or flexfuel automobiles (e.g. gasoline or ethanol) into vehicular natural gas (GNV) has been growing in Brazil, mainly by taxi and Uber drivers.  The Brazilian Ministry of Mines and Energy is studying the use of GNV for heavy vehicles to gradually replace diesel, in line with climate concerns.

Oil Refineries: ANP data shows that Brazil holds the eighth largest refining complex in Latin America with 19 refineries that processed a total of 1.8 million barrels of oil per day in 2020 of which 1.6 million barrels per day were from domestic oil. Petrobras owns 98% of Brazil’s refining capacity, however, a divestment program is in progress and new players are expected to enter the market in the short term; the Mubadala fund acquired the RLAM refinery in early 2021.

Petrobras plans to retain five of its refineries and invest USD $ 3.7 billion in main projects such as 3 hydrotreatment units (HDTs) and hydrocatalytic cracking systems to increase the S-10 (10 mg of sulphur for each diesel oil kilogram) diesel production in the Gaslub Complex. The Gaslub will also produce more advanced lubricants. A renewable diesel fuel, with 15% less greenhouse gasses (GHG) in comparison to the regular biodiesel, is also under development at selected Petrobras refineries.

LNG: There are 5 LNG terminals in operation (Petrobras owns 3 of them); 3 are in the development stage; and a few others are planned for the coming years. Among the new terminals, the Port of Açu LNG-to-power project, developed by Gas Natural Açu (GNA), is the largest of its kind in South America. 2 natural gas-fired power plants with a combined capacity of 3GW are fed by the LNG import terminal with regasification capacity of 21 million cubic metres per day.  United States company New Fortress Energy leads new LNG regasification terminal projects in Brazil, while United States company Excelerate Energy has recently finalized a long-term lease of 1 of Petrobras owned LNG terminals and associated pipelines, located in Bahia State, with a 20 million cubic metres per day import capacity.

Brazil’s new oil tax

According to EY, exports of petroleum oils and oils obtained from bituminous minerals and crude, classified at position 27.09 of the Mercosur Common Nomenclature (NCM), will be subject to an export tax at a 9.2% rate until 30 June 2023. Since the export tax is an extra fiscal tax, it can be charged immediately.

Although the imposition of an export tax over crude oil exports has generated some controversy and also surprised the market, it is important to note the matter is not new and is already being discussed by the Brazilian National Congress through bill 1,472/2021. Such a bill was approved by the Senate and sent to the Chamber of Deputies for analysis.

The Federal Government has announced that the new export tax on crude oil exports will recover public finances, since it will compensate for the maintenance of the reduced taxation on transactions with fuels. The export tax is expected to generate approximately R$6.6 billion (USD $1.26 billion) in the 4 months it will be in force.

Petrobras’ recent gas finds in the Santos Basin and other agreements

China National Petroleum Corporation (CNPC) and Petrobras, completed their first oil exploration test of a deepwater field (well Gura-1) in Brazil’s Santos basin. The Santos basin, Brazil’s largest offshore sedimentary basin, spans over 350,000 square kilometres. It reaches from Cabo Frio, Rio de Janeiro in the north-east, to Florianopolis, Santa Catarina in the south-west.

According to sources, the well made a significant exploration discovery in November 2021. This confirmed the oil-bearing interval of the field through wireline logging and fluid sampling. The well Gura-1 completed a phase test and achieved high-yield oil flow on 16 October 2022.

After being invited to bid on the project in November 2019, the partnership of Petrobras and CNPC obtained the rights to develop the Aram block in the basin. Petrobras holds 80% of the stakes, while CNPC holds 20%.

The discovery lays the groundwork for further exploration and appraisal by confirming the block’s resource potential and development prospects.

Petrobras also discovered oil in the co-participated area of Sépia offshore Brazil last month. According to TotalEnergies, Petrobras’ partner in the area, the well was dug at a water depth of around 2,200 metres. The net thickness of the well’s oil column is one of the thickest ever measured in Brazil.

Petrobras and Shell

A non-binding agreement between Petrobras and Shell focuses on identifying new upstream business, more specifically in potential exploration opportunities in and beyond the pre-salt, including the equatorial margin. It also contemplates energy transition efforts, with an emphasis on renewables and carbon capture, utilization and storage.

Petrobras and Shell confirmed they would work together to seek potential exploration and production opportunities; and share experience and best practices on reducing carbon emissions and for social and environmental initiatives.

The Brazilian energy giant noted the partnership shows that both companies appreciate there are strategic synergies in E&P projects that include decarbonisation initiatives, which are important in transitioning to a low-carbon economy, and it reinforces their intention to seek new opportunities together in Brazil and elsewhere.

Renewables in Brazil

Brazil occupies a prominent position in the renewable energy sector. According to data from the Ministry of Mines and Energy, renewable sources already account for 48.4% of the country’s energy matrix, triple the global percentage. This can be explained by the geographic characteristics of Brazil and the abundance of the country’s natural resources.

Investment in solar energy, for example, grew 92% in 2019 in the national territory, while the generation of wind energy grew 15.5%. Together, these numbers represent 50% of the total increase in the share of renewable sources in the Brazilian energy matrix. These indicators are part of the 2020 Brazilian Energetic Review, whose data source is the National Energy Balance for the base year (in this case, 2019), produced by the Energy Research Company (EPE), in partnership with the Ministry of Mines and Energy, companies in the sector and other agents in the energy sector.

The aforementioned PDE, also prepared by EPE, indicates that investment in renewable energy sources will have an average increase of 5.1% per year in the country. Other important EPE indicators suggest a growth in wind energy production from 1,000MW to 16,000MW over 2021. The generation of energy from sugarcane-derived products, such as ethanol and bagasse, also tends to increase, something around 8.1% per year. The plan also foresees an increase in the installed capacity of hydroelectric energy, which is expected to grow 56% over the next 10 years.

The perfect time to invest in Brazilian renewables

In 2021 a record number of new solar projects were registered with the National Electric Energy Agency (ANEEL). But the new distributed generation legislation, currently awaiting ratification, will see a new rush of solar projects as developers seek to avoid gradual new charges for the use of transmission networks through the Distribution System Usage Tariffs (TUSD).

The legislation proposes a 10-year transition from the current model, with projects already connected to the grid authorized to operate according to existing rules until 2045. The new legislation will see developers moving quickly with projects in an effort to overcome higher tariffs so they can offer cheaper Power Purchase Agreements (PPAs) to outside buyers for as long as possible. In 2021, the installed solar capacity in Brazil reached 12GW and, before the changes were outlined, in September 2020, the portfolio of renewable projects registered under development was 8.7GW.

In April 2021, at a United States-sponsored climate summit, Brazil pledged to achieve zero carbon emissions by 2050 (commitment reinforced in November during the 26th United Nations Conference on Climate Change), a 10-year forecast earlier than previously planned.

Brazil to host oil and gas, and renewable energy events in 2023

IN-VR, the internationally renowned energy promotion and consulting firm, will be hosting 2 Brazil-related events during 2023, both highlighting the country’s potential and available opportunities as described above.

On 1-2 June 2023, the 3rd Brazil Energy Summit will take place in Rio de Janeiro, as a continuation to a very successful 2022 event, touching base on opportunities for E&P and service companies, as well as licensing rounds, new legislation and regulations, among other oil and gas-related topics. Also, IN-VR will be hosting the 2nd Brazil Green Energy Summit later during the year in order to cover new projects and opportunities in renewables and other clean energies, as well as green technologies necessary in the energy sector to reach a successful energy transition.

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