Will COVID Derail The Worlds Hottest Offshore Oil Boom? – Yahoo Finance

During a difficult 2020, Brazils hydrocarbon sector demonstrated its resilience in the face of a price crash and the COVID-19 pandemic. Even those events along with heightened geopolitical risks and domestic instability did little to curb Brazils oil boom. For 2020, Brazils overall hydrocarbon output (Portuguese) rose 5.5% year over year to a record 3.7 million barrels of oil equivalent daily. This, according to Brazils hydrocarbon regulator, the National Agency of Petroleum, Natural Gas and Biofuels (ANH Portuguese initials) was almost 53% higher than in 2010. Crude oil production for 2020 averaged 2.9 million barrels per day or 43% higher than the 2 million barrels per day pumped on average during 2010. That notable increase was driven by the ongoing expansion of Brazils prolific offshore pre-salt crude oil production, which for 2020 grew by an impressive 18% year over year to just under 2.6 million barrels daily.

The scale of Brazils massive offshore oil boom is underscored by how rapidly petroleum production has grown in roughly a decade. National oil company Petrobras renewed focus on expanding its pre-salt oilfields was responsible for this spectacular growth. This occurred at a time when weaker oil prices and the pandemic were causing crude oil production in most Latin American countries to decline sharply. It was Chinas insatiable demand for crude oil coupled with the introduction of IMO2020 in January 2021, significantly reducing the sulfur content of maritime fuel, that caused demand for Brazils sweet medium crude oil grades to soar. In a challenging year where many oil companies saw earnings plunge, Petrobras delivered a $1.1 billion net profit.

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Production is poised to continue growing, although there are genuine fears that heightened political turmoil and an ever-escalating pandemic could derail Brazils oil boom. The latest numbers concerning the COVID-19 pandemic do not look good for Brazil. Latin Americas largest economy is now one of the worlds worst-affected countries, ranked third for its number of cases and second for its number of deaths. The rising intensity of the pandemic in Brazil is threatening oil industry operations. According to Reuters, there has been a spike in cases among offshore oil workers. Petrobras, late last month, limited operations at its Marlim Sul oilfield in the Campos Basin after a COVID outbreak on one of its floating storage and offloading vessels. That will temporarily reduce production from the field. A surge of COVID cases among oil industry workers has triggered a round of work stoppages and strikes impacting refineries and other operations. There are valid concerns that Brazils petroleum production could decline because of a sharp uptick in the volume of COVID cases among the petroleum industry workforce.

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President Bolsonaros spat with Petrobras CEO Roberto Castello Branco over fuel prices, which saw him replaced by former army general Joaquim Silva e Luna, unnerved markets causing the national oil companys stock to plummet. This event sparked fears of heavy-handed government meddling in Petrobras operations and that Lunas lack of industry experience will weigh on the national oil companys performance. That development, along with the worsening pandemic in Brazil, will certainly be accounted for by foreign energy companies considering whether to invest in the Latin American countrys vast offshore oil industry. The fallout from that event, the resultant political turmoil, and a worsening pandemic is causing investors to balk at a range of business deals across Brazil. A recent Reuters article indicates that this is weighing heavily on initial public offerings of Brazilian companies with some bankers indicating that up to half of the IPOs scheduled for 2021 will not go ahead.

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The economic fallout will not stop there. Prior to Bolsonaros dismissal of Branco, Brazils petroleum industry was, according to the ANH, expected to attract considerable investment of around $13 billion for exploration and production activity during 2021. It was estimated that $1.2 billion alone, which represents an impressive 20% increase year over year, would be spent on oil well services, with $1 billion of that amount being spent on offshore drilling and development activities for an estimated 70 wells. Such significant investment will drive higher hydrocarbon production, with it estimated that Brazils 2021 hydrocarbon output will exceed an average of 3.9 million barrels per day. Annual crude oil production is expected to be just shy of 3.2 million barrels per day, with just over three million being produced offshore.

There are mounting major headwinds threatening Brazils oil boom. These include a combination of ongoing political turmoil, triggered by Bolsonaros intervention in the operations of Petrobras, a rapidly riding COVID-19 case count, and volatile oil prices which all could cause investment in the energy sector to fall. If that occurs, it will impact Brazils economically important crude oil production, exploration, and oilfield development activities. This is all occurring after it had already been identified that further petroleum industry reforms were required in Brazil if it is to remain one of the worlds top destinations for offshore energy investment. There is also the threat posed by Irans potential return to global energy markets. China, which last year was a top buyer of Brazilian crude oil seeing the Latin American country become its fourth-largest supplier, is importing large quantities of Iranian crude oil, despite strict U.S. sanctions. Reuters recently demonstrated that this led to a sharp decline in demand for Brazilian crude oil cargoes because Irans were selling for a $6 to $7 per barrel discount to oil source from Brazil. If the Biden White House chooses to lift or ease sanctions against Iran, China will continue its buying spree leading to a sharp decline in Asian demand for Brazilian crude oil. At one point Brazil was poised to pressure OPECs attempts to control global energy markets. While oil production in Latin Americas largest economy will grow during 2021, there is the potential for the pandemic and considerable political turmoil in the country to slow its massive oil boom, which as late as December last year appeared unstoppable.

By Matthew Smith for Oilprice.com

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Will COVID Derail The Worlds Hottest Offshore Oil Boom? - Yahoo Finance