Despite the huge impact of the Covid-19 outbreak on the entire oil and gas industry, Brazil's oil market is booming and business is set to explode as demand for sweet crude blends continues to grow.
The current outbreak situation has created considerable uncertainty about the outlook for global energy demand. A persistent global glut of crude oil supplies and talk that oil demand could peak sooner than expected have also weighed on energy prices, but this has not hindered the recovery of Brazil's massive oil boom.
Brazil's oil industry is being boosted by growing Asian demand for light crude and stronger-than-expected domestic demand for gasoline. IMO2020, launched on January 1, 2020, significantly limits the sulphur content of Marine fuels, triggering demand in China for lighter crude, a key driver of Brazil's oil boom. China, the world's second largest economy, imported more than 11 million barrels of crude oil per day in November 2020, up 10.1 percent from the previous month, but still down nearly 1 percent from the same period last year. Brazil has become a major supplier of crude to Asian refiners. Latin America's largest oil producer has become China's third largest oil supplier by the end of October 2020. This is due to the rapid popularity of lower sulphur content Buzios and Lula crude, which are relatively cheaper and easier to refine into IMO2020 compliant fuels. The launch of IMO2020 has had a significant impact on the demand and pricing of low sulfur medium light crude oil grades, with seaborne fuels expected to grow nearly 1 percent this year compared to 2019, when the seaborne fuel market is worth $149 billion, accounting for about 5 percent of global crude oil consumption.
It is worth mentioning that seaborne trade accounts for about 90% of the world's total trade, underscoring the importance of seaborne trade to the global economy. This explains why IMO2020 has had such a significant impact on the demand for light, low sulphur fuels and has caused Brazil's Buzios and Lula grades to sell at a premium to the international Brent benchmark price.
Lula is trading at a 5 percent premium to Brent crude, or $2.78 a barrel, according to today's oil price data. Buzios is also more expensive than Brent crude in Asia, Petrobras said.
Petrobras, Brazil's state oil company, is focusing on developing its pre-salt operations because of growing demand for the sweet crude oil produced from Brazil's pre-salt fields. Petrobras has a budget of $46.5 billion for exploration and production activities between 2021 and 2025. Upstream projects approved for development must reach a break-even price of $35 a barrel or less. Petrobras is spending 70% of its budget on its pre-salt fields, particularly Buzios, which will account for 36% of the company's total budget. The national oil company plans to deploy four new floating production and storage vessels in the Buzios field between 2022 and 2025 and increase the number of producing Wells to 29. Petrobras recently reported that it had completed drilling of new Wells and found "high quality oil". That would give the company and Brazil a real boost to pre-salt oil production. The integrated energy giant is also racing to develop its wholly owned Itapu field, which is expected to produce its first oil next year, three years ahead of schedule. The field will pump crude of a similar grade to Buzios, meaning oil from the field will also be sold at a premium to Brent.
The Buzios and Lula fields are characterized by low break-even prices, and the oil they produce is sold at a higher price than Brent crude, which improves their profitability. According to Petrobras, crude oil from the two fields can be extracted for less than $35 a barrel. With Brent at $51 a barrel and Lula at $53 a barrel, Petrobras has considerable incentive to increase production from these fields. In addition to strong demand for Brazil's pre-salt crude from Asian refiners, stronger-than-expected domestic fuel demand is fuelling the Latin American nation's massive offshore oil boom. Fuel consumption in Latin America's largest economy has recently surged past pre-outbreak levels and will continue to strengthen in 2021, Bloomberg reports. Demand for Petrobras' low-sulphur fuel remains strong and will continue to grow as a result of global efforts to reduce sulphur emissions.
In October 2020, Brazil's pre-salt oil production increased 6 percent year on year to an average of more than 2.5 million barrels per day. Offshore pre-salt oil production accounts for 85.5% of Brazil's total oil production, compared to 81% in the same period in 2019. However, oil and gas production fell 2.6 percent in October from a year earlier, to an average of less than 3.7 million barrels of oil equivalent, as energy giants such as Petrobras cut spending and uneconomic Wells were closed due to the outbreak.
It's worth noting that while the Covid-19 outbreak has hit Brazil's oil industry, resulting in lower production as oil producers slash budgets and shut down Wells, it doesn't appear to have done substantial long-term damage. There are signs that pre-salt oil production will continue to grow at a healthy rate, driven by demand from Asian refiners. Demand for crude oil and refined products will further strengthen as vaccines are rolled out, the epidemic eases and global economic growth resumes. The US Energy Information Administration (EIA) estimates that global oil consumption will increase 6 per cent year-on-year to 98m b/d in 2021. As a result of these factors, Brazil's oil production is set to soar, with the company producing 73 percent of the country's oil in October and aiming to produce 2.7 million barrels a day by 2025.
