Brazil to Achieve Self-Sufficiency in Oil—At Least for Awhile
23 April 2006
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| The P-50 rig |
The recent activation of Brazil’s newest offshore rig—the P-50—sets the country on the path to self-sufficiency—at least for awhile—in oil. The new rig will boost Petrobras’ total oil production to an average 1.9 million barrels per day this year—more than the average consumption of 1.85 million barrels per day. (The US, with a GDP 20-times larger, consumes more than 10 times as much oil.)
Oil self-sufficiency has been a long-term goal of the Brazilian government. Brazil has become the 10th largest energy consumer in the world and the third largest in the Western Hemisphere, behind the United States and Canada, according to the Energy Information Administration.
Brazil is also the largest emitter of carbon dioxide in the region, releasing 351.5 million metric tons of carbon dioxide in 2003, but has a carbon intensity (carbon dioxide per unit GDP) below the regional average.
Brazil has 10.6 billion barrels of proven oil reserves, second-largest in South America to only Venezuela. Most of Brazil’s crude oil production is offshore in very deep water and consists of mostly-heavy grades.
The P-50 is an FPSO, or a Floating, Production, Storage, and Offloading unit characterized by its capability to produce, process, store, and flow oil and gas. It has the largest capacity of any Petrobras floating unit, being able to produce up to 180,000 barrels a day—11% of the average volume produced in the Country in 2005.
The unit will also be able to compress six million cubic meters of natural gas and to store 1.6 million barrels of oil. It is 337 meters long, has a draft of 21 meters, and is 55 meters tall, equivalent to an 18-story building.
The P-50 is installed in the Albacora Leste field (Campos Basin), and is part of a project that has a 10% participation of the Spanish Repsol company. Albacora Leste is located 120 kilometers form Cabo de São Tomé (RJ), occupying a 141 square kilometer area, where the depth varies from 800 to 2,000 meters.
In addition to the 180,000 barrels per day that will flow from P-50 at peak production, Petrobras has three other platforms are scheduled to go into production in 2006: the P-34, extracting 60,000 barrels a day in the Jubarte field, in Espírito Santo; the SSP-300, producing 20,000 barrels/day in the Piranema field, in Sergipe; and the FPSO Capixaba (100,000 barrels/day) in the Golfinho field, also in Espírito Santo.
As these offshore rigs come online, Petrobras expects to become a global net oil exporter, with production exceeding demand by nearly 300,000 barrels a day in 2010.
The net-exporter status will boost Brazil’s trade surplus and help shield the country from expected oil-price shocks. Petrobras said it won’t pass on the spikes in international oil prices to Brazilian consumers. Crude oil prices broke through the $75 per barrel level on Friday on the New York Mercantile Exchange.
Brazilian oil production began in 1953, at 2,700 barrels per day. Consumption was 137,000 barrels per day. Brazil’s break came in 1974 with the discovery of the Garoupa field in the offshore Campos Basin.
More offshore discoveries followed, and now more than 80% of Brazilian oil production flows from offshore fields. Petrobras also became a world leader in deep-water drilling, developing state-of-the-art equipment and setting world records for deep-water drilling. It is Brazil’s biggest and the 14th-largest oil company in the world, with operations in 15 countries.
Brazil’s oil production has grown by an average of 9% per year since 1980. Brazil is also the largest producer and exporter of ethanol in the world. More than half of all cars in the country are of the flex-fuel variety, running 100% ethanol or an ethanol-gasoline blend.
To simplifly things a great deal, Brazil has 10,600m bbl of proven reserves, and a pumping rate of 2m bbl per day. Assuming that they invest whatever it takes to keep that production level steady until the last drop is pumped out (not realistic on the margins, but good enough for the sake of a broad argument), it will take them 5,300 days to fully deplete their proven reserves, or about 14.5 years.
I don't know how to estimate the probable size of their unproven reserves, but it seems to me as if they don't have a lot of time left before they become a massive importer, fighting on the world stage for a share of steadily decreasing avaialable output. Now, in theory, their domestic market should already be feeling the pinch of world scarcity and $75 per barrel prices, as foreign consumers bid on their production. However, many oil-independent or oil-surplus states restrict or subsidize their domestic market for political reasons, insulating domestic consumers from the true market realities. Venezuela does this, and in truth I don't think Brazil is too guilty of this -- in fact, they have historically promoted alternatives such as ethanol. All the same, subjecting consumers to broad market pressures (natural ones, or market pressures invented through mechanisms such as taxation) is one of the better ways of convincing them to behave more rationally. E.g., gas hits $3 a gallon, and sales of large SUVs crash through the floor -- that sort of thing.
Posted by: NBK-Boston | 23 April 2006 at 01:31 PM
I should clarify: The article states that Petrobras plans to shield the domestic market from spikes, such as the $75 extreme we're seeing now, which is market manipulation of a sort. But Brazil does not, to my knowledge, have a Venezuela-like policy of keeping gas prices at absurdly low prices on an ongoing basis.
The devil is in the details, but there is some sense in reducing short-term variability. In the short term, gasoline demand -- actually, energy demand in general -- is highly inelastic. People are stuck with the cars that they own, and stuck living in the neighborhoods where the live, with their permanent jobs wherever those are. In response to a short-term, unforeseeable price spike, the only way to reduce gasoline consumption is to cut out pleasure driving, combine errands, try to carpool, and walk or take public transit for marginal trips. For all the consumption that can't be cut out, higher gas prices simply cause pain, and serve as effective "rents" to the gas companies.
Longer term price increases, which are moderate in pace and announced ahead of time by the producer -- making them more predictable -- can bring about different strategies for dealing with the increased cost. People will choose to buy more efficient cars ahead of time. People will choose to live closer to work, or in areas which give them more mass transit options and more walkable neighborhoods. They will have more time to devise carpools and other efficiencies, and have time to get in the habit of walking or bicycling.
Free markets are gospel in this country, but when the price and supply critical goods are highly unpredictable and subject to extremely undesireable influences (i.e. events in Iran and Nigeria are having a profound effect on how much American or Brazilian families pay to get to work in the morning), a good case can be made for market intervention. That's why the Strategic Petroleum Reserve was developed in this country (though we hesitate to use it even when we ought to), and why Petrobras made the promise it did.
In order of good to bad, I rank the following gasoline market structures:
Best: A free market where price is set by supply and demand, subject to adequately high taxes, which cover the costs of roads, police, infrastructure, pollution abatement, reserve build-up, R&D for long term petroleum replacements, other externalities, etc., and buffered for short term shocks through government intervention.
Middle: A free market which lacks some of the features noted above.
Bad: Low prices with arbitrary and inflexible rationing.
Worst: A Venezuela-like system, where gas is given away pretty much free in order to buy short-term political stability, without heed to the long-term consequences.
Posted by: NBK-Boston | 23 April 2006 at 01:58 PM
> buffered for short term shocks through government
> intervention
Aren't futures and other derivatives supposed to do that?
If one lives in the exurbs and takes their Suburban to work every day, but hasn't done some hedging via gasoline futures, is whining still justified?
Posted by: dimitris | 23 April 2006 at 08:45 PM
The day that gasoline futures, in 20 gallon increments over one year horizons, are available at the corner store is the day you can blame American consumers for not buying them.
Posted by: NBK-Boston | 24 April 2006 at 07:17 AM
The price of housing has a bigger impact on where people live than the desire for a short commute.
A guy I work with for example.
Value of current house = x
distance from work = y
value of equal house closer to work = 3x or more
distance from work = 2/3 y
The closer you get to "the city" the faster the prices rise.
Posted by: rj | 24 April 2006 at 08:14 AM
NBK-Boston,
Please clarify. In what way is the $75 spike "market manipulation of a sort." I realize some refiners have accumulated as much inventory as they can, but it seems to me this is market reality -- Nigeria's problems are not going away quickly, and Iran is still pumping oil to the best of my knowledge. In fact, given the fact that no one can produce enough oil to bring prices down, oil seems to be underpriced.
I would expect those countries that don't have strategic reserves of their own (China and South Korea, that I know of) to start accumulating some. That will only drive prices higher, although more gradually than in the last two months.
Posted by: JMartin | 24 April 2006 at 08:59 AM
JMartin -
It would seem that you misread the slightly unclear opening line of my clarification post, which reads: "The article states that Petrobras plans to shield the domestic market from spikes, such as the $75 extreme we're seeing now, which is market manipulation of a sort."
The "market manipulation" clause was meant to characterize Petrobras' planned actions, not $75 oil. That is, by shielding consumers from $75 oil, Petrobras is manipulating the domestic market in Brazil. I would have thought that the rest of the post would have made this meaning clear, by dint of the comparison to Venezuela (which engages in massive manipulation of its domestic market, and my justifications for short term buffering as opposed to unjustifiable long-term distortions.
The entire thrust of my post was aimed at discussing how best (in my opinion) to run a domestic consumer petroleum market (slight buffering to encourage long-term adaptation while minimizing the pain of short-run extremes or surprises), and had very little to do with the global producers market, which you discuss in your response.
Posted by: NBK-Boston | 24 April 2006 at 11:47 PM
NBK,
Thank you for the clarification. You are correct, I missinterpreted the opening. I do agree wholeheartedly with the premise of your post regarding the markets.
I also just heard that Bush is suspending additions to the strategic oil reserves to help bring down gas prices. I think that is a mistake, but understand the political compulsion.
Posted by: JMartin | 25 April 2006 at 07:11 AM
Why can't the USA and the auto makers in the country see the hand writting on the wall? It's alternative fuels time!!!!
Posted by: rick guarneri | 13 May 2007 at 11:52 AM