Before the outbreak of COVID-19 and the oil-value war between Saudi Arabia and Russia, there was an oil boom of monumental proportions in Brazil, Latin America’s largest economy. Economists and industry analysts already think in 2018 that this would be the largest in Latin American history. There were even signs that Brazil’s burgeoning oil production could challenge the decline of OPEC supremacy.
An exclusive blend of Brazil’s vast oil reserves totaling approximately thirteen billion barrels, consisting of coveted sulfide-free crude and impressive profitability balance prices have made this result inevitable. In 2019, for the first time, Latin America’s largest oil manufacturer pumped just over one billion barrels of oil. This, along with the latest oil discoveries in Brazil’s vast pre-salt marine fields, has raised hopes for a resumption of the oil-driven economic boom.
Many Brazilians expected this to revive a stagnant economy that, until 2011, had recorded impressive expansion rates. By 2015, however, the economy had sunk into its deepest recession since the 1980s, with a GDP contraction of 3.5%. This worried progression was the direct result of the vast car-wash corruption scandal, which eventually destroyed the presidency of President Dilma Rousseff.
Brazil’s oil industry is essential for its economy and for a large-scale economic recovery. Oil and fuel production based on herbs accounts for about one-seventh of gross domestic product and just over one-tenth of Brazil’s exports through value. The most recent fall in oil prices, which began in March this year, has forced power corporations to restrict the closure, reduce prices and end unprofitable operations.
The diminishing attractiveness of making an investment in Brazil’s oil industry can be attributed to the first law mandate controlled by Petrobras state for pre-salt projects and disorders similar to joint production contracts and bonds. This declining attractiveness, i.e. with respect to prolific pre-salt deposits, is accelerating due to COVID-19 and the new fall in oil prices.
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Oil corporations around the world are cutting spending, i.e. non-essential exploration and progression activities, and are stopping unprofitable operations due to sharp oil price declines. This will lead to a decrease in investment in Brazil’s economic oil industry, which will have an effect on production volumes, exploration and, ultimately, the growth of critical reserves.
According to the United Nations, declining demand for commodities, adding oil, and reducing global expansion will halve foreign investment in Latin America by 2020 to around $80 billion. Peru, Colombia and Brazil, which rely heavily on truly extensive foreign investment in their extractive industries to stimulate economic expansion, will be among the hardest hit.
While it is difficult to identify a single figure, investment in Brazil’s oil industry will decline. State-controlled Petrobras, which is guilty of approximately 94% of Brazil’s oil production, reduced capital spending in the 2020 budget to $3.5 billion and put 62 oil rigs on hold in shallow water. Earlier this year, Petrobras announced plans to reduce its planned oil production by 2020 through 200,000 barrels consistent with the day, but then reversed that resolution due to strong demand from China.
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The decline in investment, mainly of the large foreign oil companies in the Brazilian oil industry, will have an effect on oil exploration and production. Brazil’s hydrocarbon production fell sharply in May 2020. Oil production of only 2.8 million barrels was a decrease of 6.5% than in April, but strangely 1.3% more than the previous year. This was also only slightly lower than the average daily oil production forecast of 2020 of 2.88 million barrels. This, in combination with Petrobras, which is guilty of approximately 75% of Brazil’s oil production, exporting a record 1 million barrels of crude in line with April 2020, indicates that the effect on Brazil’s oil industry would possibly not be as serious as before all thinking. This will help mitigate the effect of the COVID-19 pandemic on Brazil’s fragile economy.
President Jair Bolsonaro’s chaotic handling of the pandemic, which analysts say is guilty of Brazil adjusting to the time when the world’s hardest-hit country, has noticed that the IMF expects Latin America’s largest economy to suffer the worst economic recession of fashion times. The IMF estimates that Brazil’s GDP by 2020 will decline by 9.1%, which, if Venezuela is excluded, is the fourth projected decline in Latin America. Without the resilience of Brazil’s hydrocarbons sector, this estimate would be much worse.
By Matthew Smith for Oilichelin
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