Brazilian Pre-salt Oil

From Global Energy Monitor

CO2 Emissions

According to Petrobras, the Brazilian pre-salt has 16.4 billion barrels of crude oil reserves.[1] Burning these proved offshore reserves would produce CO2 emissions of approximately 7 billion tonnes, based on the U.S. EPA estimate of 0.43 metric tonnes of CO2 per barrel of oil.[2]

Strategic Significance

According to the U.S. EIA, Brazil's pre-salt reserves have moved the country into the top 10 ranks of energy producers.[3][4]

Companies Involved

In October 2016 the Brazilian government removed a requirement that Petrobras must participate in "high-impact pre-salt oil activities."[5] Besides Petrobras other major rights holders include ExxonMobil and Royal Dutch Shell. Winners of pre-salt bids in April 2018 included Chevron Corp, Repsol SA, Royal Dutch Shell Plc, BP Plc and Statoil ASA.[6]

Petrobras and its partners (Royal Dutch Shell Plc, France's Total SA, China's CNOOC and National Petroleum Corp) will install the first of four commercial production systems in the Libra offshore oil area in 2020, adding one per year through 2023.[7]

Potential ESG Risks

Corruption issues

Petrobras has become a political instrument of the Brazilian Federal Government. In 2010 for example, the government used unorthodox accounting measures to book proceeds from Petrobras’ capitalization program to help the National Treasury in reaching its primary fiscal surplus targets. In the past two years, the company has also been used to help keep the inflation rate in line with the goals of the Committee for Monetary Policy (COPOM). This policy obliged Petrobras to sell fuel below import prices, generating major losses.[8]

Most recently the state-owned oil firm has come under investigation in Brazil and in the United States for bribery and money laundering. The multi-billion-dollar corruption scandal (Operation Car Wash) started with the arrest in March 2014 of Paulo Roberto Costa, head of refining operations for Petrobras (2004–2012), who was accused of money laundering. It has led to the bankruptcy of several partner firms, and the arrest of dozens of executives. The scandal escalated further with allegations of government corruption and a kickback schemes, resulting in losses of more than $8 billion, multiple arrests, and the resignation of the CEO, Maria das Graças Foster. The new CEO, Aldemir Bendine, was appointed in February 2015.[9]

With the investigation ongoing, the company's auditor would not certify its financial statements, which has kept Petrobras from accessing international capital markets, compounding the company's problems that have partly resulted from falling oil prices.[10]

In 2017 there was a successful push to sign a cooperation deal with Shell Oil, sell rights to Brazilian oil fields (through the law change), and obtain a loan of $5 billion dollars from China to Petrobras.[11] This push enabled a government-led leniency deal for construction firms involved in the Car Wash scandal.[12]

This has led, some may say ‘finally’, to dissatisfaction and public demonstrations that have served to dent the hitherto rather teflon-coated image of Petrobras, and outrage has poured out against political corruption and income inequality. According to Oxfam the wealthiest 5% of Brazilians earn as much as the remaining 95% of the population.[13]

In June 2018 bondholders in Petrobras obtained a $3 billion settlement against the company and a $50 million settlement against its auditors.[14]

Human Rights

In 2015 The Guardian reported on the killing and harassment of indigenous fishermen who had protested a pipeline in Rio's Guanabara Bay. These populations oppose offshore drilling because an oil spill could be disastrous for the Bay.[15]

NGO's Involved

Brazil's Worker's Party opposes the privatization of oil production, including the licensing of rights to the pre-salt formation to foreign firms.[16] Greenpeace, Climate Observatory, and WWFR say that subsidies to support development of the offshore fields threaten carbon budgets.[17] Other groups raising concerns include Federation of Organs for Social and Educational Assistance (FASE) and Carbon Trade Watch.[18]

Local Opposition

As the government moved to create tax breaks for offshore oil drilling, the Ministry of the Environment reiterated Brazil's commitment to the Paris Accords. Offshore drilling is opposed by fishermen and indigenous populations whose livelihood would be threatened by an oil spill (see Human Rights). Elsewhere in Brazil, the discovery of a new marine reef near the Amazon in northern Brazil that would be threatened by offshore drilling there may give government officials a way to claim that pre-salt drilling is relatively less damaging.[19]

Status of Project

Brazil’s pre-salt oil production in 2016 reached a record 1.02 million b/d, surpassing the 2015 production level by 33%.[20] Brazil anticipates an additional 19 platforms going into production and an average yield of 3.55 million bpd by 2022, [21] and 5 billion bpd by 2025.[22]

Infrastructure

The pre-salt area lies offshore Sao Paulo, Espirito Santo and Rio de Janeiro states The area is located 300 to 350 km away from the coast, with reservoir depths between 5,000 and 6,000 metres below sea level, in ultra deep water (1,900 metres to 2,400 metres) under a thick salt layer (in some areas, up to 2,000 metres).

Many companies did not participate in an initial auction for rights to drill in the pre-salt Lula field "because of the notorious custo brasil–the high costs of bureaucratic red tape, tax snares, and limitations imposed by infrastructure and logistics."[23]

Domestic Political Situation

Revenues from oil developments have been channeled to many social and political activities from culture to agriculture, and Petrobras is a funder of the World Social Forum. In the past, these funds and promises of funds have helped silence opposition and served to divide social movements and communities.[24]

Recent oil finds have led to promises of a Brazilian “Welfare State”, with new funding for health care, education, housing, sanitation, and land reform. Brazil was enduring its worst-ever recession in 2017,[25] and these promises come at a time of high anxiety over proposed cuts to funding for pensions and social programs.[26]

There is some evidence that public attitudes toward Petrobras and the government are changing as witnessed by unprecedented public demonstrations against corruption and bribery.[27]

Another deterrent to investment in Brazil is the country's unstable political situation. In the past five years, Brazil’s security status quo has deteriorated, as over 55,000 people were killed in 2015 due to a surge in police strikes, street crime, violent protests, and armed conflicts between the Brazilian security forces and organized criminal organizations.[28]

Alternatives

Brazil is one of the very few large economies whose power matrix consists mostly of renewable energy. Nearly 67% of total installed capacity comes from big and small hydropower plants, 9% biomass from the burning of sugar cane waste and other biological products, nearly 8% from wind power, and the remainder from fossil fuels and nuclear power. Solar power remains negligible but investment in the sector is starting.[29]

Project Economics

As of 2018 Petrobras is US $85 billion in debt, making it the most indebted oil company in the world. Petrobras is trying to alleviate this debt by selling off assets.[30]

Subsidies

During times of high oil prices, the government kept gasoline and diesel cheap with subsidies. Now with oil prices low the government has removed subsidies, although Petrobras is on record saying that they can still make a profit from ultra-deep wells even if oil drops to around $45 a barrel.

Tax Revenue

Antônio Guimarães, Executive Secretary of Exploration and Production at the Brazilian Petroleum, Gas and Biofuels Institute (IBP), emphasises the positive impacts of the pre-salt profits beyond tax revenue, since these resources are also significantly invested in healthcare and education.

"In addition to the economic impact, the distribution of royalties has a very large social weight, since part of the pre-salt proceeds are earmarked for healthcare and education, providing a further welcome revenue boost to the federal government, states and municipalities at a moment of fiscal fragility, expected to last for some time yet," he pointed out.

States such as Rio de Janeiro, where economic activity is closely linked to the exploration of oil and natural gas, now have the prospects of once again relying on these revenue streams within the next few years. The pre-salt auctions alone are expected to inject R$ 2.5 billion in royalties into the state's economy in the next decade, according to the Brazilian Association of Petroleum Services Companies (Abespetro).[31]

International Dynamics

In November 2017 it was uncovered by Greenpeace that the U.K.'s Trade Minister Greg Ham had successfully lobbied the Brazilian government on behalf of Shell, BP, and Premier Oil to introduce and pass Provisional Measure (PM) 795/2017, a multibillion dollar tax relief package that promotes offshore drilling.[32] The bill suspends taxes on exploration, development and production of oil and natural gas to be used in the domestic market until 2040.[33]

Financing

In 2017 Petrobras obtained a $5 billion loan from the China Development Bank for pre-salt development.[[34] In 2013 Petrobras received a US $700 million loan from the Japan Bank for International Cooperation for construction of an FPSO in the pre-salt fields.[35] In 2011, the U.S. Ex-Im Bank loaned Petrobras $2 billion for offshore drilling.[36]

Articles and resources

References

  1. "Brazil's Pre-salt has Significant Potential," Stratas Advisors, May 15, 2018
  2. "Greenhouse Gases Equivalencies Calculator - Calculations and References," U.S. EPA, accessed September 2018
  3. "Brazil: Petroleum and other liquids," US EIA, updated November 21, 2017
  4. Unburnable Carbon: Is Brazil avoiding the carbon bubble, CarbonTracker, Jun. 19, 2013
  5. Big Oil Prepares For Exploration Rush In Brazilian Pre-Salt, Oil Price, Oct. 12, 2016
  6. Brazil's Upcoming Pre-Salt Oil Round Attracts Record Interest, Reuters, Apr. 24, 2018
  7. Brazil - Internationial - Analysis, US EIA, Nov. 21, 2017
  8. Petrobras Finds More Oil, But Money Heads To Government, Not Shareholders, Forbes, Jun. 24, 2014
  9. Operation Car Wash: Is this the biggest corruption scandal in history?, The Guardian, Jun. 1, 2017
  10. Petrobras: Timeline of a scandal, The Financial Times, Feb. 4, 2015
  11. Shell and Petrobras sign technical cooperation agreement to strengthen deep water partnership, Shell, Sep. 11, 2017
  12. Brazil gov’t signs leniency deal with Odebrecht, Agência Brasil, Jul. 10, 2018
  13. extreme inequality in numbers, Oxfam, accessed September 2018
  14. In re Petrobras Securities Litigation, Labachon Sucharow, Jun. 27, 2018
  15. Brazil's Troubled Waters, The Guardian, Jun. 25, 2015
  16. Marta Nogueira, Alexandra Alper, "Shell bets big on Brazil as oil majors snap up offshore blocks," Reuters, October 27, 2017
  17. Jonathan Watts, "Brazil's oil sale plans undermine its role at Bonn," The Guardian, 15 November 2017
  18. "Not one more well!: corruption and Brazil's pre-salt expansion," ejolt, accessed September 2018
  19. Greenpeace launches campaign against oil exploration off Brazil, Offshore Energy Today, Jan. 27, 2017
  20. Production from offshore pre-salt oil deposits has increased Brazil’s oil production, EIA, Dec. 14, 2017
  21. UPDATE 3-Brazil's Petrobras to keep 2018-22 investment in line with prior plan, Reuters, Dec. 21, 201
  22. Brazil receives no bids for contracts for pre-salt oil cargo, Reuters, May 30, 2018
  23. In deep: Brazilian oil, OECD Observer, Q3 2013
  24. Brazil's Troubled Water, The Guardian, Jun. 25, 2015
  25. Brazil emerges from its worst ever recession, Financial Times, Sep. 1 2017
  26. Temer moves to cut Brazil’s generous pensions, Financial Times, Dec. 6, 2016
  27. Mass protests sweep through Brazil over oil giant Petrobras, BBC, Apr. 12, 2015
  28. Pre-salt reserves make Brazil ripe for investment, but risk remains, Global Risk Insights, Oct. 27, 2017
  29. Brazil’s renewable energy potential attracts investors, Financial Times, Sep. 20, 2017
  30. Petrobras Chips Away At Debt With Asset Sales, E&P, Apr. 30, 2018
  31. Pre-salt profits will lead to more investment in education and healthcare, BrazilGovNews, Oct. 26, 2017
  32. UK trade minister lobbied Brazil on behalf of oil giants, The Guardian, Nov. 19, 2017
  33. Oil Companies in Brazil Will Keep Tax Breaks Until 2040, Rio Times, Dec. 14, 2017
  34. https://www.reuters.com/article/us-petrobras-credit/brazils-petrobras-receives-3-billion-in-china-development-bank-loan-idUSKBN1E838O Brazil's Petrobras receives $3 billion in China Development Bank loan], Reuters, Dec. 14, 2017
  35. Japanese Banks Provide Cash for Brazilian FPSO Construction, Offshore Energy Today, Apr. 12, 2013
  36. US Export-Import bank loans Brazil 3 billion USD for oil and World Cup, Merco Press, Mar. 21, 2011

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