Before the outbreak of COVID-19 and the oil price war between Saudi Arabia and Russia, an oil boom of monumental proportions was underway in Brazil, Latin America’s largest economy. Economists and industry analysts as far back as 2018 were speculating that it would be the largest in Latin America’s history. There were even signs that Brazil’s burgeoning oil production could challenge OPEC’s waning supremacy.
A unique combination of Brazil’s vast petroleum reserves totaling almost 13 billion barrels, comprised of sought-after light sweet crude, and impressively low breakeven costs made it inevitable. In 2019, for the first time ever, Latin America’s largest oil producer pumped just over one billion barrels of oil. That, coupled with the latest oil discoveries in Brazil’s vast pre-salt offshore fields, spurred hopes of a renewed oil led economic boom. Many Brazilians hoped this would restart a stalled economy which up until 2011 had been registering impressive growth rates. By 2015, however, the economy had descended into its deepest slump since the 1980s with GDP contracting by 3.5%. That worrying development was a direct result of the expansive carwash corruption scandal, which ultimately destroyed President Dilma Rousseff’s presidency.
Brazil’s petroleum industry is crucial to its economy and a broad economic recovery. Oil and natural gas production is responsible for around a seventh of gross domestic product and just over a tenth of Brazil’s exports by value. The latest oil price crash, which began in March of this year, forced energy companies to rein in spending, cut costs and shutter uneconomic operations.
It is upstream oil exploration and production which has been hardest hit and couldn’t come at a worse time. Even before the March 2020 oil price crash, big oil appeared to have lost interest in the Latin American country’s vast oil potential. Global oil majors snubbed two of Brazil’s energy auctions held toward the end of 2019 with most blocks not receiving bids. This is despite their earlier enthusiasm in 2018 when they were eagerly snapping up blocks in the Campos Basin and other pre-salt fields. That earlier exuberance is because of the low breakeven prices of $35 to $45 Brent for pre-salt projects.
The declining appeal of investing in Brazil’s oil industry can be ascribed to state-controlled Petrobras’ first-right mandate for pre-salt projects and issues with production-sharing contracts and bonus pricing. That waning appeal, particularly regarding the prolific pre-salt reservoirs, is accelerating because of COVID-19 and the latest oil price crash.
Related: Is Commercial Hydrogen Possible Without Fossil Fuels? Around the globe oil companies are slashing spending, notably for exploration and non-essential development activities, and shuttering uneconomic operations because of sharply weaker oil prices. This will cause investment in Brazil’s economically crucial oil industry to decline, impacting production volumes, exploration and ultimately crucial reserves growth.