Petrobras aims to transform Brazil into global energy power

From a speck on the horizon where sea and sky merge, a pilot flame is the first thing visible to helicopter passengers flying towards one of the newest offshore oil platforms transforming Brazil into a global energy power.

Anchored 200km from Rio de Janeiro, the P-71 floating production unit is among more than 30 run by national oil company Petrobras over a hydrocarbon-rich stretch off the country’s south-eastern Atlantic coast.

The expanse is known as the “pre-salt” region because its crude deposits — 11.5bn proven barrels at the last count — lie under a thick crust of sodium chloride, deep beneath the ocean floor. It was home to an oil discovery considered the western hemisphere’s most significant for 30 years in the first decade of this century.

“There were doubts over whether we would be able to develop it,” said José Ferreira Junior, manager aboard the P-71 vessel in the Itapu field. “The expectation was fulfilled and this turned a page for Brazil, putting it on the world stage as a petroleum producer.”

The South American country’s overall output of the commodity grew 4 per cent in 2022 to 3mn barrels a day, with three-quarters from pre-salt areas, ranking it as the planet’s ninth-largest oil-producing nation.

Rising output from these vast deepwater reserves underpins an ambitious target by the Brasília government to reach fourth place by the end of the decade with 5.4mn b/d, ahead of the likes of Iran, Canada and Kuwait.

At the forefront of that drive is $99bn-valued Petrobras. Latin America’s largest oil and gas business is state-controlled but with outside shareholders and a stock market listing.

While the Rio de Janeiro-based group was given priority over the pre-salt resources and dominates the activities, it operates many fields in consortiums with international groups such as Shell, TotalEnergies, QatarEnergy, Malaysia’s Petronas and China’s Cnooc, among others.

“This year we will exceed our goals [and] surpass what we predicted,” said Joelson Falcão Mendes, director of exploration and production at Petrobras. “We have significant and growing production for the coming years.”

First found in 2006 and chiefly located in the Santos Basin, the pre-salt deposits presented technical challenges. At depths of up to 7km beneath the water’s surface, including layers of rock and 2,000 metres of salt to be drilled through, development required colossal amounts of capital.

The resource is now a cash gusher — both for the national coffers and outside investors in Petrobras, founded 70 years ago as Petróleo Brasileiro.

Pre-salt production rose from 41,000 b/d in 2010 to 2.3mn last year, fuelling record annual profits of R$188bn (US$39bn) and dividends of R$216bn at the company.

“For the shareholders — controlling and minority — pre-salt [operations] mean really good returns combined with production growth,” said Gabriel Barra, analyst at Citi. “It is finally paying off.”

While net income fell by two-fifths to $5.5bn in the third quarter — hit by lower oil prices and a weaker dollar — Petrobras increased total crude volumes by almost 10 per cent year on year.

To further boost extraction, it plans to launch another 11 platforms in the pre-salt region by 2027.

However, with output from the fields expected to peak by 2029 and then start falling, there are questions over the future strategic steps for both the company and Brazil.

The rush to secure reserves of hydrocarbons — the chief components of petroleum and natural gas — has been underscored by blockbuster takeover deals by US oil industry supermajors ExxonMobil and Chevron in the past weeks.

Yet as the world seeks to avert catastrophic climate change, the very soundness of Brazil’s continued wager on oil and gas has been challenged.

Critics say it exposes a contradiction within the green agenda of President Luiz Inácio Lula da Silva, who has promised greater ecological protection and sustainable development.

The pre-salt riches were discovered during the leftwing president’s first stint in office and his Workers’ party (PT) considers it one of his legacies.

Although the Lula administration and Petrobras have pledged to back cleaner alternatives, fossil fuels remain a pillar of national policy.

“We don’t see any type of contradiction,” said Mendes. “As an integrated energy company, we can use what we [generate] in oil and gas production to invest in renewable energy.”

He added: “Oil will still occupy an important place in the energy matrix [alongside] renewables. We want to do this together.”

Petrobras has pledged more of its capital expenditure budget to low-carbon projects since Lula returned to power. But with global crude demand forecast to decline in the next decade, campaigners argue it should pivot away from polluting activities more quickly.

Enrico Marone at Greenpeace rails against the idea that “Brazil will be the last country to produce and export oil in the throes of the now outdated petroleum era”.

“It makes no sense to keep betting on fossil fuel sources when the world is looking for urgent reductions in greenhouse gas emissions.”

Petrobras counters that pre-salt oil is cheap and relatively clean compared with other sources, and therefore an ideal supply as societies remain dependent on hydrocarbons during the energy transition.

Pre-salt wells offer huge economies of scale that bring down unit costs, say analysts. The sheer size of operations is shown by the P-71: a floating production, storage and offloading unit (FPSO) that looks like a massive ship.

A 316-metre-long industrial complex of gantries, pipework and heavy equipment with about 160 workers on board, it started production in December 2022 and can process 150,000 barrels a day.

Pre-salt oil costs roughly $35/barrel to produce, according to Schreiner Parker at consultancy Rystad Energy, well below current international benchmark prices of about $90. The CO₂ emitted in the production is also half the global average for a barrel of oil of 18kg/b, he added.

“That combination of low break-even cost and low emissions intensity means those pre-salt barrels are what we called privileged,” said Parker, whose firm forecasts Brazil will be the fifth-biggest oil producer by the end of the decade.

“By 2050, even in the most conservative scenario, we’re still going to need around half the oil that we consume today. You’ll have significant Brazilian production throughout the 2030s and into the 2040s, but the question is: what’s next?”

The answer may be a new offshore frontier located in a 2,200km tract of deep waters along Brazil’s north coast, called the Equatorial Margin.

Proponents believe it could be Brazil’s next oil frontier and draw comparisons with neighbouring Guyana, where vast offshore reserves are now being exploited by Exxon.

Estimated to contain 10bn recoverable barrels, Petrobras has allocated half its $6bn exploration budget for the Equatorial Margin over the next five years.

The company recently received permission to drill exploratory wells in one of the region’s five basins, but it faces obstacles to the section regarded as the main prize, located off the mouth of the Amazon river.

Activists claim the block lies near an ecologically sensitive zone, posing risks to wildlife and nearby indigenous populations. After refusing a drilling request, Brazil’s environmental agency is considering an appeal filed by Petrobras.

Beyond oil, the company believes its experience on the high seas equips it to become Brazil’s leading developer of offshore wind. Mendes said such projects could potentially supply electricity to oil rigs.

“In theory, offshore wind is simpler than oil production in deep waters. Historically it requires less technology. The big question is whether we can do this at competitive costs.”

In line with Lula’s campaign pledge, Petrobras is also pursuing a strategy of diversification outside its core of oil and gas, with greater investments in areas such as refining, biofuels and petrochemicals. Analysts, however, warn this could result in lower financial returns.

Another concern for minority shareholders is the spectre of political interference in the business — a hallmark of past PT administrations, under whom Petrobras was embroiled in a sprawling corruption scandal, lost tens of billions of dollars subsidising fuel and racked up massive debts.

Citi’s Barra said it was difficult to assess the longer-term scenario for Petrobras because of frequent changes at the top, with chief executives chosen by the government of the day: “We’ve had a new CEO every one-and-a-half years on average.”

For Ferreira, the pre-salt riches can unlock the company’s future.

“My view is that we invest in the pre-salt [operations] to change the energy matrix,” the P-71 rig manager said, staring out into the Atlantic. “If you look back, Petrobras went from onshore [oil] to offshore, then to deepwater. Now it can go to renewables.”