It’s easy for investors to get wrapped up in the euphoria surrounding America’s energy renaissance and forget there are several countries struggling to keep up production. Some of the countries hurting the most are our southern neighbors: Mexico, Venezuela, and Brazil. Both Mexico and Venezuela have very rigid laws concerning domestic oil production, so their journey back to prominence will probably require a fundamental change in the views of the countries’ respective leaders. Brazil, on the other hand, has a much more liberal approach than most other Latin American nations. So it’s possible that Brazil could turn things around with a little outside help.
Let’s look at the slide in Brazil’s oil industry and what it’s doing to get back to its former glory days.
The beginning of a decline
In 2010, Brazil’s oil industry hit its peak. The country was producing 2.7 million barrels per day and was a net exporter of oil. On top of that, much of the world was talking about its sugar cane ethanol business as a potential global model for alternative-fuel production. Ever since then, though, energy production from both oil and ethanol has been on a steady decline. Today, total oil production has slumped considerably. Brazil’s National Petroleum Agency estimates that February production was 2 million barrels per day, an 8% slide year over year and a 26% drop from the 2010 peak. Thanks to the decline in production and a large jump in domestic consumption, the country is now a net importer of petroleum and is even receiving ethanol imports from the United States.
What’s even more concerning, though, is the financial condition of its primary oil company, Petrobras Argentina SA ADR (NYSE:PZE). For the company to meet its expected production goals, the company will need to raise $4.3 billion per year from the capital markets for the next five years. It’s also selling off some of its non-Brazilian assets to raise capital and focus its efforts domestically. One of the largest reasons for the company’s lethargic growth as of late has been strict labor policies from the government and a mandate that parts and equipment for the oil industry be 55% sourced from Brazilian manufacturers.
The two lights at the end of the tunnel
Normally, a decline in production could indicate that a country is running out of oil. Quite the contrary in this case. It’s estimated that Brazil has 6.4% of the world’s shale gas deposits, and its ultra-deepwater oil reserves in what’s known as the pre-salt formation are massive. Proven reserves for the formation is at about 8.3 billion barrels of oil equivalent, but some estimate the field to contain as much as 50 billion barrels of oil. The problem with these resources, though, is that they’re both difficult and expensive to access. While the U.S. has adapted to the unconventional shale drilling game, Brazil has yet to produce any significant quantities of oil or gas in these plays because the tech to access it — hydraulic fracturing and horizontal drilling — has not been as quickly adapted. Also, the pre-salt formation has been determined ultra-deepwater for a reason. The most lucrative parts of the field are more than 170 miles offshore and more than 4.4 miles below the ocean surface.
Despite the heavy costs, this new field has been the major focus of Petrobras, and much of that raised capital will go into developing this resource. Since its discovery in 2006/2007, the field is now up to approximately 300,000 barrels per day. Petrobras is currently operating eight platforms and has plans to bring another 11 online in the next couple of years.