Brazil's Potential Oil Boom

Author: Meagan Flynn

Published:

Within the next two decades, Brazil is expected to triple oil production and move from the 12th top oil producer to the 6th according to the 2013 World Energy Outlook Report generated by the International Energy Agency (IEA). The predicted success of Brazil’s energy industry can be attributed to the auctioning of the Libra oil field which holds 8 to 12 billion barrels of recoverable oil. With a supply of oil this substantial, the world’s crude oil demand could be fulfilled for up to 9 weeks alone by Libra.

Petrobras, a semi-public Brazilian energy corporation, won the auction along with Royal Dutch Shell, the National Petroleum Corporation, and the National Offshore Oil Corporation of China. Should the investment of millions of dollars prove efficient for Brazil, this deal could account for a third of international net growth of crude oil supply extracted by offshoring. The Libra oil field was discovered in 2007 off the coast of the city of Macaé, which was previously known for its large fishing and tourism industries. However with the discovery of Libra and its contribution to the “black gold rush” in South America, Macaé has grown by 600% in the last decade. The demand for fuel in Brazil began to soar as a result of the growth in middle class which is stimulating car industry sales.

As a major industry purchase, concerns are emerging among investors. The Brazilian government currently has laws that require companies to buy equipment and services locally in order to encourage economic growth. However, international oil companies worry that this could reduce profits and localize all power to the Brazilian government and Petrobras. Local residents, on the other hand, would welcome this Brazilian-focused economic surge. With its foreign investors, the people of Brazil are eager to create and maintain job growth in their native country while restricting the amount of wealth accrued by other countries associated with the deal.

Petrobras itself is seen not just as an oil company, but as a governmental tool of economic policy making. The corporation itself possesses the power to control inflation through the setting of fuel prices and is so large that it can stimulate the industry by manufacturing national equipment. Despite a raise in fuel demand of 73% between 2000 and 2012, Petrobras had to increase fuel imports at international prices due to a shortage of refining capacity. The Brazilian government, concerned with possible inflation, prevented Petrobras from passing these price increases, forcing the corporation to sell fuel internationally at a discount.

Another problem linked with the extraction of oil in this particular case is that it is currently beneath layers of salt on the seabed. Petrobras already has signed billions of dollars away on deals that would contribute to the removal process.  However, extraction of the “pre-salt” oil is a costly and delicate operation and is said not to carry a particular guarantee of success when completed. Difficulties include water depth, high pressures, low temperatures, severe oceanic conditions, etc. Not only will money have to be invested in the extraction of oil, but research will have to be done to optimize the efficiency of removal.

Although there is a certain level of risk associated with the investment in Brazil’s oil industry, the potential for energy industry growth is higher than ever. Barrie Lloyd Jones is the United Kingdom honorary consul to Macaé, helping British employers and employees thrive in the city. As a 30 year resident of the city, Jones believes that “Brazil is no longer a third world country. It has fantastic opportunities for those that want to come here”. Petrobras is currently ranked 11th for highest energy sales as shown on globalEDGE’s energy industry corporations page, and with this promising outlook, this figure could increase greatly in the coming years.