Challenges in Brazil Could Benefit Tanker Markets

 

The Rio Olympics were successfully concluded on August 21. Ten days later, on Wednesday, August 31, Brazil’s Senate voted 61-20 to remove Dilma Rousseff as president of the most populous country in Latin America. 

 

Ms. Rousseff was accused of using illegal bookkeeping maneuvers to cover up a growing budget deficit. Interim president (and former vice president) Michel Temer will finish out her term, which runs through the end of 2018.

 

Brazil remains the oil powerhouse of Latin America, but the problems facing Petrobras have already had a profound impact on both their upstream and downstream oil industry and could influence the tanker market as well.

 

From 2005 through 2015, oil production in Brazil grew from 1.70 to 2.53 million barrels per day (Mb/d), a compound annual growth rate (CAGR) of 4.1%. 

 

Despite this healthy growth rate, Brazil remained a net importer of oil products, as oil consumption increased by 1.0 Mb/d from 2.17 Mb/d to 3.19 Mb/d, although the gap has narrowed again in recent years. Since 2014, Brazil’s oil consumption growth has stagnated due to the country’s recession, while production continues to push higher.

 

The development of new oil deposits from Brazil’s deepwater pre-salt layer is forecast to boost production to 2.88 mb/d in 2017. More than 94% of Brazil’s reserves are located offshore and pre-salt production has seen a dramatic rise in recent years.

 

Brazil has approximately 2.4 Mb/d of crude oil refining capacity at 17 refineries (14 of which are operated by Petrobras). The largest is located in Sao Paolo, the 434,000 b/d Replan refinery.

 

The latest addition to Brazil’s refining complex is the 115,000 b/d Abreu e Lima refinery, which cost a reported US$20 Billion to build and started up in late 2014.

 

Once fully operational, this refinery will have an ultra-lowsulfur diesel yield of 70%. The start-up of the costly Abreu e Lima facility coincided with a collapse in oil prices. A steep fall in revenues, combined with the widening corruption scandal forced Petrobras to reduce capital spending and cancel a number of refining projects in 2015. 

 

As a result, it is expected that the country will remain short light products for the foreseeable future.

 

In 2016 to date Brazil imported about 475,000 b/d of refined products, mostly from the United States. Fewer new refining projects will prolong Brazil’s reliance on product imports and continue to support the US Gulf Coast as a product export hub.

 

Because many of Brazil’s refineries have trouble processing heavier grades, the country exports growing volumes of crude: 800,000 b/d in the first half of 2016. At the same time, Brazil needs to import light crude oil (about 235,000 b/d in 2016 to date). 

 

Brazil’s crude oil exports are mostly targeted to the United States, with China and India as the second and third largest destination. Crude oil imports are predominantly sourced from West Africa (Nigeria) and the Middle East.

 

As mentioned earlier, Brazil’s domestic crude oil production comes predominantly from deepwater offshore fields and a substantial fleet of (mostly Aframax and Suezmax) shuttle tankers is employed to move the crude oil to shore. 

 

Demand for these specialized vessels will continue to grow as more pre-salt discoveries are developed. Ironically, it appears that the challenges facing Brazil at the moment could have a silver lining for the tanker market, supporting growing crude oil and product flows well into the future.