Commodities 2022: Brazil braces for elections as refining, gas opens to competition

Brazil faces a year of transition in 2022 amid ongoing moves to open the refining and natural gas markets to greater competition, a temporary lull in the installation of new production capacity and presidential elections that could dramatically change the business environment in Latin America's largest economy.

Brazil will go to the polls in 2022 to select a new president in what is perhaps the biggest shadow looming over the oil and gas industry besides the ongoing coronavirus pandemic. President Jair Bolsonaro is expected to face off against former president Luiz Inacio Lula da Silva in October, pitting Bolsonaro's mostly market-friendly policies against a return to the Workers' Party, or PT, focus on a state-led model for development.

While policies implemented by Lula and the PT lifted millions of Brazilians out of poverty, the administration was riddled with corruption that nearly tipped state-led oil company Petrobras into bankruptcy. Petrobras was tasked as the investor of last resort for industries outside the scope of its expertise in oil and natural gas exploration.

Petrobras also lost tens of billions of dollars in revenues and profits in 2011-2014 because the PT-led government prohibited the company from passing along high international oil prices to consumers at the pump. Petrobras has since implemented import-parity pricing in an effort to avoid similar losses as well as support a more-dynamic market that includes third-party importers.

Lula, however, has said that he would change the policy, once again raising the specter of government meddling at Petrobras.

But the former union leader and leftist firebrand has also showed a more pragmatic side during the pre-election cycle, including reported discussions about teaming with former rival and presidential candidate Geraldo Alckmin, a centrist who would likely temper any radical adjustments in domestic energy policy.

A market-friendly voice in the administration would likely allow the ongoing liberalization of Brazil's refining and natural gas markets to continue, a key change that most industry officials expect will lead to greater competition and lower prices.

The market opening started as part of a November 2019 antitrust agreement that ended Petrobras' monopolies in the refining and natural gas segments. Petrobras has already agreed to sell three refineries, and is in advanced talks to sell an addition two processing facilities. The company has also sold natural gas pipeline networks and is in the process of selling off stakes in state natural gas distributors.

The sale of three major refineries, however, will need to be restarted, likely after the elections, according to Petrobras officials. That could have a chilling effect on the sales, given the stance on private ownership of such key facilities held by Lula and the PT.

Reforms continue

Despite the uncertainties, Brazil continues to enact changes that industry officials expect will make the country more attractive to international players. In an important and unheralded move, Brazil's National Energy Policy Council, or CNPE, effectively changed the model for selling onshore and offshore acreage, including areas holding subsalt potential inside the polygon that requires production sharing contracts for development.

Brazil currently has three regimes: concession, production sharing and the transfer-of-rights regime. The CNPE, however, authorized the National Petroleum Agency, or ANP, to include blocks targeted for the 18th bid round, which are sold under concession contracts, and the 7th and 8th subsalt production sharing auction under the country's Open Acreage program.

The Open Acreage program allows oil companies to evaluate the portfolio of acreage available at their own pace, with an offer cycle triggered by a single company declaring interest in one of the concession blocks or mature areas included in the program. The greater flexibility offered by the program was lauded by the industry, with the two cycles already held yielding surprising successes in the sale of onshore and offshore blocks.

The CNPE's approval established signing bonuses and minimum profit-oil guarantees for 11 subsalt production sharing areas that failed to sell at previous auctions.

The policymaking body also gave the government 90 days to establish rules to carry out the country's first hydraulic fracturing under the Transparent Well program. The program is aimed at breaking the legal and environmental stalemate over the technique, which could unlock Brazil's onshore unconventional oil and gas reserves.

Petrobras also expects to break another environmental impasse in the country's equatorial margin, a resource-rich region along Brazil's northern coast that falls in the same geologic trend containing the massive offshore discoveries made in neighboring Guyana and Suriname. Petrobras plans to spend $1.5 billion over the next five years to tap 14 wells in the region, which many consider the country's final exploration frontier.

The regulatory developments will likely help compensate for what's expected to be a relatively slow year for production growth, with Petrobras expected to install a single floating production unit in 2022. The lull, however, will be temporary as Petrobras lists a whopping five floating production, storage and offloading vessels, or FPSOs, to be installed in 2023.

S&P Global Platts Analytics expects Brazil's crude output to average 3.2 million b/d in 2022, up from 2.9 million b/d in 2021, before rising to 4 million b/d by 2030.

Petrobras expects the FPSO Guanabara to pump first commercial oil from the Mero Field in the Libra production sharing area in the first quarter of 2022. The FPSO has installed capacity to pump 180,000 b/d and process 12 million cu m/d.

Additional production growth will come from the ongoing ramp up of the FPSO P-70 at the Atapu Field, which pumped first oil in June 2020, and the FPSO Carioca at the Sepia Field, which pumped first oil in August. The FPSOs have installed capacity to produce 150,000 b/d and 180,000 b/d, respectively, and should reach full capacity in 2022.