A new offshore oil auction in the Amazon, a major investment in refinery expansion, and an attempt to extract $6.2 billion from the energy industry—this may not sound very appropriate for a government that has made some big net-zero promises. Yet it is exactly what the Lula da Silva government in Brazil is doing.
South America’s biggest country produces around 3.5 million barrels of crude daily. It also recently auctioned 19 blocks in the Foz do Amazonas basin, part of the Equatorial Basin and a highly sensitive ecosystem, according to environmentalists. Their opposition, however, did not stop the auction, which featured successful bidders such as Exxon, Chevron, and China’s CNPC, in addition to Brazil’s own state energy major, Petrobras.
The Equatorial Basin includes three basins: Foz do Amazonas, Pará-Maranhão, and Barreirinhas. The area is estimated to hold large oil and gas reserves and is expected to share geology with that of Guyana’s offshore, where Exxon is finding billions of barrels of oil and is developing half a dozen projects. Some in Brazil believe it could be the next presalt zone in terms of production.
Meanwhile, Brazil last year updated its reserve estimates, now seeing its proven oil wealth at some 16.8 billion barrels as of 2024, which was up 5.92% on the previous year. The reserve replacement rate in the biggest South American oil producer was also exemplary, at over 176%. And yet, Brazil wants to be a net-zero country by 2050 and reduce its emissions by between 59% and 67% by 2030. In the meantime, it’s expanding a refinery.
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It’s all about energy supply security. The Abreau e Lima refinery is getting $900 million to boost its capacity to 260,000 barrels of crude daily. This will increase local diesel fuel production, reducing dependency on imports. So will new oil exploration in the Fox do Amazonas: Brazil may produce around 3.5 million bpd and consume 2.57 million bpd but it does not have the refineries equipped to process all the crude it produces locally. So it has to import some crude in what looks like a bit of a paradoxical situation.
Yet it is also about money. The oil industry in Brazil makes a lot of money—when the market is good—and the net-zero enthusiastic government wants a bigger portion of that. Earlier this month, Bloomberg reported that the government was looking to boost its income from the energy industry by a substantial $6.2 billion, either by “reviewing” the reference oil prices used to set taxes or by selling even more exploration licenses.
Issuing more exploration licenses would be a safer option, but it wouldn’t guarantee more income, based on some underwhelming exploration results in the presalt zone, which is currently the most prolific producing region in Brazil. Yet changing the reference price for oil tax calculation could be trickier, leading to lower income for oil producers and consequently dampening the appetite for expansion in the country’s oil sector. We are seeing this happen in real time in the UK.
Yet there’s also another source of oil money in Brazil, and President Lula da Silva is eyeing it to prop up his popularity. In the middle of February, a poll showed that approval of Lula’s government dropped to 24% from 35% in December—a record low during any of Lula’s three terms in office as president of Brazil. To fix this, the government is planning to spend some of the $3.5 billion accumulated in an oil royalty fund that was set up back in 2010.
So, Brazil wants to become greener, but it also wants to become more self-sufficient in energy, and for that, it needs more oil. At least it has acknowledged this need, unlike places like the UK, which are trying to juggle the mutually exclusive goals of killing their own energy industry while boosting energy security.
By Irina Slav for Oilprice.com
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