Opinion: Between Saudi Arabia and Norway, Brazil needs its own oil policy direction

By Marcelo Gauto

RIO DE JANEIRO, BRAZIL – (Opinion) There are many narratives surrounding fuel prices in Brazil, antagonistic, politicized and strongly ideological.

Some of them argue that Petrobras should be used to offer cheaper fuels, since the company is state-owned, a major oil producer and with virtually the entire refining capacity in the country. This narrative could be dubbed the “Brazil-Saudi Arabia”.

Another argument is that Petrobras should operate in an open market, with a private governance model, that it should not subsidize, and that the best social return is the profit the company generates and the competitive environment. This is the “Brazil-Norway” narrative.

The real situation in Brazil, despite finding common ground with the two countries mentioned, is very different.

Saudi Arabia

The desert Middle Eastern country, ruled by an absolutist monarchy, has a population close to 34 million inhabitants and its main economic activity is oil production and exportation. Its proven oil reserves amount to almost 300 billion barrels, the second largest in the world.

The average Saudi oil production over the past five years amounted to 12 million barrels per day (bpd), while consumption stood at 3.8 million bpd over the same period (per capita consumption of 40.8 barrels).

With a production three times higher than consumption, operating in a closed market, where the state-owned Saudi Aramco coordinates oil production and refining in the country, the prices of oil products are subsidized by the government.

An interesting fact is that Saudi Arabia’s refining capacity, according to BP Statistical Review data, stood at 2.8 million bpd in 2019, while derivatives consumption amounted to 3.8 million bpd.

Concurrently, Saudi Aramco had 6.4 million bpd in installed capacity, meaning that most of the installed capacity is outside Saudi Arabia, thus making the Saudi kingdom a net importer of just over 1.0 million bpd oil derivatives.

Such a situation may seem strange for the world’s second largest oil producer, but it is part of the Saudis’ strategy to sell their oil around the world.

They build refineries and petrochemical plants in other countries to use Saudi oil, importing part of the derivatives produced by these refining units. They lose out on the refining and logistics margins, but gain in market share.

Norway

The small Scandinavian country, a parliamentary democracy, has a population of a little over 5 million inhabitants and oil and gas exports are its main economic activity, but its exports are much more diversified than Saudi Arabia’s.

Norway’s proven oil reserves amount to approximately 8 billion barrels.

The average oil production in Norway over the past five years stood at 1.9 million barrels per day (bpd), while consumption amounted to 0.2 million bpd over the same period (per capita consumption of 14.6 barrels).

The Norwegian oil market has a production output 9 times greater than consumption, operating in an open market, with a large share of state-owned companies Equinor and Petoro, which coordinate investments and stakes in oil and gas production in the country.

In contrast to what occurs in Saudi Arabia, fuel prices are not subsidized in Norway, and are in fact heavily taxed by the Norwegian government.

Resources from oil exploration and production form a sovereign wealth fund, which today has accumulated over US$1 trillion in assets, with investments in several areas.

The plan is for the wealth generated by oil to be used by future generations, in addition to reducing the weight of the sector in the country’s GDP.

Norway’s refining capacity amounts to 340 kbpd, with two refineries operating in the country, the largest of which is owned by Equinor (230 kbpd) and the other by Exxon (110 kbpd), which guarantees a 60% excess capacity over consumption. The two refineries supply domestic consumption and operate as net exporters of oil products in the country.

Brazil

The South American giant has a population of approximately 210 million, the first major difference between it and the aforementioned countries. Brazil’s population is 6 times larger than Saudi Arabia’s and 42 times larger than Norway’s. The regulation of the O&G market in the country also differs from the other countries used in the comparison.

Petrobras held the monopoly of exploration, production and refining activities in Brazil between 1953 and 1997, when the law changed toward opening the market, through Law 9.478/97 which became known as the “Oil Law.”

In 1997, Petrobras’ oil production met 50% of the country’s needs; the other half was imported. Brazil only started producing oil in excess of its consumption after 2006, and only in recent years have exports of the Brazilian “black gold” begun to gain relevance.

Brazil’s proven oil reserves amount to 12.7 billion barrels (excluding the pre-salt reserves whose conservative estimates point to at least three times this figure), yet we are still far behind the Saudis.

The average Brazilian oil production between 2015 and 2019 stood at 2.7 million barrels per day (bpd), while consumption stood at 2.4 million bpd in the same period (per capita consumption of 4.2 barrels). These figures allow us to infer that oil production in Brazil was very close to consumption.

Were it not for biofuels, ethanol and biodiesel, we would even be in deficit in the volume of oil equivalent.

Another factor to be considered is that today a significant part of the oil produced in Brazil is undertaken by private companies. In 2019, Petrobras accounted for 74% of the oil produced in the country, while 26% was produced by other concessionaires.

Considering only the share produced by Petrobras over the past five years, the volume produced by the state-owned company was slightly lower than the country’s consumption, i.e., the state-owned company’s share alone would not guarantee the country’s volumetric self-sufficiency, although it is of importance in this achievement.

Additionally, when analyzing the Brazilian refining park, the installed capacity, around 2.2 million bpd, is less than the consumption of oil products in the country over the past five years. As there is no refining surplus, Brazil is currently a net importer of derivatives.

Self-sufficiency in derivatives is much more complex to achieve, since it requires a refining capacity surplus, as in Norway, which requires investments to increase the production of light derivatives and for intra-regional outlets, at prices that make such an expansion of domestic derivatives supply feasible, i.e., at import parity prices.

In search of a course

The data presented here show that the O&G market in Brazil is very different from Saudi Arabia and Norway in several aspects. Market regulation, population size, production, consumption and taxation on oil and derivatives, which distinctly govern each nation.

A population one sixth that of Brazil’s, in a closed market and an abundance of oil, produced at low cost, allows the Saudis to subsidize fuel prices. This makes the Arabs “squander” the commodity, with a per capita consumption almost ten times higher than in Brazil, which also makes them large emitters of greenhouse gases.

On the other hand, Norway, with a small population and with a large oil surplus compared to its consumption, chose to tax oil, gasoline and diesel production, using the resources as savings for future generations.

In Brazil, oil self-sufficiency was glimpsed after the offshore deep water pre-salt discoveries, something achieved in Norway 45 years ago and in Saudi Arabia more than 60 years ago.

Some people believe that Petrobras should be an instrument of the State in pricing fuel, as it was during the legal monopoly, just as the state-owned Arab Saudi Aramco was and is.

The debate clashes with legal issues, given that our market is open and currently includes dozens of other independent producers, in addition to the fact that the volume of oil from the Brazilian state-owned company is insufficient to pay for any significant benefit as occurs in Saudi Arabia.

The production sharing model in Brazil, used in the pre-salt areas auctions, tried to mirror the Norwegian model, whose state-owned company Equinor played an important role in the development of the O&G sector in the North Sea.

However, in Norway, the state-owned company has always been geared to market conditions in terms of investments and corporate governance, with a focus on generating wealth in the long term. The model was a success there, a case study widely examined by professionals in the O&G industry. In Brazil, the outcome was different than expected.

The numbers make it clear that the conditions that Brazil has to offer advantages, i. e. subsidies, to fuel prices are limited, as well as to make long-term savings from oil revenues.

In this respect, we have neither the “bonanza” of the Saudis nor Norway’s conditions. With regard to fuel prices, we need to follow our own path, geared to the country’s particularities, which should also converge with the potential in bioenergy.

The “dual personality” of Brazil-Arabia-Norway has reduced the potential value creation of energy assets in the country, delaying the longed-for prosperity that natural wealth can offer. Between the scorching sun of the Middle Eastern sands and the icy waters of the Scandinavian peninsula, Brazil needs to find its course.