Brazil's Oil Surge Set to Challenge OPEC's Market Strategy

Brazil's oil production has started to recover following a plunge earlier this year as many offshore platforms underwent planned repairs and maintenance work.

After a 25% drop in Brazilian output at the beginning of the year, platforms are returning from maintenance and producing more oil. Earlier-than-expected starts to some projects are also set to help Brazil recover its oil output later this year, and production could exceed forecasts, some analysts say.  

The rebound in Brazil's crude oil and liquids production is set to frustrate the market management policies of the OPEC+ group. The alliance has signaled it could begin easing some of the current oil production cuts in the fourth quarter of 2024. But it will be in Q4 that Brazil's oil production is set to have recovered from early-year maintenance and add new production platforms, potentially boosting global supply at the same time in which OPEC+ wants to start unwinding part of the cuts.  

Brazil Oil Output Rebounds

Several of Brazil's offshore production platforms have been undergoing maintenance since the end of last year, which has led to a 25% decline in its liquids production, led by crude output, to 3.73 million barrels per day (bpd) at the start of 2024, according to Bloomberg's estimates.

However, with platforms returning to service, production has started to rebound, and, according to Wood Mackenzie, it could exceed by 200,000 bpd the output from before the plunge. 

"We believe it's too early to say production will disappoint," analysts at Wood Mackenzie told Bloomberg.

Production at state-controlled oil and gas giant Petrobras, for example, fell by 5.4% in the first quarter of 2024 compared to the fourth quarter of 2023, "mainly due to the higher volume of losses due to stoppages and maintenance, as projected in the Strategic Plan 2024-28 (SP 2024-28), and the natural decline of mature fields," the company said in April.

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Some of the declines were offset by higher output at other FPSOs in the Buzios, Itapu, Mero, and Marlim, Voador, and Espadim fields.

Last week, Petrobras, which pumps the majority of Brazil's oil, said that FPSO Maria Quitéria is currently en route to Brazil and is expected to arrive at its location in the third quarter of this year. The unit is scheduled to begin operations in the last quarter of 2024, thus advancing the timeline from the PE 24-28 project in the Jubarte field in the Campos Basin's pre-salt layer. That's earlier than the initial plan to commence operations on the 100,000-bpd project in 2025.

Maria Quitéria is set to start operations earlier than planned, and three other major projects are expected to start up in 2025, Petrobras says. These are Búzios 7 FPSO Almirante Tamandaré of 225,000 bpd, MERO 4 FPSO Alexandre de Gusmão with a capacity of 180,000 bpd, and Búzios 6 P-78 capable of producing another 180,000 bpd.

All these will add supply to the market at a time when OPEC+ plans to gradually ease its cuts, market conditions permitting.

Brazil's crude oil production has dropped monthly in each of the months since November 2023, according to OPEC's Monthly Oil Market Report (MOMR).

In the second quarter of this year, Brazil's liquids production is expected to average 4.1 million bpd, but to rebound to 4.4 million in the third quarter.

Brazil's crude output in April fell by 162,000 bpd month-on-month to average 3.2 million bpd, OPEC said in its report. The drop in output was primarily driven by maintenance, operational issues, and natural decline. The country's total liquids production dropped by 200,000 bpd in April to average 4.0 million bpd, although this was higher by 100,000 bpd year-over-year.

Brazil is Key Contributor to Non-OPEC+ Supply Growth

Despite the production decline in the first half of the year, Brazil is expected to be the third-largest contributor to non-OPEC+ supply growth in 2024 after the U.S. and Canada, and the second-biggest such contributor after the U.S. in 2025, according to OPEC.

This year, Brazil's liquids output is expected to grow by 110,000 bpd while supply growth from Brazil next year is forecast at 180,000 bpd, per OPEC's estimates. In 2025, crude oil output is expected to increase thanks to production ramp-ups in the Buzios, Mero, Tupi, Marlim, and Atlanta fields. Oil project start-ups are expected at the Buzios, Bacalhau, Parque das Baleias and Lapa (Carioca) fields.

Therefore, OPEC itself acknowledges that Brazil would help boost oil supply from the non-OPEC+ producers. This could complicate the OPEC+ alliance's production plan for later this year and next year, especially if demand doesn't grow at the "robust" pace OPEC expects.

One headwind to Brazil's production rebound could be an ongoing strike at the environmental agency Ibama, whose employees demand better pay and working conditions. The strike could delay environmental licenses for new oil and gas projects, including a controversial plan by Petrobras to start drilling in an environmentally sensitive area offshore the mouth of the Amazon River.

By Tsvetana Paraskova for Oilprice.com

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