Petrobras weighs up crude exports, fuel production

Rio de Janeiro, 31 July (Argus) — Brazil's state-controlled Petrobras sees sustained growth in Chinese appetite for its low-sulfur pre-salt crude, but it is also shifting some production back to domestic refining to meet recovering fuel demand at home and abroad.

"Chinese appetite for our pre-salt crude is strong," Petrobras downstream director Anelise Lara said on an earnings call today. "They import a huge amount of crude oil and we see that demand will continue to grow. If we have more oil to sell, they will buy it. Our question is, what is the most valuable trade-off: produce oil products to sell in Brazil or abroad or export crude?"

Fuel demand in Brazil is steadily recovering, and Petrobras has also been increasing production of low-sulfur fuel oil and high-octane gasoline for export. After falling below 60pc in the middle of the second quarter, utilization rates at the company's domestic refineries recovered to a second quarter average of 70pc and hit 78pc at the end of June, close to the 79pc first quarter rate.

Chinese demand has faltered in recent weeks because of a local resurgence of Covid-19, but the disruption is considered temporary, Lara said, adding that all of the company's crude markets, including Europe, have recovered.

Around 87pc of the 688,000 b/d of crude Petrobras exported in the second quarter went in China, up from around 394,100 b/d, or 49pc of the total, in the first quarter.

Countries such as Chile, Spain, India and the Netherlands increased their share of Petrobras' exports in the first quarter, when China was dealing with the worst of the crisis, but retreated in the second quarter.

"Discounts to dated Brent increased due to a demand collapse in part of the second quarter, when only Chinese refiners were purchasing crude. When the buyer market recovered in the other destinations, the discounts were significantly reduced and then switched to premiums," Lara said. "What we saw in the second quarter was very high shipping rates, but they are now back to normal levels of around $2.5-$3/bl from Brazil to China."

Petrobras' crude is traded at a premium to Brent in China, the result of brand consolidation and the preference of several Chinese independent refiners, Petrobras chief executive Roberto Castello Branco said.

China anchor

Chinese demand has buoyed Petrobras pre-salt projects for years, and the demand outlook will play a key role in new projects. The company has set a baseline break-even price of $35/bl for future projects, which could sideline post-salt projects within the scope of a Campos basin production revival, but could also be a challenging target for some major pre-salt projects such as Mero, in which Chinese state-owned CNOOC and CNPC have stakes.

Petrobras chief financial officer Andrea Marques de Almeida said the company's revised five-year business plan, due out in December, will focus on deepwater assets with a $35/bl breakeven price.

The plan's centerpiece is expected to be the Buzios pre-salt field, which has eclipsed Tupi, formerly known as Lula, and Mero as Petrobras' crown jewel.

Petrobras says negotiations for a co-participation agreement with its Buzios partners, CNOOC and CNPC, should be completed by year-end. The agreement, which that covers costs Petrobras incurred in the development before the Chinese partners joined in a November 2019 auction, could exceed $5bn, according to some estimates.

By Nathan Walters