Daily Energy Report
Brazil oil exports by country, Brazil to join OPEC+, OPEC+ cut, Oil’s trader bots, NY grid problems, Hiding wind/solar costs in NJ, Maduro moves on Guyana oil, and more.
Chart of the Day: China is the Largest Importer of Brazilian Oil
Brazil has been in the news since yesterday after the announcement that it will join OPEC+ at the beginning of next year. For this reason, we focus on it here and in the Story of the Day below.
Figure (1) shows Brazil’s crude and condensate exports by destination. It shows the remarkable output rise in the last 10 years that moved Brazil from an importer and consumer to a major exporter. It also shows that Brazil’s main customer is China, which is an important point when we talk about BRICS in the Story of the Day below.
EOA’s Main Takeaway
Going from exporting 200,000 b/d to 2 mb/d is a remarkable success story. What is more remarkable is that most of the growth is going to China. It is not only the amount that matters but also the crude quality. China and other countries like the US are after medium and heavy sour.
Story of the Day
Brazil is set to join OPEC+ in January, according to the CEO of Petrobras, but will not partake in the group's production cuts. The nation's energy minister and President Lula da Silva are positive about the membership, which will see Brazil participate as an observer, contributing to energy transition discussions. Formal acceptance of the invitation is expected by June.
EOA’s Main Takeaway
What are the benefits to Brazil joining OPEC+? What does OPEC+ gets from accepting Brazil? We discuss that in the bullet points below, but first some detail on what is happening.
There is still confusion about Brazil's membership in OPEC+: while the news from OPEC+ is that Brazil will become a member starting on January 1, 2024, Brazilian media said that Brazil is studying the proposal to join OPEC+. The story started with a visit of OPEC Secretary General, Haitham Al Ghais, to Brazil in October. He invited Brazil to join OPEC, but he was told that Brazil’s Petrobras cannot be subject to a production quota because it is a public company. Then he suggested that they join OPEC+, along with Russia and the other nine non-OPEC members.
Below are some preliminary thoughts. I welcome any additional thoughts and ideas.
National oil companies own and operate the fields in many OPEC countries. Petrobras owns and operates oil and gas fields in Brazil, but is a publicly traded company in the US and European exchanges. If it cuts production along with other OPEC members, it might anger investors and face some legal problems in the US and Europe. This will explain why it will join OPEC+ but not OPEC.
Many others have contracts with international oil companies, either profit-sharing contracts or service contracts. In most cases, contracts contain a clause that forces companies to cut production if asked by the government under the OPEC quota. Many international oil companies operate in Brazil and the contracts do NOT include such a clause. The government cannot force them to cut if asked by OPEC+.
The biggest benefit of being an OPEC+ member comes when prices collapse. Cooperation to cut production benefits every member. If the Brazilian government agrees to cut in the future, it will ask its own company Petrobras, to cut.
It remains to be seen if the Brazilian government will add that clause to new contracts or when existing contracts are due for renewal.
The decision to join OPEC+ is political, especially when you look at it as another form of cooperation under the BRICS umbrella. However, a future far-right president might withdraw from all of them, exactly as President Trump did with several international organizations and agreements.
Aside from the clout OPEC+ gets as it gets larger, the political benefits are huge: if the proposed NOPEC becomes law in the US, whom they are going to sue? Russia and Brazil?
For Brazil, now it has a say in OPEC+ affairs. It will get the private information and research that non-members do not get. Such information is important for the Brazilian budgets and future spending plans.
Finally, it is a message from Brazil’s government to climate change pundits in the US and the EU on where it stands on these issues. Probably the largest benefit of being an OPEC+ member in the future is that members will stand united against certain policies that harm their oil and gas industries. The irony here is that Brazil was at the forefront of the fight against OPEC in the 1970s by shifting to biofuel and flex-fuel. This is not the case now after massive offshore oil production.
In conclusion, it is a political decision that might result in more cooperation that might benefit both sides.
News of the Day
OPEC+'s decision to cut crude output by about 2.2 mb/d early next year is indicative of weaker global demand growth for crude. The action by OPEC+ raises questions about their ability to further influence prices if they continue to fall and whether they can maintain prices above the $80 a barrel threshold. The pledged total cuts amount to approximately 5 million bpd, which contrasts with still positive demand growth forecasts by OPEC and the IEA.
EOA’s Main Takeaway