Petrobras and other major oil producing companies have implemented some sustainability policies ..... is allowed with the approval of the competent environmental authority (section 17, Federal Law ..... http://uk.practicallaw.com/2-524-2451.
Politecnico di Torino
Masters of Science in Petroleum Engineering
TECHNICAL AND ECONOMICAL OVERVIEW OF BRAZILIAN PETROLEUM INDUSTRY Course Denomination: 02OULNA
1. 2. 3. 4. 5.
Authors: Amoah-Kyei, Ebenezer s219342 Ho, Mallory s213790 Olapade, Olushola s214040 Qamar, Muhammad Salman s218363 Vu, Thi Thanh Nguyet s217454
Dated: 21 January 2015 Torino, Italy.
Executive Summary Brazil is the 8th largest total energy consumer and 10th largest producer in the world. The oil and natural gas sector’s contribution to Brazilian Gross Domestic Product has accelerated over the past few decades. Gasoline, ethanol, compressed natural gas (CNG) and diesel are the main fuels being produced. While there is price elasticity of demand for ethanol and gasoline, CNG prices are inelastic. Substitution and blending of renewable fuels into gasoline is a crucial strategy to lighten the environment issues. The future perspective of development is also focused on the movement towards electrification of automobiles and the induction of the growth of the fleet based on flex-fuel technology to encourage the biofuel usage. However, there are major negative environment and social consequences of use and disposal. In order to better understand these issues, this study exposes the level of energy accessibility and affordability differing greatly among the regions from a social perspective and a decrease of greenhouse gas as well as the disposal of plastic and lube oil in from an environment aspect. Most Brazilian oil, which consists of mostly heavy grades, is currently produced in the South Eastern region along with pre-salt. Brazilian oil industry involves the production chain from upstream, middle stream and downstream which is mostly dominated by Petrobras. In upstream, most of Brazil's crude oil production is offshore in very deep water and consists of mostly-heavy grades. Recent offshore exploration efforts in Brazil have yielded massive discoveries of pre-salt oil fields. With reservoirs buried below as much as 6,500 ft of salt, it presents a multifaceted deep water scenario that is bringing new challenges to Brazilian exploration and production. In midstream, it owns a network which enables the movement of crude oil from coastal production facilities and import terminals to inland refineries and consumption centers. In downstream, diesel has been the biggest contributor due to its importance in transportation. Oil refiners are increasingly facing obstacles derived from the heavier and poorer quality feedstock that could probably be addressed by applying the modern technology. The Brazilian oil industry has undertaken severe actions related to sustainable development. Petrobras and other major oil producing companies have implemented some sustainability policies associated with environment and social sustainability. General and Water Policies are introduced in this research. Some major steps to address sustainable development issues are also demonstrated. The sustainability reports look at the impact of the operations on environment, social, culture and energy waste sectors. It uses international reporting standards and framework to report its sustainability performance such as Global Reporting Initiative and Carbon Disclosure Project with the aim to increase transparency. Despite having abundant oil reservoirs and huge crude oil production, Brazil is still compelled to export its crude to US, China and India due to the lack of refining capacity and import light oil from major OPEC countries. Product imports have risen steadily due to strong increase in domestic demand while the product exports have remained stable. There is an expected rise in exports due to the expansion of the pre-salt. The oil price has increased steadily, even higher than the international price in order to meet the increasingly high demand and insufficiently alternative energy sources. When it comes to ethanol, the retail price is also relatively unchanged despite fluctuation of ethanol production. Oil prices directly influence supply and demand as well as changes of oil price affect foreign exchange markets, inflation and employment. In the future, the price trend is estimated to decline owing to the majority of new reserves that will start producing and the efficient substitutes.
1 Introduction Brazil is the 5th most populous country in the world, one of the most rapidly developing economies with a GDP per head that is greater than India or China and is expected to become one of the world’s leading economies by 2050. Rich in natural resources with a developed industrial base, Brazil has high standards in scientific research and substantial human capital, and it also has great energy and environmental characteristics [2]. Brazil enjoys a broad mix of energy resource endowments and technologies and valuable environmental assets. A major priority for Brazil is to satisfy growing energy demand fuelled by population and economic growth, and to balance this effort with environmental priorities and other issues such as energy affordability, accessibility, security and efficiency. Energy policies implemented and the formulation of future policies should be monitored and evaluated in light of both sustainable development needs and their effectiveness in ensuring efficient expansion of energy services [2]. With the availability of various substitutable fuels, the Brazilian energy market behaves differently from other markets. This affects the short and long term price, cross price and income elasticity of different fuels that can greatly alter supply and demand of these fuels in the present and in future. As the rapidly expanding Brazilian economy is highly dependent on more sustainable and secure energy supply, economical, social and sustainability issues related to the ongoing and future exploration and developmental projects for renewable and non-renewable resources are top priority. Mitigation strategies implemented by the industry or by government have been successful to some extent but there are limitations [3]. This primary objective of this research is to develop a country profile of Brazilian petroleum sector to analyze the business structure, its economical, social and environmental implications and the way forward towards sustainable development. This report has 3 main parts: Structure of Demand, Structure of Supply and Market. In each part, a technical overview will be provided followed by discussions on the environmental, social and economic issues, impacts and mitigation strategies.
2 End Uses (Structure of Demand) 2.1 END-USES Brazil is the 8th largest energy consumer in the world and the third largest in American with the total primary energy consumption in Brazil growing to 11.7 quadrillion British Thermal Unit (BTU) in 2011, increasing by more than one third in the past decade because of sustained economic growth [4]. Major sources of energy production in Brazil are represented by the pie chart in figure 1 [1]. The Brazilian fuel market is quite different from other countries because several competitive alternative fuels are available simultaneously. Gasoline, ethanol, compressed natural gas (CNG) and diesel are the main fuels being produced. While gasoline remains the fuel in demand, there is strong competition from two substitutes: ethanol and CNG [4]. Total energy consumption increased at a rapid rate of 3 percent/year between 1990 and 2008. The energy consumption by sector is shown in figure 2 [1].
Figure 1. Energy matrix of Brazil by fuel sources (%)[1]
Figure 2. Total Energy Consumption by Sectors (%)[1]
2.1.1 EFFECT OF SHORT-RUN DEMAND ON ELASTICITY Theory of consumer behavior in the presence of alternative fuels suggests that consumers are more responsive to price adjustments in crude oil. The estimation of price and income elasticity of consumers in Brazil has been studied extensively in the recent years. Following are some studies briefly described. Table 1. Summary of studies conducted on price and income elasticity Study Conductor Azevedo, B.S., 2007 [5] Schünemann, L., 2007. [6] Nappo, M., 2007. [7] Silva, G.F., Tiryki, G.F., Pontes, L.A.M., 2009. [8] Freitas, L.C., Kaneko, S., 2011. [9]
Objectives
Conclusions
Estimation of short and long price, cross-price and income elasticity of ethanol and CNG demand in Brazil Gasoline demand elasticity and impacts by introduction of flex-fuel vehicles Gasoline demand elasticity and impacts by introduction of flex-fuel vehicles Impact of growing ethanol market on the demand elasticity. The characteristics of ethanol demand in context of fuel mix diversification.
Ethanol demand is almost elastic to its price and elastic to gasoline price, in general price elasticity growing in Brazil. A high income elasticity and only a very small effects of flex-fuel vehicles on long-run gasoline demand. Considerable increase in price elasticity of gasoline demand after flex-fuel vehicles introduction. Considerable increase in price elasticity and cross-price elasticity regarding ethanol Ethanol strengthens its position both as an independent fuel and a substitute for gasoline.
In general, there is price elasticity of demand for ethanol and gasoline. For example, prices of gasoline have increased after the introduction of flex fuel vehicle fleets. Natural gas (in the form of CNG) consumers usually come from lower income groups and/or owners of older vehicles whose engines were converted from gasoline or ethanol to also run on CNG. Since CNG prices are maintained artificially low to stimulate the market for these consumers, the prices are inelastic [10]. 2.1.2 ECONOMIC IMPORTANCE OF END-USERS Brazil economy grew rapidly from 2011, fueled by oil and gas. The oil and natural gas sector’s contribution to Brazilian GDP (Gross Domestic Product) increased from 3% in 2000 to 12% in 2010 and has attained 13%. The economic importance of growth in oil and gas sector can be seen in the development of hydrocarbon end-users sectors. Industrial contribution in GPD constitutes 25 percent and the largest segments within this sector are manufacturing (13%), construction (5%) and mining (4%). The Services sector is the most important and accounts for 69% [11].
2.1.3 FUTURE PERSPECTIVE OF DEVELOPMENT The Brazilian energy policy is moving towards electrification of automobiles in the future. This development in the future has direct implications on the oil and gas production and consumption market. A reduction in consumption of gasoline, in 2030, of 40.7% would be accompanied by an increase in electricity consumption of 31.3%. Despite considerable increase in consumption of electricity, the economy will reach a balance of approximately 24.6 x 106 TOE [12]. Brazil’s domestic oil consumption will grow significantly by 2020. During the time 2010-2020, with the mushrooming development of the pre-salt production, two new fields should become in operation producing an expected 71 billion m3 of reserves and production forecasted at 10 million m3 per day) [13]. The Brazilian government has taken measures to prevent future ethanol supply shortages and increase government involvement in the sector. In 2013, the government raised the blend requirement in gasoline back to 25%. It also brought regulation of the ethanol sector under the jurisdiction of the ANP and announced plans to expand Petrobras' presence in the ethanol market. According to the Brazilian Department of Transit, because of the growth of the fleet based on flex-fuel technology [14] and the environmental issues, the increasingly high number of diesel vehicles led to the of demand for pure biodiesel or several mixtures[13]. However, the use of ethanol in Brazil varies between regions. While in the center-south region the price elasticity for both ethanol and alternative fuels is high, consumption in the north-northeast is more sensitive to changes in the stock of the ethanol-powered fleet and income [15]. 2.1.4 SOCIAL AND ENVIRONMENT CONSEQUENCES The main social issues related to the end-users of hydrocarbon are the level of energy accessibility and affordability differs a great deal both among the regions in Brazil and between urban and rural areas. This difference among the social classes reflects typical and unacceptable Brazilian income disparity level. National energy inequalities are lower than income inequalities owing to energy cross-subsidies for lower income groups. LPG is relatively well distributed throughout most of the country, but distribution companies could be stimulated to supply some remote areas still lacking modern energy services. Ethanol production presents huge opportunities for job creation and environmental benefits, especially if biomass is to play a major role in sustainable development in Brazil [3]. CO2 emission can lead to severe drawbacks on nature preservation or biodiversity, causing global warming and climate changes [16]. The amount of CO2 released in the production process is a small contribution to the environment when compared to oil consumption and refining [13]. The total emission regarding the extraction and combustion of the pre-salt oil will be approximate 22.2 billion ton CO2 [13]. In terms of biodiesel, it is stated that total CO2 emissions will drop markedly if the use of pure biodiesel or several mixtures is applied [13]. The comparison between the CO2 released by using different fuel is described in Figure 1 a. In Figure 1 b, the emissions of the main polluting agents are represented [17].
Figure 3. a) CO2 emission from various fuel [17]
b) Gaseous emissions of biodiesel combustion engine compared with the emission level of the diesel engine which is considered of 100%. [17]
A by-product of fossil fuel is the production of plastic. Brazil is known as one of the largest consumers of PET bottles [18]. Therefore, the conservation of non-renewable natural resources is considered as a significantly important benefit and can be accomplished by recycling. However, there are gaps in the recycling system and legislation requiring companies to find sustainable locations for post-consumer waste. Nearly 60% of recycled plastic is collected from dumps in Brazil [19]. The environmental impact of PET bottle recycling system could be associated with solid waste, energy use, pollution emissions, water pollution, hygiene, public health and extends landfill, etc [20]. In Brazil, the yearly lube oil consumption is in the vicinity of 1 million m3, leading to 3.5x105 m3 of waste. However, only an approximately 18.4 % of this quality is recovered as re-refined oil. Besides, automotive use makes up 70% of motor oil
consumption. Most of the lube oil that is not burned during motor use is recovered. Although used lubricating oil exhibits a small proportion of petroleum waste, its environmental impact is dramatically high due to the fact that it contains heavy metals and highly toxic substances. Hence, it is classified as a dangerous residue. Recycling has become a sufficient treatment of oil, thereby allowing the recovery of the part not burned, which is separated from the residue [21]. Recently, oil refiners are increasingly facing challenges related to the production of heavy residues due to the heavier and worst quality feedstock. Instead of directly discarding this residue to the pool, options involving the expansion of the atmospheric distillation unit capacity of a hydrocraking (FCC) unit, the refinery with petrochemicals and deep-conversion units (especially a petcoke gasification unit) are introduced to improve refinery [22]. The expansion proposed and implemented by Petrobras aims to adjust the quality if the final products to tighter specifications. 2.1.1 ROLE OF BIOFUELS In recent years, ethanol has played an important role in fuel sector as an independent fuel and a substitute for gasoline, mainly owing to the growth of the fleet based on flex-fuel technology [14]. Development in the production and consumption rates of ethanol in Brazil indicates the successfully effective rapport between public policies, institutional arrangements and marketoriented initiatives [15]. Consumption of ethanol has accelerated to 13.4% per year in Brazil, mainly in automotive fuels [23]. As a national policy, Brazil blends sugarcane-derived alcohol with gasoline rendering an ethanol fuel blend of between 20% 25% ethanol. Though having less energy per unit volume than gasoline, the cost economics of ethanol, combined with its high octane rating and environmental advantages, make ethanol an important element in Brazil’s energy matrix. In order to encourage biofuels usage, the government made agreements with manufactures to promote a market for purposely modified vehicles leading to the increasingly high consumption of biofuels and automobiles in 1985. The VAT on ethanol is also lower than gasoline; in 2004, gasoline was in charge at US$0.26 per liter, compared to US$0.01 per liter for ethanol [24]. Eighty percent of the cars in Brazil now run on blended fuel making the country the world’s 2nd largest producer of ethanol while concurrently reducing its consumption of traditional fuel. The country’s ethanol policy along with newfound oil transformed Brazil from oil self-sufficiency in 2006 to a net oil exporter in 2009 and as a result, one of the largest non-OPEC oil producers globally [4].
3 Production (Structure of Supply) 3.1 GEOGRAPHICAL DISTRIBUTION OF HYDROCARBON DEPOSITS Most Brazilian oil is currently produced in the southeastern region of the country in Rio de Janeiro and Espírito Santo states (as portrayed by Figure 4). More than 90% of Brazil's oil production is offshore in very deep water and consists of mostly heavy grades [25]. Hydrocarbon accumulations deposited in a closed lake system under extreme anoxic conditions producing the necessary conditions to yield low-density oil (around 30° API) characterized by a low sulphur content (around 0.30%) [26].
Figure 4. Main reserves of oil and gas per state in % [25]
In 2007, a consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field, which contains substantial reserves in a pre-salt zone 18,000 feet below the ocean surface under a thick layer of salt. Following Tupi, many pre-salt finds were announced in the Santos, Campos and Espirito Santo Basins. Some analysts place total extent of pre-salt recoverable oil and natural gas reserves at more than 50 billion barrels of oil equivalent (boe) about 4 times greater than the country’s current national reserves. The pre-salt discoveries can potentially make Brazil the 6th largest oil producer in the world by 2035 [27].
3.2 MAIN PRODUCING COUNTRIES AND/OR COMPANIES State-controlled Petrobras is the dominant participant in Brazil's oil sector, holding important positions in upstream, midstream, and downstream activities. The company held a monopoly on oil-related activities in the country until 1997, when the government opened the sector to competition. Royal Dutch Shell was the first foreign crude oil producer in the country, and it has now been joined by Chevron, Repsol, BP, Anadarko, El Paso, Galp Energia, Statoil, BG Group, Sinopec, ONGC, and TNK-BP. Competition in the sector is not just from foreign companies: Brazilian oil company OGX, which is staffed largely with former Petrobras employees, started to produce oil in the Campos Basin in 2011 [28}. Table 2. Exploration, offshore and onshore production shares of major players [28]
Shell
Exploration activity (number of drilling rigs in operation) 1
SK
5,078
Chevron
2
Repsol YPF
4,794
BG
Company Petrobas
Exploration activity (number of drilling rigs in operation) 68
Offshore production (boe/d)
Onshore production (boe/d)
1,736,454
174,916
Company
Petrogal
3
4,243
OGX
8
-
HRT O&G
3
Devon
Imetame
2
ONGC
Total
98
1,894,352
98
Statoil
Offshore production (boe/d) 46,960 36,870 14,369
2
Frade Japao
14,131 13,051 7,616
1
8,954
177,333
3.3 GEOPOLITICAL ISSUES THAT MIGHT DISRUPT SUPPLY The Brazilian government, which controls both fuel prices in the country as well as a voting majority in Petrobras, announced an underwhelming increase for the price of fuel. The state has kept fuel prices low over the past few years despite the fact that oil prices have doubled since hitting a trough below $50 per barrel in the wake of the 2008 financial crisis. This policy, although a firm strategy in the face of rampant inflation, has eroded the oil company’s earnings because the firm has essentially been selling fuel at a discount [25]. In contrast to the concession-based framework for non pre-salt oil projects, where companies are largely uninhibited by the state in exploring and producing, Petrobras will be the sole operator of each production sharing agreement (PSA) and will hold a minimum 30% stake in all pre-salt projects. The scale of the proposed expansion in production will stretch Petrobras' exploration and production resources and Brazil's infrastructure, as will strict local content requirements. However, to incentivize companies, the PSA will also include a signing bonus of U.S. $6.6 billion and a low-cost recovery cap [28]. Brazilian legislators must agree on a system for distributing royalties from the pre-salt oil. Currently, most oil production revenue accrues to the state and municipal governments of oil-producing states Rio de Janeiro, Sao Paulo, and Espirito Santo. Other Brazilian states are fighting for a greater share of the royalties from the pre-salt oil. After weeks of protests, the lower chamber of Brazil's Congress approved a bill, which has stalled in the Congress, to allocate petroleum revenues to education and health throughout the country [29]. According to the ANP, in 2012, Brazil produced 405,000 bbl/d of ethanol, matching the declined 2011 levels. A combination of high world sugar prices, a poor sugar cane harvest, and underinvestment resulted in a precipitous decline in ethanol production in 2011. This shortage forced Brazil to import corn ethanol from the United States.
3.4 PRODUCTION CHAIN Oil is a mineral resource composed by a wide mix of substances. From its processing, several goods are extracted, like gasoline, diesel, kerosene, house gases, fuel and lubricant oil, paraffin wax, and chemical composts. These elements are crucial inputs for several sectors, like ink industry, axes, plastic, oil extraction etc. [30]
The diagram below illustrates the general production chain from exploration to end use in Brazil
Figure 4. Oil and Gas Production Chain
[31]
3.4.1 UPSTREAM: EXPLORATION, PRODUCTION AND DRILLING The largest oil-production region of the country is Rio de Janeiro state, which contains over 80% of Brazil's total production. Most of Brazil's crude oil production is offshore in very deep water and consists of mostly-heavy grades. [33] Recent offshore exploration efforts in Brazil have yielded massive discoveries of pre-salt oil fields. Pre-salt oil is generally characterized as oil reserves situated exceptionally deep under thick layers of rock and salt and requiring substantial investment to extract. With reservoirs buried below as much as 6,500 ft of salt, it presents a multifaceted deep water scenario that is bringing new challenges to Brazilian exploration and production. The difficulty in accessing the reserves, considering both the large depths and pressures involved with subsalt oil production mean that there are many technical hurdles that must be overcome [43]. Along with their potential to significantly increase oil production in the country, the subsalt areas are estimated to contain sizable natural gas reserves as well. According to Petrobras, Tupi alone could contain 5-7 Tcf of recoverable natural gas, which if proven, could increase Brazil's total natural gas reserves by 50% [43]. As of January 2014, Brazil had 329 blocks in the exploration phase, 72 fields in the development phase and 437 concessions in the production phase –– operated by 23 companies. There were 8,980 producing wells, of which 8213 were onshore and 767 offshore [43]. 3.4.2 MIDSTREAM: OIL AND GAS TRANSPORT Transpetro manages a system consisting of 4,000 miles of crude oil pipelines, coastal import terminals, and inland storage facilities. The overall structure of the network enables the movement of crude oil from coastal production facilities and import terminals to inland refineries and consumption centers [32]. Petrobras operates Brazil's domestic natural gas transport system. The network has over 4,000 miles of natural gas pipelines, mostly in the southeast and northeast parts of the country. The network consists of main systems in the southeast, northeast, and the state of Espirito Santo; these systems are not currently interconnected, which has hindered development of domestic production and consumption [33]. A lack of natural gas transportation infrastructure has delayed exploration and production in the interior regions of the country. In particular, Amazonas state contains considerable reserves that remain unexploited, especially the Urucu field, which contains Brazil's largest onshore natural gas reserves [32]. 3.4.3 DOWNSTREAM: REFINERY, DISTRIBUTION AND MARKETING As of 2004, Brazil had an estimated crude oil refinery capacity of about 2 million barrels per day of which about 98% is controlled by Petrobras. [34] There are currently 13 refineries in Brazil of which Petrobras operates 11 facilities, the largest being the 360,000 bpd Paulinia refinery in Sao Paulo hence the company has a stunning influence on the price of oil by-products in Brazil and it is able to practice a predatory price policy. Another problem is that most refineries are old fashioned and do not perform well in refining domestic oil, which has a worse quality than the Middle Eastern one, for which the technology of the Brazilian refineries were inspired by [35]. Petrobras plans to increase its Brazilian refining capacity to 3.0 million bpd by 2020. Two Petrobras-owned LNG re-gasification terminals entered commercial operation for LNG in 2009. Together, the terminals have gas processing capacity of 21 million m3/day. In addition, Petrobras and its partners are now working on a new concept of a floating liquefied natural gas plant (FLNG) for developing gas reserves located in the Santos Basin [36]. The retail supply comprehends two parts strongly connected with each other: the distribution and resale. The distribution comprehends the transportation from refineries to the deliverers (gasoline stations) or to domestic consumption (canalized and bottled liquid gas for domestic consumption, called GLP) [30]. Table 3 shows the share (%) of oil by-products produced at national refineries, in equivalent barrels of oil. As one can see, diesel has the biggest share, representing nowadays about 40% of refined oil, since its importance to transportation in Brazil (whose transport structure is mostly road-based). Gasoline, on the other hand, represents 18% of refined oil [30].
Table 3. Composition of processed oil in the Brazilian refineries [30] In equivalent barrels of oil Asphalt Coke
2003
2004
2005
2003
2004
2005
0,99% 2,50%
In equivalent barrels of oil Fuel Oil Solvents
1,39% 1,96%
1,64% 1,80%
19,05% 0,78%
18,91% 0,79%
17,19% 0,72%
Gasoline
17,45%
16,40%
17,71%
Diesel
37,92%
40,08%
40,24%
Airplane’s gasoline Liquid Oil Gas – GNP11
0,07%
0,07%
0,07%
Paraffin
0,14%
0,15%
0,13%
6,20%
6,03%
6,65%
Airplane’s kerosene
3,95%
4,07%
4,03%
0,20%
0,11%
0,06%
1,49% 0,25%
1,43% 0,15%
1,48% 0,16%
Lubricants
0,88%
0,75%
0,76%
Naphtha
8,27%
7,62%
7,31%
Illumination’s kerosene Other Non-energy Other Energy
3.5 SUSTAINABILITY AND SUSTAINABLE DEVELOPMENT In the last 10 years the Brazilian oil industry has undertaken a series of actions and practices related to the concept of sustainable development [37]: Environmental management - In 1995, Petrobras started the process of implementing environmental management systems by the ISO 14001 standard. In the following year, published its policy on environment and industrial safety, which formed a basis for Petrobras to incorporate an auditing program on environment and industrial safety. Social, cultural, environmental areas - Since 1998, Petrobras has published its annual Social Balance for shareholders and the public, which was a consolidated statement of the company's principal achievements and funding in the areas of environmental, community and cultural projects. Energy conservation, renewable energy - Through its management of energy conservation, renewable energy, and support for the CONPET conservation initiative, Petrobras has been active in measures and actions dedicated to sustainable development. 3.5.1 SUSTAINABILITY REPORTING Major operators in country are certified in accordance with ISO 14001 and OHSAS 18001 standards. Adopting GRI proposed sustainability report model has improved the quality of social-environmental information periodically disclosed by the companies. Petrobras, along with multinational operators in Brazil, have drawn up their sustainability reports in accordance with the grade A+ (highest adherence) of the GRI format. Furthermore, industrial response to the Carbon Disclosure Project (CDP) proposed questionnaire scored in the range of high transparency, indicating internal structures and corporate strategies to deal with the sustainability issues [38]. 3.5.2 TRANSPARENCY Brazil does not have rules or legislation to ensure transparency and accountability in the extractive industries, in spite of the presence of a large number of public agencies related to the sector. Petrobras, for its part, stands out as the only Latin American oil and gas company on the United Nations International Global Pact Council. It is also reflected in the DJ Sustainability Index (DJSI), and follows Sarbanes-Oxley Act (SOX) enacted by U.S. Congress in 2002 to protect investments by increasing the reliability of the information disclosed by corporations [39]. A strategy to increase transparency and accountability in Brazil’s extractive sector could begin with Petrobras and an international consortium of NGOs implementing the ISO 26000 international standard for social responsibility. A debate on transparency and accountability is urgently needed in Brazil. [39] Petrobras Corruption Scandal A recently corruption scandal related to Petrobras has raised a question mark on the transparency claims and institutional mechanism of the national giant. Top officials from Petrobras are alleged to have operated a kickback scheme on contracts, with money from inflated contracts eventually being fed back to the governing Workers’ party and other major parties for political campaigns. Prosecutors investigating the scandal have filed charges against 35 people including executives from some of the nation’s biggest construction firms. The investigation, dubbed Operation Car Wash, is proving to be one of Brazil’s biggest corruption schemes. The charges include corruption, money laundering and the formation of a cartel to drive up the prices of major Petrobras infrastructure projects [40]. There is no evidence that Brazil's President Dilma Rousseff knew of the corruption though much of it took place while she was energy minister and chairman of Petrobras during the presidency of Luiz Inácio Lula da Silva, her predecessor [41]. 3.5.3 SUSTAINABILITY POLICIES Petrobras and other major oil producing company have policies in place related to environmental and social sustainability. Environmental Policies are generally classified under General Policy, Pollution Control and Hazardous Substances, Biodiversity and Water. These policies are to ensure effective water and energy use, in association with the generation of the lowest possible amounts of effluents, residues and emissions. General and Water Policies of the various producing companies are shown in the tables below [42]:
Companies BP Canadian Natural Eni Oxy Shell group Total
Companies BP ChevronTexaco ExxonMobil Marathon Oxy Petrobras
Table 4 a. Water policies of producing companies [42] Policy on Water “Developed a new approach to global water issues and to sustainable water management” “Minimizing produced water volumes onshore and offshore through cost effective measures” “Sustainable management of water requires attention to potential saving in the use and treatment of waste to reduce concentration of pollutants” “Will conserve the use of water in our facilities “ “Efficient use of Natural resources- for example energy, land and water. The Exploration and Production business has launched a vast program to improve the quality of its waste water discharges by 20% over five years Table 4 b. General policies of producing companies [42] General Policy “Committed to demonstrating respect for the natural environment and work toward our goals of no accidents, no harm to people and no damage to the environment” “Protect the safety and health of the people and the environment”. “Verifies conformity with company policy and government regulations.” “Committed to continuous efforts to identify and eliminate or manage safety risks associated with its activities” “Recognizes the need to explore, produce, transport and manufacture energy products in an environmentally responsible manner” “Makes health, safety and environmental protection an integral part of designing, manufacturing, marketing, distributing, using, recycling and disposing of its products” “Over the years, we have introduced increased external monitoring of our activities: remedial action plans have been signed with re-known environmental entities”
3.5.4 SOCIAL AND ENVIRONMENTAL IMPACTS OF DRILLING AND PRODUCTION The immense production activities from the pre-salt fields is likely to enlarge Brazil’s carbon footprint, not only due to the burning of more fossil fuels or the escape of fugitive methane emissions during transport, but growing number of companies that will set foot in the Brazilian market for this new business opportunity. Disposal of waste products resulting from oil or gas extraction or processing in the platform outside the boundaries of environmentally sensitive areas is allowed with the approval of the competent environmental authority (section 17, Federal Law No. 9,966/2000). It is not known whether existing facilities for waste and effluent disposal or treatment will be able to cope with the additional volume to be generated by pre-salt related operations [23]. With respect to crude oil and derivative spills and the environment, the Brazilian oil and gas E&P industry performance is significantly better than the world average. The recent crude oil spill (November 2011), from the Frade field in the Campos Basin, Rio de Janeiro, was an infrequent event and, fortunately, involved small amounts, but that certainly lead to procedural improvements to be adopted by all operators in the country. [38]Although Chevron took full responsibility for the accident and has paid more than $27 million in fines, the spill has caused many Brazilian legislators to question Chevron's presence in their country [43]. The biodiversity and global significance of the Amazon Rainforest has been well documented but is subjected to extreme destructive practices that have been threatening it for decades. It is believed that the Amazon is no longer the lungs of the earth, due to deforestation. Brazil government is accused of lacking the resources to prevent it or perhaps even condoning it. Till today, protection of the forest and the biodiversity in Brazil remains a struggle between financial gain and the need for conservation [44]. Amazon’s indigenous people have historically failed to see many benefits from oil extraction, but have borne many of the costs in the form of pollution and displacement. Lacking what they consider fair compensation, local people may resort to sabotage of oil installations to collect oil-spill compensation [45]. Without a doubt, the current problems affecting communities will get worse: pollution and environmental devastation; the territorial and cultural displacement of indigenous populations, failure by companies to restore damaged areas to their original condition; social upheaval; and the changes in sources of livelihood, especially in fishing where oil and gas is extracted in bays. 3.5.5
MITIGATION STRATEGIES
3.5.5.1 GOVERNMENT POLICY Some major steps to address sustainable development issues are summarized below [23]: National Policy on Climate Change: In December 2009, Brazilian government approved the National Policy on Climate Change, including the creation of a voluntary national emissions reduction target of reducing 38.9% of projected emissions to 36.1% by 2020. Petrobras has also decided not vent the naturally produced CO2. The gas processing units have been designed to separate CO2 from the natural gas it re-injected into reservoir [46].
Resizing existing facilities for waste and effluent treatment, and developing a system to monitor and control emissions and waste generation throughout the entire supply chain. Strengthening the model of effective partnerships with stakeholders such as NGOs, government agencies and communities Defining percentage of profits allocated to the Social Fund, it is extremely important and urgent to establish an Investment Policy that will earmark these resources for solving actual socio-environmental problems arise from pre-salt exploration. A social fund that prioritizes investments in education and health is something that goes in the right direction in terms of positive transformation of society and reduction of inequality. Deeper assessment of risks of environmental accidents and safety. Integration of social and health factors in the so-called Environmental Impact Assessments (EIA), which are a mandatory part of licensing for any potentially polluting large size facility.
3.5.5.2 Initiatives by Petrobras Petrobras Development & Citizenship (2007-2013) and Petrobras Environmental (2008-2013) programs, which invested a combined total of R$ 2.4 billion in social and environmental projects all over Brazil [47]. Social Investment [47] In May 2013, Petrobras announced plans to invest R$ 200 million over 12 months in One Land Two Waters program, building 20,000 rainwater collection and storage systems in 210 municipalities. Petrobras Educational Sports Awards to identify, certify, reward and publicize successful educational sport experiences developed in the educational institutes. Environmental Investment [47] Reduced GHG emission intensity, especially torch flaring gas in production operations, which has decreased by 11.4% since 2012. These results reflect the efforts of our Natural Gas Optimization Program. Potential for approximately 620,000 tons of CO2 equivalent in terms of carbon fixation and avoided emissions for the twoyear sponsorship period, covering 31 projects in 2012 sponsored by Petrobras Environmental Program. Energy Efficiency [47]: R$ 47.1 million spent on projects to rationalize energy use, as well as actions related to optimization, reliability and altered operational procedures, ensuring annual energy savings of about 7,200 terajoules per year (TJ/year) Waste management [47]: In 2013, Petrobras processes produced 260,000 tons of hazardous solid waste, which was 15% below the alert threshold set for the period. In addition, some 40% of all hazardous waste we sent for treatment and disposal was reused.
4 Market 4.1 MARKET DATA 4.1.1
EXPORTS: HISTORICAL TRENDS
Crude output is expected to reach 3.9 Mbpd by 2020. Brazil exports the majority of its oil to the US, which buys 45% of it. The next biggest market is Asia accounting for over 30% of Brazilian crude oil exports with China and India being the most important. [48] In 2013, Brazil exported 146 Mbbl of oil against 211 Mbbl. In 2012. During the same period, Brazil refined about 2 Mbpd, with 386,000 bpd being light oil that was imported to mix with Brazil’s predominantly heavy crude. Imports in 2013 totaled 146 Mbbl of oil while they reached 113 Mbbl in 2012 [49]. The following table details Brazil’s crude oil exports by country through December in 2010 and 2011 from the Trade Ministry in Brasilia. The figure reflects the percentage share of exports by country. Figures are in millions of U.S. dollars [50]. Table 5. Brazil’s crude oil exports by country through December in 2010 and 2011 =========================================================================== YTD % of YTD % of YoY% 2011 Total 2010 Total Change =========================================================================== U.S.A. $5,780.2 26.8% $3,849.6 23.8% 50.2% China $4,883.7 22.6% $4,053.4 25.1% 20.5% Saint Lucia $2,941.0 13.6% $2,741.8 17.0% 7.3% Chile $2,184.2 10.1% $1,103.0 6.8% 98.0% India $1,702.5 7.9% $1,255.0 7.8% 35.7% Portugal $1,139.2 5.3% $496.3 3.1% 129.5% Canada $634.3 2.9% $334.8 2.1% 89.4% Netherlands $538.2 2.5% $781.9 4.8% -31.2% France $497.0 2.3% $312.1 1.9% 59.2% Spain $454.7 2.1% $229.6 1.4% 98.0% All Other $848.3 3.9% $993.5 6.2% -14.6% =========================================================================== Total $21,603.3 100.0% $16,151.0 100.0% 33.8% ---------------------------------------------------------------------------
NOTE: Product measured as dollar value, FOB. SOURCE: Ministerio do Desenvolvimento, Industria e Comercio Exterior
4.1.2 CRUDE OIL IMPORTS Petroleum products including natural gas account for over 50% of the country’s total energy use. Almost all of Brazil’s production comes from Brazil’s offshore rigs, which produce heavy sour and heavy sweet crude with a high degree of Total Acid Number (TAN). This requires refineries to be equipped with advanced technologies that translate into a significant refinery complex in order to refine and process various crudes. This is the prime reason that despite having an abundance of reserves Brazil still imports its oil from countries producing light sweet crude. Construction of new advanced refineries and petrochemical complexes are also taking place on an enormous scale with capacities that are unprecedented in the country [48]. Developments in the downstream are closely linked to trade patterns of oil and oil products. For crude oil, Brazil’s imports have been steady over the past 13 years at just under 0.4 million b/d, peaking at 0.44 million b/d in 2007, and falling to a low of 0.31 million b/d in 2012 (Figure 5). In the period 2010-2012, the majority of Brazil’s crude oil was imported from Africa (0.21 million b/d), largely from Nigeria (0.18 million b/d). Brazil also imported around 0.1 million b/d from the Middle East, including around 70 thousand b/d from Saudi Arabia and around 30 thousand b/d from Iraq [51].
Figure 5. Brazil net crude imports, million B/D [51] 4.6 IMPORTS AND EXPORTS OF PETROLEUM PRODUCTS
Due to the strong increase in domestic demand, Brazil has become a net importer of oil products, a trend exacerbated by several domestic refining issues. Product imports have risen steadily from a low of below 0.19 million b/d in 2005 to 0.53 million b/d in 2013 (Figure 6). Diesel has seen the largest rise in product imports, rising from 41 thousand b/d in 2005 to a peak of 0.18 million b/d in 2013. Gasoline imports, which were previously close to zero, have averaged 51 thousand b/d over the past three years [51]. In terms of product exports, diesel exports have remained below 10 thousand b/d on average over the past 13 years. Gasoline exports, which averaged 44 thousand b/d between 2000 and 2010, have fallen to 4 thousand b/d since 2011. The main export product is fuel oil (including bunker fuel) of which Brazil has exported around 0.15 million b/d over the last three years [51].
Figure 6. Brazil oil product imports, million B/D [51]
4.2 FUTURE EXPORT SCENERIOS AND EFFECT ON GDP As a result of the growth of Brazil’s domestic oil consumption, the expansion of pre-salt production will only be partially directed for export, which, by the end of the decade, is expected to reach approximately 600,000 bpd in 2020. Assuming that for the next decade, the country’s exports were to grow at a rate equal to its historical average (1991-2010), in 2020 oil export revenues will be US$ 27.9 billion, representing 5.2% of total exports. Finally, taking into account the country’s GDP growth over the decade, exports generated by pre-salt oil will only have a positive impact of about 0.4 percentage points in Brazilian GDP by 2020. It becomes clear therefore that the importance of oil exports to the Brazilian economy will grow moderately in absolute terms, and may even decline in relative terms. This is especially true if the industry continues to emphasize on crude oil production and export, not refining and adding value [23].
4.1 PRICE TRENDS 4.1.1 HISTORICAL BACKGROUND In 1980s, heavy load on the economy characterized by low growth (3%), high inflation (272%), and overall budget deficit reaching 40% of GDP, pressurized Brazilian authorities to liberalize the economy, including oil sector. In mid 1990s, a gradual approach was adopted to increase the fuel prices by removing the subsidies on fuel products with the promise that the liberalization and privatization will lower energy cost and neutralize the effects of subsidies removal. Initially, the subsidies on products consumed by politically weak stakeholders were removed, while those used by transport and industries are removed later. In sequence, asphalts and lubricants were first to see price rises followed by gasoline (1996), LPG (1998) and diesel (2001). The dynamic effect of oil price liberalization was a short-term spike in inflation, which later on smoothened when the prices were allowed to follow the international trend, but this is a main concern today [52]. .
4.1.2 FUEL PRICING For CNG, the wholesale gas in Brazil is similar compared to the international gas, or even higher than price in Europe in some case. This price depends on negotiation between PetroBras and other producers [53]. The prices of oil, on the other hand, are determined by Petrobras. However, the government uses oil price as a tool to control the inflation. For example, the government has removed the taxation on LPG to keep petroleum prices constant for the end user, but low prices resulted in growing high consumption but the aggregated tax amount has not increased. This has posed large operation losses for Petrobras refining, marketing and transportation business [52]. Since the trend of oil prices in Brazilian market has been strongly influence by the policies of the federal government, ANP and Petrobras instead of international prices, it remains stable and does not fluctuate with international oil prices [23, 54]. However, without price setting mechanisms and prices being simply monitored through survey of fuel process and margins by ANP, the negative effects of high and volatile oil prices on economic growth are still felt in Brazil [52]. In recent years, the oil prices have been increased steadily since 2011, even higher than the international price in order to meet the increasingly high demand and insufficiently alternative energy sources. Brazil will adjust its prices in order to attract investment for its ultra-deep offshore oil reserves [55] and help debt-laden state-run oil company Petrobras [56]. They also promoted the use of ethanol in order to encourage the agricultural and social development on rural and subside the oil import. Therefore, they introduced a mandate to mix 18-25% of anhydrous ethanol with gasoline as well as the tax on gasoline while providing a tax credit for ethanol [52].
Figure 7. The variation of gasoline and ethanol prices from 2002 to 2013 [52] 4.1.3 PRICE TREND EFFECTS ON ECONOMY Supply (rise in production costs, reallocation effects and loss of competitiveness) and demand (increase in prices, lower real disposable income and consequently demand), changes oil prices, thereby affecting foreign exchange markets and inflation. This indirectly affects employment, wages and economic policy reactions. In some cases, this causes trade deterioration and thus precipitate trade balance losses [57]. The combination of direct impacts contributes to the economic downturns and the monetary policy after oil price shocks [57-60]. The size of the indirect effects of oil price changes depends on the efficiency and oil intensity of production processes [57]. Inflation volatility has also been decreasing but oil price shocks do not seem to have a clear impact on output growth and they account for a very small fraction of the Brazilian inflation and output growth rate volatility [57]. The oil import dependence has decreased substantially in Brazil in the last 30 years [57]. In Brazil, changes in the oil price have a positive impact on inflation; it contributes to about 16% of the volatility of inflation in Brazilian economy. Real output growth might not be influenced by oil price shocks. In November 2014, the government raised the oil prices as Petrobras raised wholesale price of petrol and diesel by 3% and 5% respectively. This decision takes into consideration the heavy losses ($24 billion since 2010) to government owned Petrobras due to low pricing by the government to control inflation, subsidies and to sell the imported gasoline and diesel at a loss in the domestic market due to controlled governmental pricing. [56] Analysts estimated that this recent price increase would likely push inflation close to 6.5% by the end of the year, far above the country’s 4.5% target but just within the upper limit of the ‘tolerance’ range reserved for emergencies. [56] While Brazil has managed to ramp up oil production from 1.8 Mbpd in 2004 to 2.7 Mbpd in 2013, it is only a minor exporter of crude because of internal consumption. As a result, the effect of the falling oil price on Brazil is mixed. With fuel prices already subsidized by state oil firm Petrobras, consumers are unlikely to feel much of the drop. But paradoxically, Petrobras will partially benefit from the price shock. As it has spent an increasing amount of its profits on the subsidies, the lower oil price will now allow it to spend less on subsidies and more on production. However, it will at the same time fetch fewer dollars for the oil it produces. In summary, Brazil’s political landscape is unlikely to be affected much by the fall in prices [61].
4.1.4 FUTURE PRICE TRENDS From 2017, the price trend is expected to decline owning to the majority of new reserves producing and the efficient substitutes. The fuel prices in Brazil will move parallel with the international market from 2020. The duration of price changes is associated with the policy transition that determines the curve of the Brazilian currency against the dollar, the transition timing, and the potential for economic growth as well. Economists predict that the average oil prices for 2020 will range from 35% to 60% higher than the 2010 [52]. When it comes to ethanol, the retail price is also relatively unchanged despite fluctuation of ethanol production which is determined by agricultural factors. It is estimated that by 2020, ethanol could reach an average price of R$ 1.37 to R$ 2.03 per liter, moving from a 13% drop to a 29% increase over its current prices. This gap is subject to the timing of Petrobras policy transition, the currency exchange rate, and the expansion of ethanol production capacity [52].
5 Conclusion Brazil is experiencing a price elasticity of demand for gasoline and ethanol which will further increase in future with increasing concerned of environment, development of fuel mix diversification technologies, natural gas sector, electrification of automobiles and transformation of diesel vehicles to biofuels. To retain the status of a greener energy producer, Brazil has to monitor environmental impacts due to heavy production and consumption of fuel from pre-salt development. The Brazilian government is taking steps to encourage user inclination towards eco-friendly fuels and to manage the CO2 emissions and refinery residual increments but these steps are still preliminary phases. Pre-salt discovery has opened new horizons for Brazil to be a major game player in the global offshore industry but issues like governmental controlled fuel price that is eroding the profits of oil companies is a serious concern for the future exploration and development operations in pre-salt fields. Unjustified sharing of benefits among different states of Brazil is also generating conflicts on the Pre-Salt oil royalties, a political issue which must be handled by Brazilian government as soon as possible to avoid political uncertainty. One of the major hurdle in attaining self-sufficiency and energy efficiency is the outdated refining structure and lack of interest is development of gas distribution network. With the development of pre-salt reservoirs, the need of refinery will increase to a much higher level, thereby increasing the extent of the problem. In terms of sustainable development, there is mixed behavior by the Brazilian oil industry. Along with political steps taken by the government, the voluntary initiatives in terms of GRI reporting, ISO and OHSAS certifications and especially precautionary policies and implementations to prevent oil spills have certainly created a difference. However, due to deforestation by the extractive industry, Amazon forest and its inhabitants have borne huge social and environmental cost and have not been fairly compensated. The unjust behavior of the industry with the local community can certainly raise question about the implementation of sustainable policies but also threaten their social license status in future. The lack of proper and strictly implemented transparency and anti-corruption policies are also an important area of improvement. Increasing trends of domestic energy demand and the lack of in-house value addition servicing of crude oil has transformed Brazil into a net oil product importer. By 2020, due to accelerated production from pre-salt reservoirs, the exports revenue of Brazil will reach up to US $ 27 billion, but its effect of GDP is quite minimal indicating the increasing importance of value addition processing within the country. In the recent years, Brazilian government is following an incremental price trend, to support the losses borne by Petrobras due to the subsidized fuel pricing policy and to attract the international operators for the development of pre-salt reservoirs. The fuel prices are expected to decline from 2017, with the new reservoirs entering mainstream production. Brazil faces numerous challenges and has implemented some successful and unsuccessful mitigation strategies. One is to balance the positive outcomes afforded by exploration, such as increased production, export possibilities and increases in revenues, with all possible social and environmental impacts.
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