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Brazil at a Crossroad: Join OPEC or Oil Production Expansion?

By: Kathyrn Kellyne Chong, Navya Bajaj

Research Head: Shreya Kasibhatla

Editor: Akshat Daga

Illustration by Ng Jia Ying Abstract Brazilian President Jair Bolsonaro expressed his interest in Brazil joining OPEC (Organisation of Petroleum Exporting Countries) in late 2019 after huge oil rights auctions, raising doubts in its energy industry. This article explores Brazil’s past relations with OPEC, reasons as well as the effects for and against Brazil joining OPEC as a member. Despite the benefit of stabilising oil prices for Brazil’s increasing oil exports, Brazil is unlikely to join because of possible OPEC limits on Brazil’s production expansion, which it depends heavily on to boost investments and reduce its high debt. 1. Introduction In October 2019, Brazilian President indicated his interest in Brazil joining OPEC, after Brazil expressed interest in exporting more oil in the future with its oil rights auctions to raise rapid output (Kalin, Rania and Lawler, 2019). In late January, Brazil’s energy ministry conveyed the possibility of talks regarding Brazil-OPEC cooperation with Saudi Arabia officials (Verma, 2020), which was later dismissed by its minister Bento Albuquerque (Chakraborty and Singh, 2020). 2. Background (OPEC)

An international organisation founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, OPEC aims to coordinate member nations’ production policies, in order to stabilize oil prices and ensure efficient oil supply to consuming nations. Member countries monitor the petroleum market and vote to alter oil production to maintain stable prices and supply (OPEC, n.d.). Comprising 14 members from

Africa, Middle East and South Africa (OPEC, n.d.), OPEC controls almost 80% of the world’s crude oil reserves (OPEC, n.d.) and supplies 41.91% of the global production (OPEC, n.d.). 3. Brazil & OPEC Brazil has rejected previous invitations to join OPEC by its founding members: from Saudi Arabia in late 2008 claiming its priority was to export refined and not crude oil to boost income (Watkins, 2009) and from Iran the same year after discovering massive offshore oil fields containing approximately 40 barrels of untapped oil which could make Brazil a major oil exporter (BBC News, 2008; France24, 2008). In 2009, Brazil rejected OPEC’s invitation, reasoning it should only join when it becomes an exporter and not when it required oil imports to meet its consumption needs (Watkins, 2009). Now that Brazil has become an oil exporter with increasing exports (Statista, 2019), it was considering joining OPEC. 4. Brazil’s Oil Industry

According to BP Statistical Review of World Energy 2019, Brazil has the 10th largest share of global crude oil production at 2.8% and 5th largest compared to top-producing OPEC members as of 2018. If it joins OPEC, Brazil would contribute substantially to the organisation’s global oil production share. Despite being one of the largest economies with gross domestic product (GDP) of 1.689 trillion USD (The World Bank, 2019), Brazil has been plagued with considerable national debt, comprising 87.89% of its GDP in 2018 and expected to reach 95% by 2024 (IMF, 2019).

To tackle its growing debt and boost investments, energy reform policies are being implemented. They include letting private companies operate offshore reserves through government auctions for energy projects and authorising foreign investment access in offshore oil fields. Its regulator, National Agency of Petroleum, Natural Gas and Biofuels, anticipates that 300 offshore wells, which are to be functional by 2027, would contribute 2mb/d (million barrels per day) as compared to its current rate of 2.5 mb/d. Its national oil corporation, Petrobras cut planned investments by a quarter to $74.1 billion for the 2017-2021 period. Reforms have had some success with Shell announcing its plans to increase investment by $10 billion in Brazil over the next five years in November 2016 (OPEC Secretariat, 2017). 5. Reasons & Effects of Joining OPEC

One of the biggest benefits for Brazil joining OPEC is the organization’s ability to stabilize oil prices. Brazil’s oil output from offshore fields has been increasing and production surged by 220,000 barrels per day (bpd) in August 2019 to a record of 3.1 million bpd, according to the International Energy Agency. Brazil would become OPEC’s 3rd largest producer, pumping the equivalent of over 10% of its oil output and its membership would help stabilize the global market. With rise in Brazilian exports (supply rising while demand falling), the price of oil would stabilize. Ironically, it is the soaring non-OPEC supply growth that poses a barrier to OPEC’s efforts to rebalance the oil market. Rystad Energy, a Norwegian consultancy, estimated that the global oil market will be oversupplied by 800,000 barrels a day because of the new production and slowing economic growth. Consequently, OPEC wants to recruit more members (to control global output). Other advantages of joining OPEC include geopolitical aspects. “We believe in democracy, market economies, cooperation and global integration," Economy Minister Paulo Guedes said. He also noted participation in cartels and artificial price controls is something anathematic to the country's core principles.

Despite the pros of joining, several factors prompt Brazil to decide otherwise. According to 2017 OPEC World Oil Outlook 2040, Brazil is expected to increase its crude oil production from 2.6 mb/d in 2015 to 4.2 md/b in 2040. Its oil and gas industry is expected to attract $258 billion USD of investments and create 400,000 jobs (Jones, 2019). Joining OPEC would hinder Brazil’s oil expansion plans as Brazil would have to comply with any organization-level production cuts even as its production is currently and set to continue rising. According to Minister Albuquerque, Brazil is expected to be among the top-five energy exporters by 2030 and is tapping on private investment to boost output. An OPEC membership would make Brazil less attractive to investors if given output limits, which could further the country’s political and economic instability. 6. Conclusion Brazil’s growth in offshore production is against Saudi Aramco’s IPO and OPEC+’s efforts to limit world supply, but it is committed to the free market which reduces the likelihood that it will suddenly join OPEC and limit its production. To grow its economy and reduce national debt, Brazil must continue with its reforms to boost its oil industry’s competitiveness, in order to attract foreign investments to develop its offshore fields and increase production.

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