São Paulo – The top export product from the Arabs to Brazil, oil, has been harshly impacted in 2020. In the first half of the year, shipments dropped by 15% from a year ago. The industry is one that suffers the effects of the COVID-19 pandemic, which includes social distancing and reduced mobility as safety measures. The attempt to curb the spread of the disease resulted in significant decreases in both the demand for fuels and the refining process in Brazil.
The effort directly hit the demand for the type of oil produced by the Arabs. “The pandemic was reflected in the Brazilian imports of Arab oils because one of the main goals of importing Arab oil is producing lubrication base oils. Since Brazil is not self-sufficient in the production of paraffinic base oil for producing lubricants, it regularly imports two types of oil from the Middle East (Arab Light from Saudi Arabia, and Basra Light from Iraq), which are processed in the Duque de Caxias Refinery in Rio de Janeiro,” Energy Research Company (EPE) Studies in Oil, Gas and Biofuels director Heloisa Borges Bastos Esteves explained.
This raw material from producers such as the Saudis is used by Brazilian refineries and supplies the automotive industry. The decreased mobility caused a decrease in demand and processed volume in refineries, thus resulting in a year-on-year 18% decrease in the production of lubricant base oils.
While the purchase of oil decreased, the sales of fertilizers imported from the Arabs stepped up. Year-to-date through May, imports of Arab oil (USD 690 million) was surpassed by imports of fertilizers from that bloc (USD 778 million). “The agricultural sector is flourishing. Even amid the pandemic, the demand for food does not decline much. Another point is a very strong devaluation of the real, far above other currencies. This is favoring rural activity. So, the demand for fertilizers have that stimulus,” EPE Trends analysts Walter de Vitto explained. He points out that, although fertilizers are bought in dollar, the product is but a portion of the cost, thus its purchases do not burden the producer too much.
For the following months, the EPE director is optimistic. “Although the pandemic still translates into significant impacts in the demand for fuels, there are better prospects for the following months. “In June, we could notice a return to previous levels in the Brazilian refinement processing volumes. We estimate that the impact of the pandemic in the refining industry will be smaller than in demand for fuels, and we can expect that the levels of oil processing in 2021 will return to 2019 levels.”
Pre-salt and Brazilian production
However, there is a long-term movement that is also contributing to the decrease in oil imports. “The reduction in Brazilian imports of oil from the Arab countries in the H1 was a result of two trends: the reduction in the total processed volume in the refineries due to the effects of the COVID-19 pandemic and the decrease in the contribution of imported oils, including from the Arabs, in the processed volume in refineries,” Esteves finished.
The decrease in the use of imported oils in Brazilian refineries is largely due to pre-salt. “Brazil started producing a lighter oil with pre-salt. So, previously you had to import almost all oil because the refineries in Brazil were predominantly set up to process light oil. The emergency of pre-salt caused imports of light oil, such as the Arab one, to consistently fall,” the Trends analyst explained.
While globally the producers have faced an impact amid the sharp drop in demand, which reached levels below 25 to 30 million barrels per day, Vitto explains that Brazil saw a decline in production but was not hit as hard as other countries. “The adjustment is occurring mainly through imports. No wonder the Arab countries have felt it,” he said.
In this world crisis, the strategy was making cuts in less competitive fields. “The impact in the Brazilian production was not that big. On the other hand, pre-salt production is increasing. It saw a decline but not as much as other countries, as pre-salt has very competitive fields. In fact, we have forecasted an increase in production this year. Brazil could be one of the few countries with a projection of increase,” he explains about the growth, which could reach around 6%.
The percentage of imported volumes in the processing of Brazilian refineries fluctuated from 2016 to 2019, ranging from 9.2 to 11.0%. As for 2020, it decreased to just 8.7% in H1. Still, the EPE director says that “one cannot state that the increase in the pre-salt production is reducing the reliance on imports.” Esteves stresses that in the specific case of imports from Arab countries, there is the particularity that we need to import paraffinic oil to produce lubrication base oils.
For the following years, EPE forecasts imports at the same levels of 2018, when 944.117 million barrels were produced, and 2019, when Brazil produced 1.018 billion barrels. “From the perspective that Brazil becomes a large oil producer, it’s possible – based on the analysis of technical, market, economic and financial aspects – that we substitute imports for Brazilian oils. But this relates to corporate strategies of the refining companies and will depend on trade talks, prices and types of oils produced domestically, and supply conditions. In other words, the final impact will depend on the refining strategies and trade strategies of the companies,” Esteves ponders.
Translated by Guilherme Miranda
