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Much of South America’s refined output was low-sulphur anyway, which has been a boon to suppliers ©Mauricio Pingo

Proceeding with Caution

With the pandemic deeply entrenched in the continent and the full economic impact still biting, South America’s main fuel producers aren’t getting ahead of themselves, John Rickards reports

South America, and Brazil in particular, was always going to be a key producer of VLSFO as much of the region’s crude is naturally lower in sulphur than elsewhere in the world. Nonetheless, with local export trade to China falling off a cliff in the early part of the year due to the Covid–19 and Petrobras, the main producer of the product, limiting output as a result during the early spring, it took a while to see fuel production in full flow again.

In July, with output at full speed, Petrobras announced that the Paulinia Refinery (Replan), in the state of Sao Paulo, had broken its monthly production record for 2020-compliant bunker fuel for two months in a row. In June, Replan produced 148,000 cubic metres, 20% higher than May’s previous record of 123,000 cubic metres.


The company also reported that June saw the resumption of operations of a distillation unit and a catalytic cracking unit at Replan to meet increased market demand for refined products. With the return of these units to operation, the refinery will once again have the capacity to process 69,000 cubic metres of oil per day, the largest in Petrobras’ refining arm.Petrobras exported 1.11 million tonnes of fuel oil in May, surpassing the previous record set in February 2020 by 10%. The amount of fuel oil exported was 231% higher than the volume exported in May last year.


“The record in exports occurs in a challenging period of the world economy with reduced global demand for oil and oil products caused by the Covid–19 pandemic,” the company said in a statement. “The strategy of diversifying the destinations of fuel oil exports has proved effective in capturing greater participation in the foreign market.”


The statement went on: “The record achieved reflects the result of actions taken during the crisis to return production to the Exploration and Production [branch of the company] and to readjust refining loads by focusing on products that maximize the company’s margin without putting pressure on inventories.”

In its quarterly reports, written as Brazil became one of the countries worst affected by Covid–19, Petrobras went into more detail regarding its approach to weathering the oil glut and economic effects of the pandemic – and how it sees any future recovery.


“The recent creation of a logistics executive officer and the strengthening of marketing and sales activities were quickly reflected into a more aggressive stance in crude oil exports – which in April reached a historical record of 1 million barrels per day – and fuel oil and bunker oil exports. Given the reduced level of variable costs in our E&P operations and the hedging strategy put in place, exports contribute to cash generation in the short term, partially offsetting the effect of the deep contraction in domestic fuel demand. This movement anticipates the preparation to thrive in a more competitive environment in the future.”


“The growth in exports and the reduction in the refineries utilization factor contributed to avoid the build-up of excess inventory, one of the most serious problems that affect the oil industry today.”


“In contrast to what happened in 2008–2009, we are predicting a slow recovery in global economic activity and, consequently, in demand for fuels. The nature of the shock is different, more powerful. The sudden loss of income is accelerating the financial leverage on families, companies and governments and the uncertainties associated with the lack of a vaccine, that may only be available in 2021, and the political and trade tensions between the US and China, a country that plays a critical role in the global supply chain also hinder the vigorous recovery of the global economy.”

“In the specific case of oil, the execution of the production cuts promised by members of OPEC+ is quite uncertain given the long history of non-compliance and the temptation caused by the need to generate cash for some of its members. The behavioural changes generated during the social distancing phase and the governmental incentives to replace fossil fuels are other factors that lead us to have a more cautious view on the evolution of oil prices over the next few years.”


Shipping is to some extent insulated from the consumer-end economic damage but Petrobras has to consider that three quarters of its domestic products sales are for road transport.


To the south, the second largest economy in South America has been hit hard by the pandemic lockdown. Argentina’s government was, at the time of writing, trying to renegotiate a vast tranche of international debt. After two years of recession, the further crunching of its domestic economy caused by Covid–19 has left Argentina struggling to appease foreign creditors as the government ramps up spending to cover for Covid–19 relief measures. The prospects for a speedy end to the coronavirus emergency did not look good at the time of writing as the country’s case rate spiralled and Buenos Aires was being hit particularly hard. Primary spending nearly doubled in May, to cover various assistance packages. Meanwhile economic and industrial activity sharply declined.


The effect of those economic struggles on the bunker sector are yet to be determined. However, as is the case elsewhere, it is likely a reduction in import/export traffic will eventually ripple down to fuel sales. According to the Argentinian Petroleum and Gas Institute, bunker sales in the first quarter of the year (Q2 figures had not yet been released at the time of writing) showed a boom in volumes, with sales up 70% year-on-year. In common with Brazil, locally-produced fuel tends to be low sulphur anyway, which could explain the sales surge. Colombia remained deep in the grip of pandemic lock down, with the country’s Caribbean coast particularly badly affected. However, Ecopetrol, the national oil producer, is still looking to expand its fuel production capability across the coming years.


A new investment plan announced in July includes around US$300 million in funding for the company’s downstream segment, focusing primarily on ensuring the reliability and sustainability of the operation of the Barrancabermeja and Cartagena refineries, as well as continuing the company’s fuel quality and waste water management programs.

“The joint throughput expected from the refineries for 2020 is ranging between 300 and 320 thousand barrels per day,” the company said. “Looking at growth opportunities, the project to interconnect the original crude unit of the Cartagena refinery with the new refinery is expected to continue, with investments of $60 million in 2020. This project would increase the refinery’s capacity to more than 200,000 barrels per day by 2022.”


These measures are a post-Covid decision and while they represent a sharp reduction in its original plans, they’re still a considerable investment.


The company said: “As a result of the solid financial results reported in 2019, Ecopetrol announced in November of last year an increase in its investment levels for 2020, to a range of between $4.5 to $5.5 billion (a plan set with an average Brent price of $57 per barrel). The unprecedented crisis suffered during the first quarter of 2020, instigated by the simultaneous shocks to the supply (price war) and demand (Covid–19) of oil, resulted in an downward adjustment of the investment level to a range between $2.5 and $3 billion (with an expected average Brent price of between $30 and $40 per barrel). After a thorough review of the company’s portfolio and the progression of its interventions, and with the gradual recovery of economic activity, the current outlook allows for an investment increase to a new estimated level of between $3 billion and $3.4 billion for 2020.”


As with anything in 2020, how accurate such predictions will prove to be remains very much to be seen.

Petrobras has seen bunker demand rebound, but is guarded about the future ©Petrobras Press Agency
Petrobras has seen bunker demand rebound, but is guarded about the future ©Petrobras Press Agency

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