Brazil refineries soaking up crude exports

An increase in domestic crude runs at Brazilian state-controlled Petrobras' refineries has suppressed exports, mainly to China, according to data from oil regulator ANP and Brazil's planning ministry.

The volume of domestically produced crude used in the 14 refineries averaged 1.63mn b/d in May, a 5.5pc increase over April and the highest level since January 2016.

Petrobras' use of lighter pre-salt grades in the domestic refining fleet will rise significantly in the second half of the year, according to an executive familiar with downstream planning.

After months of utilization rates hovering around 75pc, Petrobras is starting to ramp up some refineries to meet recovering demand, mainly for diesel. The company's domestic fuel production has increased steadily since February and is expected to continue to grow throughout the second half of the year.

Increased demand for government-subsidized diesel and new perks for distributors are expected to help Petrobras claw back market share lost to importers throughout 2017. But the improved downstream scenario and lower domestic output is starting to crimp the volume of crude Petrobras sends abroad, particularly to China.

Petrobras produced around 2.035mn b/d of crude in Brazil in June, a 7.3pc year-on-year decrease. In the first half of 2018, Petrobras' domestic oil production averaged 2.074mn b/d, an almost 6pc decrease compared with the same period of 2017. Output is expected to average 2.10mn b/d in 2018, compared with 2.15mn b/d in 2017.

In May, a Petrobras executive told Argus the company expected average crude exports to drop to 420,000 b/d in 2018 from 500,000 b/d in 2017.

The company's crude exports averaged 496,000 b/d in the first quarter, down by 19pc from a year earlier. The company will release export data along with second quarter results on 3 August.

Total crude exports from Brazil averaged 854,269 b/d in May, a 17pc decline compared with the previous month, according to ANP data.

Exports to China, the primary destination for Brazilian crude, experienced a 34pc year-on-year decline in value in June, based on US dollar fob prices collected by the planning ministry.

By volume, the lion's share of Petrobras' crude exports is destined for China. An undefined percentage of the China-bound crude goes toward servicing a $5bn export-backed loan with China Development Bank.

Other independent producers in Brazil, including Chinese state-owned firms CNOOC and CNPC, are increasing eastward shipments of pre-salt crude, but the volumes are still limited relative to the Petrobras portfolio.

Petrobras' exports are likely to rebound in 2019, when the company will ramp-up four new pre-salt units—two in the Lula field and two in the Buzios field—that it plans to bring on stream in the fourth quarter. Three other platforms are planned for the first half of next year.

The company has been shipping cargoes from the 831,000 b/d Lula field, Brazil's biggest, to China for years, but is also introducing new grades such as Mero and Buzios.

At least two shipments of 29°API crude from the 40,000 b/d Mero field have already been sold to Chinese refiners since the field started test production in November 2017. The number is likely to increase throughout the second half of the year as the field partners—Petrobras, Shell, CNOOC, CNPC and Brazil's state-owned pre-salt marketing firm PPSA—iron out offloading schedules.

Petrobras also plans to bring the 28.4°API Buzios crude to market by first quarter 2019, a company executive tells Argus. The firm says production at Buzios should average around 65,000 b/d by year-end and should reach 360,000 b/d by the end of 2019.