Potential for Brazil to China tonne-mile gains

Petrobras’ Chief Executive Jean Paul Prates caused something of a stir with recent comments made regarding the planned opening of a Chinese subsidiary.

Brazil Crude Production Jan 2012-Jul 2023

Not particularly notable in and of itself, but the stated aim to increase Petrobras’ share of total Chinese oil imports from 5% to 15% within the next couple of decades, creates a significant narrative for the future growth of longer haul crude trades. With this being a potential longer-term story, we felt it pertinent to examine in closer detail the current story around Brazilian crude, tanker utilization in the region and the ongoing potential for growth across the short, medium, and long term.

Brazilian crude exports and production growth has been one of the most significant bright spots across the crude tanker market, as huge investment in developing new fields has seen crude production shoot up from 2.6m b/d in January 2019, to sit around 3.4m b/d by the latest month of June 2023 data. The proliferation, especially in pre-salt fields, has seen a significant uptick in tanker utilization in the region, with much of the exports heading out on larger crude tankers, especially VLCC’s, which have accounted for around 64% of Brazilian exports during 2023, the highest share seen since the data began in 2015.

Even before focusing on the longer term aims of Petrobras, the medium-term direction of crude exports is expected to be positive, with the latest published ‘Strategic Plan’ highlighting the addition of a further 18 FPSO projects from 2023-27. This creates an environment where further growth of production and exports are expected in the near to mid-term, of undoubted benefit to the health of the tanker market over the same period.

Of current Brazilian exports seen during 2023, around 39% has headed out East to Chinese buyers, almost exclusively on VLCC’s. With a round voyage from Rio to Ningbo taking circa 80 days based on 13kn, this generates significant utilization of VLCC’s, with the trade requiring around double the number of vessels compared with lifting the same barrel of oil from the Middle East to China, for example. For VLCC’s Brazilian exports have generated a total of 198bn tonne-miles during 2023 to date, only 3bn tonne-miles below the figure for the total year of 2022.

Chinese crude imports currently sit around 10.3m b/d, as per July data, with crude oil ex Brazil currently accounting for just under 6% of that total, with 605,000 b/d of crude heading into China throughout July loaded from Brazil. In the simplest of terms, this creates the requirement for a single VLCC to be loaded every 3.3 days for this China run, tying up the equivalent of 25 VLCC’s to satisfy this trade route based on current volume. If Brazil were to satisfy 15% of overall Chinese crude imports, this would amount, in today’s volumes as just over 1.54m b/d. The number of VLCC’s that would be tied up would jump significantly, up to a total of just under 64 vessels, or the equivalent of just over 7% of the currently trading fleet. With Chinese refinery capacity forecast to grow significantly over the coming few years this figure is likely to be even higher in practice.

With VLCC utilization and tonne-mile demand ex-Brazil expected to see growth over the near, mid and longer term, the signs remain positive for the VLCC market in the region.