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The New York Times: Hot Prospect for Oil’s Big League

By ALEXEI BARRIONUEVO
Published: January 11, 2008

RIO DE JANEIRO — While some of the world’s largest oil producers, including Mexico and Iran, are struggling to remain exporters, Brazil is moving in the opposite direction. A huge underwater oil field discovered late last year has the potential to transform South America’s largest country into a sizable exporter and win it a seat at the table of the world’s oil cartel.

The Petrobras 54 platform was in Niteroi, Brazil, last August, before its deployment.
The new oil, along with refining projects under way by Petrobras, the national oil company, could eventually make Brazil a larger exporter of gasoline as well, adding to supplies in the United States and other countries where it is all but impossible to build new refineries.

The subsalt basin that contains Tupi, the new deepwater field estimated to hold the equivalent of five billion to eight billion barrels of light crude oil, is creating a buzz among the world’s largest oil companies. They have struggled lately to find global-scale projects worth investing in, even with oil touching $100 a barrel. Tupi is the world’s biggest oil find since a 12-billion-barrel field discovered in 2000 in Kazakhstan.

Talk by the Brazilian government of tightening investment terms for the new offshore exploration frontier, however, could quickly curb international enthusiasm. Brazil is even drawing comparisons with Bolivia and Venezuela, two South American countries that have nationalized parts of their energy industries in recent years.

Still, Brazil has remained far more open to foreign investment than those neighbors, and it has encouraged international oil companies like Exxon Mobil, Shell and Chevron to pour billions of dollars into offshore exploration, though so far without much success.

Even if Petrobras asks for help from other major oil companies, developing Tupi will require solving thorny technical challenges and executing a project on a scale it has never tried before. The first commercial quantities of oil are not expected for some seven years.

José Sergio Gabrielli, the chief executive of Petrobras, said he was optimistic that the company could develop the oil with little outside help.

“We think we can develop the oil faster than we thought at the beginning,” Mr. Gabrielli said in an interview here last week. “We don’t think we have any insurmountable challenge on the technology side.”

Just a decade ago the notion that Brazil would become self-sufficient in energy, let alone emerge as an exporter, seemed far-fetched — even in the sunny beach city of Rio, where Petrobras is based. Petrobras was formed five decades ago largely as a trading company to import oil to support Brazil’s growing economy, which is now the world’s 10th largest and supports more than 185 million people.

Yet two years ago, even without Tupi, Brazil reached its long-sought goal of energy self-sufficiency, in part by expanding its domestic fossil fuel resources but also by developing an extensive ethanol industry using sugar cane. Today Petrobras has a standing goal of raising its Brazilian crude oil output by at least 100,000 barrels a day every year.

With Tupi, Brazil’s 12.2 billion barrels of proven reserves would increase to some 17.2 billion, putting Brazil ahead of Canada’s 17.1 billion and Mexico’s 12.9 billion. It would fall between China and Nigeria on a world scale, according to the BP Statistical Review of World Energy. Venezuela, by contrast, has some 80 billion barrels of proven reserves.

Rapid economic growth and declining oil production in oil-rich nations like Indonesia, Mexico and Iran are crimping how much they can sell abroad, straining the global oil market. In some cases, the governments of these countries subsidize gasoline heavily at home, which tends to encourage wasteful habits.

But Brazil, with an economy growing at a healthy clip, sells fuels to its citizens essentially at market rates. And the huge three-decade-old effort to turn sugar cane into ethanol has made Brazil the largest consumer of plant-based biofuels in the world. The government requires that gasoline contain a minimum of 25 percent ethanol and that every service station have at least one pump that delivers pure ethanol.

The growing ethanol program is putting Brazil in a better position to take advantage of Tupi’s oil riches, Mr. Gabrielli said. Petrobras expects ethanol use to rise as more flex-fuel vehicles hit the roads. “We are going to have more gasoline for export than we have today,” he said, “because part of the gasoline is going to be displaced by ethanol.”

Petrobras currently sells some 90 percent of its refined products in the Brazilian market. To ensure a future as an exporter, Petrobras is building two new refineries scheduled to begin operations in 2010 and 2014, which will increase the country’s refining capacity by nearly 40 percent. The company is also investing in units that will expand its production of heavy crude oil into diesel, and is pouring $8.6 billion into reducing sulfur at its 11 refineries.

But its biggest challenge will be developing Tupi into a major production field. The field lies some 4.5 miles below the ocean’s surface. To reach it, Petrobras will have to go through 7,000 feet of water and then drill up to 17,000 feet of sand, rock and a massive salt layer that extends across hundreds of miles. Drilling around or through the salt poses a more significant challenge than drilling through salt layers in the Gulf of Mexico, which are more dispersed, analysts say.

Some analysts forecast that Tupi could cost more than $20 billion to develop, an estimate Mr. Gabrielli would not confirm. Drilling rigs are in short supply around the world, with rates running almost $600,000 a day for the largest ships.

The first big task, Mr. Gabrielli said, is to find an outlet for the huge amounts of natural gas that are also in the Tupi field, which is nearly 200 miles offshore. Given the challenges of building a gas pipeline from such a remote location, Petrobras is considering building floating liquefied natural gas plants or a floating gas-fired turbine to generate electricity.

To get the oil to shore, the company’s engineers will need to find innovative ways to keep pipes warm and to develop stronger casings for wells to resist the effects of salt corrosion.

The new oil frontier that Petrobras and its partners — including BG of Britain — have discovered in the Santos Basin where Tupi lies may lead the company to scale back its spending in Africa and the Gulf of Mexico in favor of pouring more money into developing Brazil’s reserves. “The company will be overstretched and will have to revisit its strategy,” said Roger Diwan, a partner at PFC Energy in Washington.

The Tupi discovery has changed the psyche seemingly overnight in Brazil. Venezuela’s president, Hugo Chávez, chided President Luiz Inácio Lula da Silva, calling him an “oil magnate.” Mr. da Silva himself declared the find as proof that “God is Brazilian” and vowed that Brazil would seek to join the Organization of the Petroleum Exporting Countries in a few years.

Petrobras’s success was hardly an accident. In 1997 the Brazilian government opened up Petrobras’s exploration and production division to outside companies and invited in private investors. More important, the company developed expertise in deepwater drilling that has put it on par with Shell and Exxon Mobil.

“They were not as insular as many of the state-owned oil companies were,” said Donald Hertzmark, an international energy consultant in Washington. “They are widely considered world class in deepwater drilling and have pursued myriad joint ventures throughout the world.”

The rise of Petrobras contrasts starkly with the decline of the other large oil company in South America, Petróleos de Venezuela, the national oil company of Venezuela known as Pdvsa. While Petrobras has achieved record production, Pdvsa’s output has fallen since Mr. Chávez was elected in 1998.

Mr. Chávez has all but re-nationalized parts of the Venezuelan industry by imposing much-stricter terms on foreign oil companies.

Mr. Gabrielli says that Petrobras will avoid following the path blazed by Venezuela and Bolivia. He said that he was in favor of imposing tougher terms for the subsalt basin where Tupi is located, which the Brazilian Congress is now considering.

But he says that Petrobras has already borne considerable exploration risk, making it a far smaller gamble for outside companies to explore further in the offshore area. And he adds that most major oil producing countries, not just those proclaiming their socialist ambitions, impose stiff terms on foreign oil companies, especially in times of high oil prices.

“After the discovery we had,” he said of the potential profits to be earned by the oil majors, “this is like buying a winning lottery ticket.”

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