Highlights
• Brazil finds new oil field in Santos Basin; could hold up to 8 billion barrels
• Brazil could become a factor in the international energy industry
• Brazil will be challenged in extracting the oil and confronting potential changes to oil policy
On November 8, Brazil’s state-run oil company, Petrobras, announced that it had discovered as much as 8 billion barrels of untapped oil at the Tupi oilfield, 155 miles offshore southern Brazil in the Santos Basin. The find is the largest oil discovery since 2000 when the Kashagan oilfield in the Caspian Sea was found to hold nearly 12 billion barrels. However, development of the Kashagan oilfield has been sporadic in part because of ecological concerns. As a result, the detection of oil off Brazil’s coast is that much more appealing to international oil companies and oil-dependent nations. The find could transform Brazil from a barely self-sufficient producer into a major crude exporter.
A Game-Changer for Brazil
Domestic oil production by state-run Petrobras fell 2.3 percent in October 2007 from September 2007. This drop-off continued a four-month production slide and was a steep five percent below 2006 levels. With Petrobras slowly depleting its current resources, the Tupi oilfield holds promise for Brazil’s ailing oil industry.
When Petrobras begins oil output from Tupi, in approximately 2011, the oilfield will produce about 100,000 barrels a day, but is expected to ramp up to as much as 1 million a day before 2020. Thus, within a few short years, Tupi could catapult Brazil ahead of Mexico and Canada in total oil reserves, becoming second only to Venezuela and the United States in the race for the largest oil reserves in the Americas.
Changes and Challenges
Some changes to oil policy have already become apparent since the discovery in the Santos Basin. Brazil is analyzing its relationship with private oil companies, resulting in the removal of 41 exploration tracts from an upcoming auction of potential oil fields open to private oil companies. The remaining tracts, almost 270, will still go up for sale, but Brazil has reserved the most promising areas around the Tupi field for national exploration.
This policy is quite different from the previous decade of relatively open concessions. Most officials are calling for revamped laws limiting the role private oil companies in the nation and some have gone so far as to suggest a Venezuela-like nationalization of the oil sector so that Brazil and Brazil alone would profit from the Tupi oilfield. While changes to the laws concerning private oil companies are almost certain, it is unlikely that Brazil will completely nationalize the sector.
Nationalization is unlikely because Brazil likely recognizes the high levels of financial investment required to extract oil from the Tupi oilfield. The extraction of the oil, which is located 4.5 miles beneath the ocean’s surface, is an extremely costly proposition. Petrobras does have vast expertise in deep-water drilling but the development of Tupi is a distinct challenge unlike any previously drilled field. To reach the Petrobras will have to tap the industry’s latest technologies. Petrobras will need to run lines through 7,000 feet of water and then drill up to 17,000 feet through salt and rocks. To date this feat has not been achieved by other companies. In all, it is expected that over 100 wells will be needed to fully tap the reserve at Tupi, an endeavor that could cost upwards of $100 billion to develop.
Brazil’s Oil Future
Brazil is years from extracting oil from the discovered field and perhaps close to a decade from realizing any profits. Thus, the nation will still have to deal with declining output and the current regional energy crisis. Additionally, there is no guarantee Brazil will be able to cultivate the field.
The prospect of the Tupi oil field has been enough to boost the prospects of Brazil’s energy industry. It has provided a new dimension to Brazil’s economy and is likely to stimulate negotiations and deals within the region. However, for Brazil to retain its bargaining power and become a permanent high-level player in the international oil industry, the discovery must be developed in a timely manner and produce at least the projected level of crude. Despite the excitement generated by the discovery of the Tupi field, much investment and innovation is still required.
