Brazil is Pumped up over Offshore Oil Field

RIO DE JANEIRO (By Chris Kraul, LATimes) September 25, 2008 — Exploratory oil wells drilled off Brazil's coastline indicate the presence of a vast pool of crude that could propel this nation into the top tier of world energy producers.

The oil field highlighted last week by state-controlled oil company Petrobras lies in "ultra-deep" waters beneath an unstable layer of hot salt, presenting technological challenges that are sure to be ultra-high cost. The find has sparked a fierce debate about whether Brazil should stake hundreds of billions of dollars on a risky field amid market uncertainty and pressing social needs.

Already, Brazilians are bickering over how the revenue from the field called Pre-salt should be spent, years before the first barrel is pumped, economist Edmar Bacha said. Suggestions include improving education and building a nuclear-powered navy -- and even wiping out poverty.

But foreign oil companies, whose investments helped make the recent discoveries possible, have been spooked by the Brazilian government's threat to shut them out of future projects.

This month, the government may announce the formation of a national oil company that could own 100% of the deep-water reserves.

Expectations of such a development have caused a sell-off in shares of Petrobras, which has grown into the world's fourth-largest oil company in market value on the strength of Brazil's rising energy output over the last decade.

The oil field's prospects are dramatic.

Results from test wells drilled by Petrobras and two partners in the so-called Iara block in waters 150 miles south of here indicated the presence of as much as 4 billion barrels of crude, officials said Sept. 10.

Combining Iara with as many as 8 billion barrels estimated to be in the adjacent Tupi block could boost Brazil's proven reserves of 15 billion barrels of crude by 80%.

Brazil is abuzz with indications that Iara and Tupi are merely parts of a much larger, New Jersey-size deep-water oil field. It's been dubbed Pre-salt in reference to the mile-thick layer of salt between the ocean floor and the oil.

The preliminary tests are auspicious enough that President Luiz Inacio Lula da Silva touted the undersea wealth as enough to turn Brazil into a "nation of engineers," a reference to his belief that oil will finance a development boom.

"It could definitely change the face of the country," said Paulo Levy, an economist with IPEA, a Rio de Janeiro think tank.

How huge is the Pre-salt field? The Iara discovery bolsters estimates that it could contain 70 billion to 110 billion barrels of oil, said Segen Estefan, a professor of ocean structures at the Federal University of Rio de Janeiro, a leading petroleum research center.

For comparison, proven reserves in Venezuela, the United States and Canada stood at 87 billion, 29.4 billion and 27.6 billion barrels, respectively, at the end of 2007, according to the U.S. Department of Energy.

"There is no question there is a lot of wealth down there," said Joao Carlos Ferraz, research director at Brazil's national development bank, known by its Portuguese initials BNDES. "But there are uncertainties in terms of its size and the technical difficulties you will face."

Brazil ranks 15th among nations in oil reserves and 11th in production with a current average of 2.3 million barrels pumped daily. Unlike Latin American energy leaders Mexico, Venezuela and Colombia, where reserves and production are flat or falling, Brazil has doubled reserves and output since 1998.

A key to Brazil's success has been its advanced exploration and drilling techniques that enable it to exploit once-inaccessible oil deposits one mile or more beneath the ocean floor. Just as important was the decision in 1997 to open Brazil to investment by foreign oil companies. Dozens now operate in the country, usually in partnership with Petrobras.

The salt layer sitting above the deep-water reserve represents a new technological challenge. It's a shifting mass that makes the integrity of wells difficult to maintain, like "drilling through marshmallow," as geologist Estefan put it.

Added to the complexity is the depth of the deposit, a mile deeper than Petrobras has ever drilled.

"Pre-salt is a new frontier but it's not impossible," said Reginaldo Takara, a senior director at debt-rating firm Standard & Poor's. "The level of technology that company already has will allow it to move forward."

Another challenge is simple logistics. The crude is as much as 150 miles from shore, which means the oil companies would have to build an enormous infrastructure of pipelines, floating gas liquefaction facilities, boats, helicopters and shuttle stations to access and service the reserve.

Investment bank UBS figures the development cost could be as much as $600 billion over the next two decades. To move forward, energy companies would be betting that oil prices would remain high enough to recoup their costs and generate a profit.

Estefan estimates that as long as oil prices stay above $70 a barrel, the field will be profitable. But proving the size of the Pre-salt reserve could take six or seven years, he added, and as many as 40 additional exploratory wells, which will require billions of dollars in investment.

That's a big reason Petrobras this year said it was changing its investment strategy, pulling back from several oil projects in foreign countries to deploy more resources at home.

The government is expected to release a development plan by Tuesday. Officials at Petrobras, once a state monopoly and now 45% owned by private shareholders, declined several requests for interviews.

"It's very dangerous to change the rules of the game now," said David Zylbersztajn, an energy consultant and onetime president of the country's hydrocarbons agency ANP, which was formed in 1997 to break Petrobras' monopoly and attract investment.

"The current system has worked very well. After all, it's what got us to Pre-salt."

President Lula feels confident enough in the oil field's potential to have declared during Brazil's independence day celebrations this month that the bounty from Pre-salt may abolish Brazilian poverty.

"It may be premature to talk that way," said geologist Estefan. "But technically I don't see impossible problems. We have had big challenges before but nothing that Petrobras engineers and researchers weren't able to solve."

Zylbersztajn was more circumspect.

"It's going to be risky," he said. "But that's oil."