Brazil's Potential

May 2, 2008

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

Brazilians are dancing in the streets. But will the hoopla last? The celebration comes amidst observations by key energy officials there that surveyors have discovered an area off-shore that may hold 33 billion barrels of oil. That would make it the largest such find in 30 years and the third biggest ever.

Brazil could potentially transform into an international powerhouse while the United States could win access to oil supplies from a friendly and democratic nation. Brazil, meantime, is warm to foreign investors, having already partially privatized its oil sector. A rich, new source of oil would invite a host of prospects. "We're already doing well, and if I look ahead, I think it will only get better," says Antonio Bonchristiano, who manages Latin America's largest private equity firm called GP Investments. In a speech, he also praised Brazil's well-developed infrastructure.

Brazil, which is second in the region to Venezuela in terms of oil production, now holds 11.8 billion barrels in reserves, or about 1 percent of worldwide capacity. With new finds, Brazil could catapult into the eighth spot globally and give it the political and economic respect it has long sought. It may furthermore cast a shadow over the "peak oil theory" that says such supplies will soon reach a plateau and decline thereafter.

The latest announcement out of Brazil with respect to the Carioca area comes atop two earlier ones. Last November, Petroleo Brasileiro said the Tupi oil field may hold 8 billion barrels while in February it said that its Jupiter region was possibly a goldmine. Altogether, Brazil may have access to 100 billion barrels, although that is well below the 256 billion barrels that exist in Saudi Arabia.

While the partly state-owned oil company is adept at getting to deepwater oil discoveries, it will certainly be challenged by the latest proclamations; the purported deposits are located far at sea and layered under miles of salt. Even the company says that it cannot make any guarantees. Under the best of circumstances, it will take up to a decade before any of it Brazil's potential finds could be sold on the world market.

It's all good for the United States, which has long been tormented by Iran and Venezuela. Brazil, conversely, would negate those threats and seek to increase production.

"Long-term, Brazil is going to be a major petroleum power," says David Fleischer, a political scientist at the University of Brasilia, in an Associated Press story. "It will enhance its importance in South America and the world as an energy supplier -- and that translates into political power."

Other Beneficiaries

No doubt about it, Brazil has put its debt-plagued past behind it. But it is still beset by the problems that afflict much of Latin America -- populations overwhelmed by poverty, lack of education and poor health care. Brazil is furthermore suffering as illegal loggers try to cut down its plush rainforests.

Huge oil discoveries could certainly move Brazil into the developed world. And while the potential is there, Petroleo Brasileiro adds that oil reserves in the middle of the ocean are impossible to measure and equally difficult to extract. "The ongoing exploratory activities include drilling new wells, long-duration formation tests, and new geological studies to prove the range of the discovery," the company said in a statement.

In the short run, the announcement of a potentially huge oil find has boosted the share price of not just Brazil's oil company but also that of its partners in the region that include firms from the United States, Great Britain and Spain. But it has done nothing to ease the price of oil that continues to go higher.

It's a predicament that could only worsen as the demand for oil escalates not just among Western nations but also among those in the Eastern bloc, the Middle East and South Asia. In fact, oil consumption outside of the world's most developed economies is anticipated to grow by four percent a year for the rest of the decade.

At the same time, exports from OPEC, Russia and Mexico are expected to fall by 7 percent over the next three years. It's all precipitated by increased consumption and declines in global production rates, particularly in the North Sea, Mexico and in parts of the United States. The phenomenon could occur throughout the world.

Brazil could not only empower itself but much of the rest of the world as well. If the nation is to get access to rich oil deposits, it must attract foreign capital. The estimated price tag associated with testing one drill site is $240 million. Subsequent costs are only going to climb as companies increase their exploration efforts. It's also getting pricier to explore, albeit new drilling technologies are cutting the risks.

But ongoing market reforms will bear fruit, even though the government there is anticipated to increase its taxes as the nation becomes a lush place in which to explore. According to Brazil's National Oil Industry Organization, the domestic petroleum industry there is expected to attract $100 billion in investment over the next decade. "Brazil is on its way to becoming one of the main international poles for the exploration and production of petroleum," says the World Petroleum Council.

If Brazil realizes its aspiration, it could enrich its people and win international prominence. The United States, in turn, would receive a plush and reliable new source of oil. It's all years away but the prospects are good news for a global community that has long been held captive by unfriendly producers.