Brazil poised to become oil superpower

[October 10, 2008]  RIO DE JANEIRO, Brazil (AP) -- Four miles under the ocean's surface off Brazil's lush coast lie billions of barrels of recently discovered light crude -- a treasure that could transform the country into an oil superpower.

President Luiz Inacio Lula da Silva called it "a gift from God" and pledged to end chronic poverty and narrow the country's broad gap between the rich and the poor.

But before rhetoric becomes reality, Brazil must first get to the underwater reserves, among the world's deepest, and then manage a massive influx of wealth -- a formidable task that has left other national economies awash in corruption and even greater gaps between the rich and poor.

Jockeying for a cut of the proceeds has already begun.

Military officials are calling for increased military spending, stressing the need for a nuclear submarine program and new fighter jet fleet to protect the oil from rivals.

The nine fields discovered in the last year are thought to hold 50 billion to 80 billion barrels of light crude -- more than four times Brazil's current proven reserves. With the find, Brazil could supply all of its own needs for nearly a century or become one of the world's top oil exporters.

Even getting to that point will test the state-run oil company Petroleo Brasileiro SA, which has decades of experience in deep-water drilling.

The oil fields will be the most complicated and costly it has ever developed. Analysts say the project will require at least a $600 billion investment over 30 years.

The deep-water reservoirs lie some 185 miles offshore in the Atlantic, more than a mile below the ocean's surface and under another 2.5 miles of earth and corrosive salt. The salt beds can break loose and shear off piping, making it one of the toughest substances to drill.

Given those conditions, rough ocean currents and floating rigs, the technology required to tap Brazil's so-called "pre-salt" oil is on par with that needed to land a man on the moon, said Eric Smith a drilling expert at the Entergy-Tulane Energy Institute at Tulane University in New Orleans.

"If you were doing this with a drill from atop the Empire State building, about 1,000 feet up, you'd be trying to hit a target on 34th Street the size of a quarter," said Smith.

"Then you've got to go down an equivalent distance to reach the oil, and it might not be on 34th Street, it might be on 42nd Street," he said.

Petrobras will use seismic imaging to map the reserves, but even that will not provide a clear view under the salt, which blurs images, said Judson Jacobs, director of upstream technology at Cambridge Energy Research Associates in Cambridge, Massachusetts.

Drilled wells must also withstand crushing pressure of extreme depths, Jacobs said.

But there are logistical problems beyond engineering.

The recent record prices for oil have led to global shortages of drilling equipment just when Brazil needs it most. The country will have to rent 138 drilling platforms -- or build them for as much as $1.7 billion each -- and find at least 200 ships to transport oil and gas over the next 30 years, a mid-September study by Brazil's national development bank found.

The financial spillover could begin with Brazil's dormant shipping industry and create tens of thousands of jobs, Silva has said.

Silva appointed a cabinet-level committee to draft plans for restructuring the oil industry to accommodate rapid growth. That committee is expected to recommend a new state-owned oil company negotiate contracts for the pre-salt finds.

Still, some consider that a return to nationalism -- and an unfair rebuff of Petrobras shareholders, whose capital largely financed the most recent discoveries and who expect returns.

Petrobras will have to work with private partners, more likely through production-sharing deals than the current concession contracts it now favors, said Christopher Garman, head of Latin America research for the New York-based Eurasia Group consulting firm.

Garman called fears of nationalism that once dominated Brazil's energy industry a bit "overblown." Laws passed in 1997 broke the government's monopoly over Petrobras, allowing foreign investors to buy stakes in 60 percent of the company. About a million Brazilian citizens hold shares, too.

Brazilian officials insist any new oil company would not actually drill, but negotiate production-sharing agreements between Petrobras and private partners, which already include Royal Dutch Shell, BG Group Plc, and a division of Galp Energia, Portugal's biggest energy company. Petrobras, the dominant player in Brazil's energy sector, would retain its leadership position.

If oil hovers around $100 a barrel, the pre-salt fields would yield at least $5 trillion, doubling the oil sector's share of Brazil's economy to 20 percent, according to Garman. It would also triple currency reserves to $600 billion, the president of Brazil's central bank said.

Taxes and royalties from Petrobras were $34 billion, or about 4 percent of government income in 2007.

How the money is spent will have very serious ramifications.

A deluge of oil money has fueled labor abuses and economic imbalances that hit the poor hardest in many nations, such as Nigeria. It has also triggered rapid inflation and even overvalued local currencies, like the Netherlands saw in the 1960s. In those and other cases, the result was slashed exports and unemployment.

Silva has suggested Brazil might invest a good portion of its oil revenue, as Norway has done, rather than pump it into the economy. Treasury officials in May unveiled plans to funnel pre-salt income into a sovereign investment fund, which could ultimately hold between $10 billion and $20 billion.

But with 57 million Brazilians living in poverty, the government may spend much of its oil money to help the poor and boost education -- though no new programs have been outlined.

During a visit to an offshore oil platform, Silva promised that oil income would be "a direct bridge between nature's riches and the eradication of poverty."

"We will transform a perishable wealth, like oil and gas, into a source of permanent wealth for the Brazilian people," he said, clad in a Petrobras hardhat after dipping his fingers into some of the first crude pumped from the pre-salt area last month.

"God has given Brazil one more chance," he said.

[Associated Press; By BRADLEY BROOKS]

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