God may indeed be Brazilian after all
From The Economist print edition
WHEN Francisco Suares, a Portuguese explorer, wrote home to his brother in Lisbon about Brazil's natural bounty in 1596, he declared himself “ashamed to write it, fearing that I shall not be believed.” And so it remains today. Brazil's forests are bigger than anywhere else's. Its soil is so fertile that some trees grow to full maturity quicker than people do. Beneath the soil lie huge mineral deposits that are raw material for China's double-digit growth. Brazil is already on its way to becoming an alternative-energy superpower. And as if to prove a popular saying that “God is Brazilian”, it now seems that there are billions more barrels of oil than previously thought lying beneath deep waters off the country's coastline.
Just how many billions is unclear, but Petrobras, Brazil's state-controlled oil company, announced earlier this month that it reckons the Tupi oilfield contains between 5 billion and 8 billion barrels. That may not quite yet put Brazil in the same league as Venezuela and Saudi Arabia, as Dilma Rousseff, President Luiz Inácio Lula da Silva's chief of staff who also chairs Petrobras's board, excitedly proclaimed. But the higher estimate would make the Tupi field alone equal to all of Norway's reserves. It contains light crude, which is less expensive to refine and therefore worth more. And there may be other big deposits to be found nearby.
José Sergio Gabrielli, Petrobras's chief executive, refuses to speculate about how big an oil power Brazil might become. But he does concede that there is the potential for many more discoveries on the scale of Tupi—which itself is the world's second-biggest strike in 20 years, after Kazakhstan's 12 billion-barrel Kashagan field, discovered in 2000.
Most of Brazil's oil comes from the Campos basin, in the waters off Rio de Janeiro. It is typically found at depths of 1,000-2,000 metres below the seabed. Below that lies a huge layer of salt, at some points more than a mile thick. This stretches both north and south to the hitherto less prolific basins of Espirito Santo and Santos. It is below the salt, in the Santos basin, that Petrobras discovered Tupi. The company has also found “sub-salt” oil in Espirito Santo, although it has not yet assessed the scale of this. Mr Gabrielli believes that the two basins have yielded relatively little oil to date not because it is not there, but because it lies deeper underground, below the salt.
Tupi's oil will be hard to extract. Petrobras is a world leader in deep-water oil production, but Tupi is farther down than any of its existing fields. Drilling through the salt layer and the hard rock beneath brings further technical difficulties. The first test-well alone cost $240m. Moreover, there is a shortage of skilled labour and equipment throughout the oil industry at the moment—although Mr Gabrielli says Petrobras can transfer staff and resources from other projects if necessary.
Despite these caveats, it is reasonable to assume that Brazil's economy and currency will get a boost when the oil starts flowing, it is hoped, in 2010. The discovery might also tip the balance of power in South America further in Brazil's favour. Already self-sufficient in oil, Brazil is now likely to become a significant exporter. That may reduce the clout of Venezuela's oil-rich president, Hugo Chávez, in the region. As if to underline this, Petrobras announced on November 13th that it was pulling out of a joint venture in Venezuela.
Brazil's drive towards oil self-sufficiency follows the opening up of the industry to foreign investment in the 1990s, when the government also floated some 40% of Petrobras's shares on the stockmarket. Britain's BG Group has a 25% stake in the Tupi field, and Portugal's Galp Energia holds 10%.
The government followed up the announcement of the Tupi field by withdrawing neighbouring blocks from an auction of exploration rights due later this month. That might signal rising petro-nationalism. But it also looked prudent, since those blocks may be worth much more as more becomes known about Tupi.
Amid the euphoria, which included an instant leap of 26% in Petrobras's share price, came suspicion about the timing of the announcement. Less than a week after it was made, the company announced a poor set of results, with operating profit down 22% compared with the same quarter last year.
Petrobras has also faced mounting difficulties in supplying natural gas to thermal power plants, especially since its fields in Bolivia were quasi-nationalised last year. Some see the Tupi announcement as an attempt to distract attention from this. “It is like throwing a second ball onto a football pitch when the game is going against you,” says Alexandre Marinis of Mosaico, a political consultancy.
Electricity rationing under the previous government in 2001-2 helped Lula to win office. One solution now would be to raise the price of gas, but officials are worried that this would feed into inflation, and jeopardise the scope for further cuts in interest rates. Mario Pereira, an energy consultant, reckons that the risk of electricity shortages should wane after 2008, if Petrobras completes a planned liquefied natural-gas terminal on time.
That may be a big if. Lula and Ms Rousseff, a former Trotskyist who is sometimes touted as a potential presidential candidate for the ruling Workers' Party, were keen to associate the government with Petrobras's strike. But the oil may not start flowing until after the next presidential election in 2010. Energy may be an electoral headache rather than a boon for the government, if not for the country.