Tupi Oil Find Could Prompt Brazil to Limit Private Oil Companies

RIO DE JANEIRO Nov 15, 2007 (Dow Jones Newswires)

Brazil is one of the few countries in the world to have opened up its oil industry to the private sector in recent years, just as many governments have sought to cash in on sky-high oil prices by increasing state controls.

That may be about to change with last week's confirmation of the largest oil discovery ever made in Brazil, which could mark a major turnaround in the country's relatively minor role in the oil world. State-run Petroleo Brasileiro SA (PBR), or Petrobras, on Thursday said reserves at its ultra-deep Tupi field could be up to a massive 8 billion barrels of oil equivalent.

While it's too early to tell exactly what the ramifications will be, Brazil has given some indications that it could increase national control, following the trend that has spread around the globe, from Venezuela to Russia.

Just hours after the announcement, Brazil cut out 41 promising oil exploration blocks from a license auction scheduled for the end of November. The blocks are close to Tupi or have similar geological characteristics in Brazil's pre-salt area, which lies off the coast in the Atlantic Ocean.

Mines and Energy Minister Nelson Hubner said Wednesday the government hasn't yet decided what to do with these blocks, the Estado newswire reported. "We don't even know whether it's necessary to make legislative changes, or whether the current law allows a differentiated treatment for those blocks," Hubner was quoted as saying.

The latest discovery lies a considerable seven kilometers below sea-level: the water depth is around 2,000 meters, followed by 3,000 meters of rock and sand below the seabed, and then a further 2,000 meters through a layer of salt.

Petrobras Chief Executive Sergio Gabrielli said further discoveries in the pre-salt layer could place Brazil among the eight countries with the largest oil reserves in the world.

"It's clearly in Brazil's national interest to keep that oil. It's strategically very important for Petrobras," said Alan Nesbit, senior portfolio manager at First State Investments in Edinburgh. First State manages $28 billion in emerging market stocks, with about 20% in Latin America. "Other oil companies will be very disappointed, but there's nothing they can do about it."

Jorge Camargo, the president in Brazil of Norway's StatoilHydro ASA (STO), called the change to the upcoming oil block auction "grave and worrying," and complained about the change in the rules in the middle of the game.

There have been hints that broader moves may be afoot.

"The government doesn't discard the possibility of implementing a new model for oil exploration," said Haroldo Lima, general director of Brazil's National Petroleum Agency, or ANP.

Lima said the government was considering shared production contracts with Petrobras for promising areas such as the pre-salt play, while keeping a concession system for most other oil areas. Lima also said that a move to change the oil legislation was being coordinated by Dilma Rousseff, the powerful chief-of-staff to Brazilian President Luiz Inacio Lula da Silva.

Rousseff, a former guerilla fighter known for her tough style, clearly puts national interests ahead of a free market in oil exploration.

"In the case of significant discoveries, no government can afford the luxury of dealing with exploration without considering that there could be a gold mine down below," Rousseff said Thursday.

Petrobras has shown that it can thrive in the private-sector environment, both in terms of production and finances. The firm has more than doubled its overall oil and gas output to 2.3 million barrels of oil equivalent a day since the industry was opened up and has become a world expert on producing oil in deep waters - as evidenced by the latest Tupi find. It has also been extremely profitable, providing a welcome chunk of funds to the government's coffers.

Altering oil legislation would have to pass through Brazil's Congress, where, so far, followers of the current concession model had outnumbered those favoring a return to the state monopoly on production.

"I don't think it's necessary to impose a new model for the sector," Progressive Party Congressman Joao Pizzolatti said. The congressman said he planned to propose a special debate in the Lower House mines and energy committee on whether alterations were needed to the current legislation.

It's still unclear whether legislative changes could mean ceding the pre-salt area to only Petrobras and reinstating at least a semi-monopoly.

"That would send a little shock wave through the industry," said Wood Mackenzie analyst Matthew Shaw.

Few companies have the technology to drill in ultra-deep conditions like at Tupi, but majors such as ExxonMobil (XOM), Royal Dutch Shell (RDSA), Chevron Corp. (CVX), or larger oil independents such as Devon Energy Corp. (DVN) would be very disappointed if their access to the pre-salt areas were to be cut off, Shaw said.

Brazil's Lula said companies already owning stakes in pre-salt areas will keep them. According to Petrobras, a quarter of the area has already been auctioned off, with Petrobras owning about 75% of that area.

Petrobras has a 65% operating stake in Tupi. U.K. energy company BG Group PLC (BG.LN) holds another 25%, and Portugal's Galp Energia (GALP.LB) the remaining 10%. BG also has stakes in other pre-salt blocks.

Copyright (c) 2007 Dow Jones & Company, Inc.


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