Brazil Minister Eyes 2nd Company to Manage Pre-Salt Oil Output

RIO DE JANEIRO (Dow Jones Newswires), June 27, 2008

Brazilian Mines and Energy Minister Edison Lobao will propose the creation of a second state-run energy company to manage oil exploration and production in the country's promising pre-salt layer.

In an interview published Friday in local business daily Valor Economico, Lobao said the ministry was studying the proposal and would likely forward a recommendation to President Luiz Inacio Lula da Silva in 60 days.

The new company would be responsible for dictating production levels and supervising exploration of the pre-salt layer off Brazil's Atlantic Coast, where possible massive reservoirs of light-sweet crude oil are thought to exist, Lobao said.

Furthermore, the company would be entirely state-owned.

"It would be a company that is 100% of the Union, 100% of the Brazilian people," Lobao said.

According to Lobao, the new entity would not be responsible for actual production or exploration. Current heavyweights such as state-run Petroleo Brasileiro (PBR) and other major oil companies would be hired as third-party service providers to drill exploration wells and handle production.

Brazil's pre-salt layer is primarily located in the Santos Basin off the coast of Rio de Janeiro and Sao Paulo states. Interest in the area was first piqued in November, when Petrobras announced its reserves estimate for the massive Tupi field. Petrobras pegged recoverable reserves at Tupi, the country's largest-ever oil discovery, at between 5 billion and 8 billion barrels of oil equivalent, or BOE.

The discovery caused the government to remove several nearby exploration blocks from last year's concessions auction.

Previously auctioned blocks near Tupi have also shown great promise, with a series of discoveries dubbed Carioca, Bem-Te-Vi and Guara testing positive for light-sweet crude.

Industry experts and analysts believe that a gigantic geographical structure that could contain several oil discoveries the size of Tupi crosses several of the blocks, including the areas removed from last year's auction.

Prospecting in the Santos Basin, however, is complicated and expensive. Brazil's pre-salt layer lies below 2,000 meters of water and a further 5,000 meters below sand, rocks and salt.

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