Forewarned is forearmed

In In Brazil, Energy Finds Put Country at a Whole New Power Level

In In Brazil, Energy Finds Put Country at a Whole New Power Level

By SIMON ROMERO

RIO DE JANEIRO — Of all those who might smile at Brazil’s unfolding oil boom, Walter Link could rank near the top. A U.S. oilman here at a time of nationalist fervor, he was the former chief geologist for Standard Oil Company of New Jersey whom Brazil hired to find its oil reserves.

The year was 1954. Petrobras, the newly created national oil company, put the blunt, Indiana-born Link to work creating Brazil’s oil exploration sector. Six long years ensued before he issued his polemical “Link Report,” describing tepid results. For Brazil to meet its oil needs, he recommended going offshore or abroad.

Petrobras grew at its own impressive pace for decades, mixing progress with setbacks as Brazil struggled with drawn-out dependence on foreign oil. But Petrobras’s huge offshore oil discoveries in recent years now enable its leaders to contend that it could surpass Exxon Mobil — called Standard Oil in Walter Link’s day — as the world’s largest publicly-traded oil company.

“Petrobras is engaged in by far the biggest industrial undertaking in Brazil’s history,” said Norman Gall, director of the Fernand Braudel Institute of World Economics in São Paulo.

Mr. Gall said Petrobras’s annual spending, estimated at more than $45 billion through 2020, might surpass NASA’s budget in the 1960s — when it was preparing to send a man to the moon.

Brazil, which is maintaining investments to increase oil production even as turmoil hits financial markets in Brazil and around the world, is leading a shift in Latin America’s oil industry with the potential to alter the geopolitics of energy.

By the 2020s, if the stars align in Brazil’s favor, the country could emerge as the fourth-largest oil producer after Russia, Saudi Arabia and the United States.

Brazil’s rise as an oil power is part of a broader expansion of the Western Hemisphere’s energy output, especially in the United States and Canada. But it also offers a vivid example of the reordering of Latin America’s energy hierarchy in which traditional energy exporters like Venezuela, Ecuador and Bolivia are seeing their sway eclipsed by nations with big discoveries.

Emerging exploration technologies like those capable of tapping rock formations by combining horizontal drilling with hydraulic fracturing explain some of the focus on the region’s potential to produce new oil kings.

In May, for instance, Argentina announced its biggest oil discovery since the 1980s in a sprawling Patagonian shale deposit, luring new interest from foreign companies like Apache Corporation and Exxon Mobil.

Argentina ranked third in the world, after China and the United States, in shale gas reserves with about 22 trillion cubic meters, or 774 trillion cubic feet, according to a report released in April by the U.S. Energy Information Administration.

Neighboring Paraguay and Uruguay, both marginal energy players, also boast enviable shale reserves, as do swaths of southern Brazil. Mexico, a traditional oil powerhouse where nationalist policies have kept large output increases in check, has huge shale gas reserves ranked fourth in the world.

Beyond the focus on shale, energy strategists say Latin America’s profile is set to rise as the global economy relies more on a range of energy sources, like sugarcane ethanol and the lithium found in the vast salt flats high in the Andes. New discoveries in recent months also underscore the potential to open new oil frontiers.

For instance, Tullow Oil, the British oil company that made a huge 2007 discovery off the coast of Ghana, said in September that it had found oil off French Guiana’s coast, in a basin that may be geologically similar to West Africa.

Elsewhere in South America, the exodus of Venezuelan petroleum engineers after President Hugo Chávez purged Venezuela’s oil industry of dissident employees is lifting the fortunes of neighboring Colombia, where output has roughly doubled in five years to almost one million barrels a day.

If Colombia improves security conditions further, officials see production climbing to 1.7 million barrels by 2020. In Brazil alone, output may increase from just above two million barrels a day to more than five million by 2020, about the equivalent of adding another Kuwait to world oil production.

The region’s oil boom is notable not just for rising producers but also because energy-rich countries in Venezuela’s ideological sphere of influence, which have asserted greater state control of natural resources, are largely being excluded from the output gains.

“We’re coming to the end of the cycle of leftist ideology-driven politics in Latin America, which were a reaction to the free-market ideas fashionable in the ’90s,” said Roger Tissot, an independent energy consultant. “More centrist positions are starting to prevail.”

Perhaps no country in the region better illustrates its potential — and its capacity to fall short — than Venezuela, which surpassed Saudi Arabia this year as the nation with the largest oil reserves, at 1.19 trillion barrels.

Pointing to the influence that Venezuela might possibly wield in global markets, the U.S. Geological Survey said that just one of its hydrocarbon assets, the heavy oil found in an area called the Orinoco Belt, called the Faja in Venezuela, is the largest oil accumulation it ever assessed.

But that geological good fortune arguably has not translated into broader energy clout for Venezuela. The country’s regional influence has waned in recent years as its national oil company, Petróleos de Venezuela, has struggled to raise output while focusing on other objectives like subsidized food distribution.

Venezuelan energy laws remain more welcoming to foreigners than those in Saudi Arabia or Mexico. But oil executives contend that a range of factors limit the advance of projects, including the difficulty in attaining financing in a country prone to nationalization and ceding control to Petróleos de Venezuela.

“The oil is there, but the conditions, both financial and physical, are so far from ready for prime time that getting foreigners to risk money in the Faja is one tough slog,” said Francisco Toro, founder of the Venezuelan political blog Caracas Chronicles.

While Venezuela and Brazil maintain warm ties with one another, and have even explored collaborating on a refinery project in northeastern Brazil, one country’s loss is effectively another’s gain in regional political heft.

Brazil’s new naval buildup, for instance, would give its military a heavier presence from its deepwater oil fields into South Atlantic sea lanes.

Other countries in the region, notably Colombia, have taken note of Brazil’s experience in the 1990s of exposing Petrobras to market forces by issuing shares that now trade in São Paulo and New York, while still maintaining state control.

Of course, big challenges still await Brazil’s energy industry. The devilish complexity of producing oil from its “pre-salt” discoveries off the coasts of the states of São Paulo and Rio de Janeiro, located in water 3,000 meters, or 9,800 feet, deep and beneath about 4,000 meters of salt, sand and rock, have some investors questioning whether Petrobras is overextending itself.

Just one discovery made in 2007, called Tupi at the time and now renamed Lula, may hold as much as eight billion barrels of oil and natural gas, making it a contender for second-largest field discovered in the past two decades, behind Kazakhstan’s Kashagan Field.

The logistics of the new offshore fields, located so far into the Atlantic that Petrobras needs entire platforms midway to the coast where workers can sojourn between land and sea, are not the only challenges.

Bitter talks between Brasília and regional officials over royalties could delay development of new fields, and portend protracted revenue disputes. Middle East oil remains cheaper to produce, while cost overruns here could limit the ability to meet output targets.

Energy historians also warn that the bounty off Brazil’s coast could become a resource curse when big inflows from oil exports start streaming in.

Brazilian leaders, guiding a highly diversified economy, seem aware of the risks. They have taken the important step of creating a sovereign wealth fund to invest some revenues.

The prophetic Venezuelan oil minister, Juan Pablo Pérez Alfonzo, who helped create OPEC five decades ago, understood an oil bonanza’s hazards. He disparaged his country’s triumphalism and spending sprees and what he called “economic indigestion,” when officials focused on megaprojects and neglected essentials like education.

“A wave of money,” Mr. Pérez Alfonzo warned in the 1970s when Venezuela’s prospects seemed as promising as Brazil’s today, “can destroy as well as create.”

http://www.nytimes.com/2011/10/11/business/energy-environment/in-brazil-energy-finds-put-country-at-a-whole-new-power-level.html?pagewanted=all