In Brazil, Another Gusher

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Technological Challenges

Regardless of whether the Carioca field proves to be enormous, or merely large, Brazil's energy sector is experiencing a major reversal of fortunes. The country, which is the eighth-largest oil consumer, was dependent on imports for nearly all its oil until the 1970s, when Petrobras began tapping Brazil's offshore discoveries. It finally became self-sufficient in oil production last year. The latest spree of discoveries comes as global crude oil futures trade at record highs, passing $113 a barrel on Apr. 15. Brazil would be in a position to export much of its new petroleum output, Petrobras' Zelada said, since its motorists now rely on cheaper, local sugarcane ethanol, instead of gasoline, for half of their vehicle fuel.

Still, some energy experts question whether Brazil can fully exploit its new reserves. The country is relatively new at drilling and producing oil in water deeper than 6,000 feet, and that's where the discoveries lie. Tupi, Jupiter, and Carioca are located 100 to 200 miles from shore, at depths up to 4.5 miles beneath the sea surface. The reservoirs lie underneath layers of rock, sand, and a particularly tough-to-drill layer of salt that can be up to 1.3 miles thick.

Production from fields like these represents a new technological frontier, and the high cost of drilling that deep will become a steep hurdle if oil prices drop. Even Petrobras admits it hasn't mastered the technical points of how to produce the hydrocarbons (at piping hot temperatures and from high-pressure reservoirs), or bring them to shore.

No Saudi Arabia

With so much information still unavailable, measuring Carioca's potential impact on future oil supplies "is an exercise in futility," said Sophie Aldebert, an associate director at Cambridge Energy Research Associates in Rio de Janeiro. "There are still far too many variables."

That hasn't kept some investors from getting excited. Past "leaks" about big discoveries, such as Tupi last year, were initially dismissed by Petrobras but later proved true. After Lima's Monday announcement, shares surged in the companies involved at Carioca. U.S.-traded shares of Petrobras, which holds a 45% operating stake in Carioca, closed up 8%. Britain's BG Group (BG), which holds a 30% stake, rose 10% in U.S. trading, and Repsol YPF, with its 25% stake, surged 17% to a new high.

Other companies with nearby deep exploration stakes also rose. Exxon Mobil (XOM), which holds an operating role at another Brazilian block underneath the salt layer, rose to near a three-month high on Apr. 15. Hess (HES), with stakes in a field adjacent to Carioca, rose to its highest level this year.

Deeper oil reserves mean Petrobras must also write bigger checks to ramp up production. The company's Brazilian production last year was 1.8 million barrels per day, a small fraction of Saudi Arabia's 9 million barrels per day. And the desert kingdom has far lower costs to extract the oil that lies just under its sandy ground. In terms of production, Aldebert says "Brazil is never going to be a Saudi Arabia."

Public-Private Tension

Petrobras will have to pay dearly to expand its use of drilling rigs, which are in short supply these days. On Monday, Petrobras awarded Norway's SeaDrill (SDRL) with contracts worth up to $4.1 billion for deepwater rigs. Petrobras has also signed a letter of understanding with Texas-based Noble (NE) for drilling contracts worth as much as $4 billion. Petrobras Chief Executive Jose Sergio Gabrielli says Petrobras will likely boost its planned spending of $112 billion between 2008 and 2012.

Brazil's oil patch has been open to private companies, including foreign oil majors, since the late 1990s, when Petrobras lost a monopoly role. The government holds annual auctions for exploration acreage, and the foreign companies operating in Brazil include Chevron (CVX), Shell (RDSA), StatoilHydro (STOL), and Eni SpA (ENI). But as new discoveries and high oil prices make Brazil's explorations more promising, the government is rethinking the terms it will offer private investors in the future. It's considering boosting the royalties that Brazil charges to extract its oil and gas, Lima said, so that more of the profits go to government coffers.

"Petrobras has taken the biggest exploration risks and should get the biggest rewards," said CEO Gabrielli earlier this year. One bill floating around Brazil's Congress would limit private companies to minority roles in new discoveries underneath the salt cap. Brazil's government already took 41 areas off the auction block in November, frustrating private oil companies.

But Brazil has no intention of closing off its oil sector to private investment, according to officials at Petrobras and ANP. Those executives say they intend to benefit from the drilling expertise of partners like BG and Repsol. Still, at a time when private oil companies are losing ground against national oil companies worldwide—state-controlled companies control nearly nine of 10 barrels of oil reserves—the private outfits are watching Brazil with some concern. Recently Venezuela, Ecuador, Bolivia, and Argentina all have sharply increased oil and gas royalties or limited private producers to selling their oil and gas locally, at discount prices.

For years, Brazil has named its offshore oil fields after local fish. Its biggest fields include Barracuda, Marlin, and Albacore. The catch: Fish names aren't assigned to fields until their commercial potential is proven and production plans are under way. Discoveries like Carioca, Jupiter, and Tupi aren't there yet. And it's not clear yet if they will sink or swim.

Schneyer is a special correspondent based in Rio de Janeiro.