brazilia overview

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    BrazilLast Updated: September 2009

    BackgroundBrazil has experienced rapidly

    expanding oil, natural gas, and electricity

    consumption in recent years.

    Brazil is the 10th largest energy consumer in the world and the 3rd largest in the WesternHemisphere, behind the United States and Canada. Total primary energy consumption in Brazilhas increased significantly in recent years, due to sustained economic growth. In addition, Brazilhas made great strides in increasing its total energy production, particularly oil, over the pastdecade. Increasing domestic oil production has been a long-term goal of the Braziliangovernment, and recent discoveries of large offshore, pre-salt oil deposits could transform Brazilinto one of the largest oil producers in the world.

    The largest share of Brazils total energy consumption comes from oil (49 percent, includingethanol), followed by hydroelectricity (36 percent) and natural gas (7 percent). The large share ofhydroelectricity in Brazils energy mix represents the dependence of electricity generation onhydroelectric dams. Natural gas is currently a small share of total energy consumption, butattempts to diversify electricity generation from hydropower to gas-fired power plants shouldcause natural gas consumption to grow in coming years.

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    OilThe largest oil discoveries in recent

    years have come from Brazil s

    offshore, pre-salt basins.

    Overview According to the Oil and Gas Journal (OGJ) , Brazil had 12.6 billion barrels of proven oil reservesin 2009, second-largest in South America after Venezuela. The offshore Campos and SantosBasins, located on the countrys southeast coast, contain the vast majority of Brazils provenreserves. In 2008, Brazil produced 2.4 million barrels per day (bbl/d) of oil, of which 76 percentwas crude oil. Brazils oil production has risen steadily in recent years, with the countrys oilproduction in 2008 about 150,000 bbl/d (6 percent) higher than 2007. Based on its September2009 Short-Term Energy Outlook , EIA forecasts Brazilian oil production to reach 2.61 million bbl/din 2009 and 2.81 million bbl/d in 2010. Brazils oil consumption averaged 2.52 million bbl/d in2008. As a result of this rising oil production and flat consumption growth, EIA expects that Brazilwill become a net oil exporter in 2009.

    Sector Organization State-controlled Petrobras is the dominant player in Brazils oil sector, holding important positionsin up-, mid-, and downstream activities. The company held a monopoly on oil-related activities in

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    the country until 1997, when the government opened the sector to competition. The principalgovernment agency charged with monitoring the oil sector is the National Petroleum Agency(ANP), which is responsible for issuing exploration and production licenses and ensuringcompliance with relevant regulations.

    Despite the opening of the sector to private actors in the late 1990s, foreign-operated oil projectsare not common in Brazil and represent a small share of total oil production. Royal Dutch Shellwas the first foreign operator of crude oil production in the country, and it is now joined byChevron and Devon. Private competition in the sector is not just from foreign companies: inSeptember 2009, Brazilian oil company OGX commenced an exploratory drilling program in theCampos Basin.

    Exploration and Production Petrobras controls almost all crude oil production in Brazil. The largest oil-production region of thecountry is Rio de Janeiro state, which contains over 80 percent of Brazils total production. Mostof Brazils crude oil production is offshore in very deep water and consists of mostly-heavygrades. One of Brazils principle marketed crude streams is Marlim, which has an API of 19.6(heavy) but a relatively low sulfur content of 0.7 percent (sweet).

    Petrobras has brought numerous projects onstream recently. In December 2008, Petrobrasbrought the P-53 floating production, storage, and offloading (FPSO) unit online in the MarlimLeste field, with a production capacity of 180,000 bbl/d. In January 2009, Petrobras deployed asecond FPSO to the Marlim Sul field, P-51, also with a production capacity of 180,000 bbl/d. InMarch 2009, Petrobras launched the FPSO Cidade de Niteroi in the Jabuti field, with a productioncapacity of 100,000 bbl/d. Finally, in May 2009, Petrobras commenced the Tupi Extended WellTest, the first attempt to produce from the recently-discovered sub-salt reserves in the SantosBasin (see below). Along with these new projects, many units brought online in 2008 continued toramp-up towards their peak production rates.

    In large part due to this sizable slate of recent expansions, EIA expects that Brazils total oilproduction could reach 2.81 million bbl/d in 2010. This forecast takes into account the above-mentioned projects and an estimate for decline rates at Brazils older, mature fields. This couldmake Brazil one of the largest sources of new, non-OPEC oil supply growth. However, recentexperience has shown that forecasts of non-OPEC supply growth have generally been over-optimistic, so there is considerable downside risk to this forecast. Such risks include larger declinerates at mature fields and delays to project schedules.

    Foreign Oil Operators Shells Bijupira-Salema project in the Campos Basin was the first field in Brazil not operated by

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    Petrobras. The project came on-stream in 2003 and produces about 50,000 bbl/d. Shell launchedits BC-10 project in July 2009, which has a designed capacity of 100,000 bbl/d. Devon brought itsPolvo project (50,000 bbl/d) online in August 2007, representing the only upstream oil project inBrazil without any Petrobras participation. Chevron commenced operations at the Frade project(100,000 bbl/d) in July 2009. Finally, StatoilHydro is developing the Peregrino field in Brazil, withexpected production capacity of 100,000 bbl/d.

    Pre-Salt Resources: Tupi and Beyond A consortium of Petrobras, BG Group, and Petrogal discovered the Tupi field in 2006, containingan estimated 5-8 billion barrels of recoverable reserves (including both oil and natural gas). Thereserves occur in a subsalt zone that is an average of 18,000 feet below the ocean surface. TheTupi find was the largest oil discovery since the supergiant Kashagan field in Kazakhstan. Inaddition, oil encountered in the subsalt zones appears to be lighter and sweeter than most ofBrazils existing production. Following Tupi, numerous additional pre-salt discoveries wereannounced, such as Carioca, Iara, and Guara. Preliminary estimates by industry analysts of thetotal extent of recoverable oil and natural gas reserves in the entire subsalt reserve haveexceeded 50 billion barrels of oil equivalent. In early 2009, Petrobras inaugurated an extendedtest at the Tupi field, which will produce 14,000 bbl/d and help develop techniques and expertiseto overcome the challenges of pre-salt production.

    Tupi and the subsequent pre-salt announcements immediately transformed the nature and focusof Brazils oil sector, and the potential impact of the discoveries upon world oil markets is vast.However, considerable challenges must still be overcome in order to bring these reserves tofruition. The difficulty of access to the reserves, considering both the large depths and pressures

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    involved with subsalt oil production, mean that there are many technical hurdles that must beovercome. Production from additional pilot projects is possible in the next several years, but large-scale development of the subsalt reserves will likely not occur until well into the next decade. In2009, Petrobras released its strategic plan for developing the pre-salt areas. This plan includeddevelopment of the Tupi, Iara, and Guara fields that would occur in three discrete phases:extended well tests, pilot projects, then large-scale production through multiple, duplicate FPSOs.

    Proposed Regulatory Reforms The Brazilian government released the proposed regulatory framework for the pre-salt reserves inAugust 2009. The framework consists of four pieces of legislation. First, the rules would establishnew production share agreements (PSAs) to exploit the pre-salt reserves, in contrast with theconcession framework used for existing resources. Petrobras would be the sole operator of eachPSA and would hold a minimum 30 percent stake in the projects. Second, the rules would createa new agency, Petrosal, to administer the states share of each PSA. Third, the governmentwould establish a new development fund to manage government revenues from the pre-saltdevelopment. The fourth piece of legislation would allow the government to capitalize Petrobrasby granting it pre-salt oil reserves that are currently not otherwise licensed. These new ruleswould not affect existing operators in Brazil.

    The proposed regulatory framework would have important implications for the development ofBrazils oil sector. The emphasis upon Petrobras as the sole operator in the pre-salt basin wouldsurely slow the pace of development of new projects, especially conside

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