BRASILIA: Despite tumbling oil prices, Brazil’s government insists it will develop massive offshore oil deposits, but critics say geological hurdles, regulatory uncertainty and depressed markets could delay the country’s hope for a fast track to oil wealth.
The largest discovery of oil deposits in at least 20 years could make Brazil one of the world’s top 10 producers and has triggered avid debates on how to spend the new-found wealth. While the onslaught of the global financial crisis has cast a pall over Brazil’s dream of becoming an oil power, government officials remain optimistic.
“This crisis won’t last more than a year,” Energy Minister Edison Lobao told Reuters on the sidelines of an oil conference in Brasilia. “We are not going to cut a single cent of our investments,” Lobao said in reference to the state-run oil giant Petrobras, which holds roughly 65 percent of around 15 billion barrels of confirmed reserves.
Unless oil prices recover from current levels, the deposits under a thick layer of salt beneath the ocean floor may not be profitable. “We are talking about at least $50 per barrel to make the subsalt (oil) viable,” Gustavo Gattass, oil and gas analyst with investment bank UBS Pactual, told the conference. He assumed a minimum return on investments of 10 percent.
The price of a barrel of Brent crude oil fell below $44 on Thursday, down from a high of $147 in July, to its lowest since February 2005. A host of technological challenges to extracting an estimated 50 billion barrels from around 7 kilometers (4.5 miles) below sea level could further increase costs, currently at around $600 billion, Gattass said.
A slow oil flow from the wells could double the need of production modules and increase costs to a “ludicrous” $1.3 trillion, he said. “The production cost may be higher than its market value—that’s a big risk,” Nina Todorova, a World Bank oil economist, told the conference that ended on Thursday.
On the other hand, slowing demand for drilling equipment and supplies could cut costs, other experts said. Whether associated gas can be monetized or will be re-injected will also affect the bottom line, they said. How to finance such investments, equal roughly to two years of the world’s total upstream expenditures, is also uncertain. Assuming the price of oil bounces back to $60, Petrobras would have the capacity to finance only the development of Tupi, one of several subsalt fields, with its own cash flow, Gattass said.
The oil company said on Thursday it secured three loans in the last month totaling $900m, the latest in a flurry of recent announcements seeking to dispel speculation it was struggling to raise funds.
Raising debt to finance the subsalt project would cut profits significantly, adding to a tax burden of more than 60 percent, Gattass said. Brazil will depend on private and mostly foreign investors to help develop a significant part of the subsalt reserves, said Edmar Almeida, an oil expert at the Federal University of Rio de Janeiro.
But doubts abound about how the government will regulate the development of the new reserves. “You don’t pump $500bn into an industry without a strong regulatory framework,” said Almeida.
Skeptics are concerned that a political battle over the distribution of oil wealth and the tender of remaining exploratory blocks could muddle and delay the process. “There are several large, unresolved challenges,” Aloizio Mercadante, government leader in the Senate, told delegates. Brazil needs to take its time with an extensive public debate to avoid mistakes other oil nations made, he said. “We are late in becoming a global oil power, we need to ensure we do it right.”
