AMSTERDAM () -- In the last couple of months, several major offshore oil discoveries in Brazil have made headlines. The discovery of two oil fields has given new life to the idea that Brazil could become the world's largest oil producer in the coming decades.
The discovery of the Carioca field, estimated to hold 33 billion barrels, could alone increase Brazil's future oil production capacity by 1-1.5 million barrels per day. This would make it the third largest oil field in the world and turn Brazil into the seventh largest producer of oil. In addition, Brazil's national oil company Petroleo Brasileiro (Petrobras) [NYSE:PZE] reported in November 2007 that the offshore Tupi field may hold 8 billion barrels of recoverable crude.
Western news sources have been buzzing with the idea that Brazil could become an energy source large enough to undermine the current supremacy of the Middle East. The need for the U.S. and Europe to diversify away from current oil suppliers is obvious; these suppliers are largely based in instable and growingly anti-Western regions, such as the Middle East, North Africa and West Africa. Brazil, as one of the leading Latin American economies, is still considered to be one of the most stable oil producing regions.
However, optimism should be tempered if the big picture is taken into account. In contrast to what experts of Austin-based consulting company Strategic Forecasting indicated in a recent Bloomberg article, Brazil's overall impact on the global oil market will be only minor.
Peter Zeihan, VP analysis at Strategic Forecasting, believes that Brazil's discoveries of what may be two of the world's three biggest oil finds in the past 30 years could help end the Western Hemisphere's reliance on Middle East crude. He indicated that the new discoveries would result in a decrease of Saudi Arabia's position as largest oil producer and exporter.
The position taken by Strategic Forecasting's Zeihan is based on the belief that Brazil will be pumping "several million" barrels of crude daily by 2020, but an increase of 1-1.5 million bpd in crude oil production is just a drop in the ocean. At present, the Gulf region transports about 17-18 million bpd to world markets. Total global demand at that time is predicted to be about 112-115 million bpd, with around 55-60 million bpd produced by OPEC to counter lower production in other regions.
To end the Middle Eastern supremacy, the world will need, in addition to the Brazilian discoveries, a tripling of Canadian oil sands output and higher fuel efficiency. The U.S. alone imports around 10 million bpd of crude oil, showing that Brazil's 1-1.5 million bpd could only supply 10%-15% of imports. And this percentage would decrease as import volumes are increased if and when the American economy recovers. So as long as Gulf-based producers are still supplying around 23% of total U.S. imports, the need for stability in the Middle East will remain.
The oil market also needs to take into account that first production will not be hitting the market before 2012-2015. At present, no real infrastructure is available on or next to the new fields, while equipment and services are in short supply due to the immense investments in oil and gas worldwide, which will not help to speed up a potential commercial exploitation.
Furthermore, the Carioca discovery still has to be assessed. Normally, out of the entire amount of oil estimated, only around 20 billion barrels will be produced commercially with current technology and price level settings.
On another note, these recent discoveries undermine the growing support for the 'Peak Oil' theory. Oil watchers have always stated that there is more crude oil available than presently known. Even major oil producing regions, especially Iran, Iraq and Libya, are still largely unexplored, showing an immense potential for additional reserves. If this is taking into account, new ultra-deep offshore drilling and onshore drilling operations could show ample room for new elephants out there. These offshore discoveries in Brazil are just the first indication of such.
Zeihan also said that the new situation could mean that China and India would become dominant buyers of Persian Gulf oil, which has been largely ignored by news sources but could be extremely significant. He warned that a focus on Brazil and other Atlantic Basin producers could result in a destabilization of the Middle East and especially the Persian Gulf region.
If Brazil is seen as a new strategic producer for the U.S., the move to reduce the U.S. Navy's presence in the Persian Gulf will expose the region to more conflict. Strategic Forecasting also said: "If the United States isn't getting any crude from the Gulf, what benefit does it have in policing the Gulf anymore? All of the geopolitical flux that wracks that region regularly suddenly isn't our problem."
This scenario, however, shows a slight biased approach, as this isolationist policy ignores that in a globalised economy, conflicts in the Middle East, even if not directly involving U.S. or Western forces, will have an impact on the world. Disturbances to Persian Gulf oil and gas exports will have a direct effect on Western economies. The need for U.S. and E.U. military presence is needed to keep a high level of stability in place. Brazil's oil reserves will not be enough to counter a potential blockade of the Straits of Hormuz.
In any case, Brazil's oil sector is heading for some major changes. The discoveries have prompted Brazil's government to review its legislation by the end of 2008. The government will examine the current level of taxation, in comparison with other oil producers, such as Russia, Iran, Venezuela and Algeria. Brazil's current tax levels are very low in comparison to its fellow producers.
Hopefully, the government is not listening to its neighbour, Venezuela, which recently decided to enact a "windfall" tax that will take 50% of oil revenues above $70 per barrel, and an additional 60% of revenues over $100 per barrel. In Brazil, international investors and operators are currently paying taxes of around 10% as fixed royalties. On top of this, a special tax is being paid for large fields between 10% and 40% of revenue depending on volume, location, depth and age of the field.
Some unnamed sources have indicated that Brazil's oil regulatory agency is working out a proposal for changes, which it plans to present to the government's National Energy Policy Council by the end of June. It may propose to hike the special participation tax to a range of about 40% to 60%; however, no specifications have yet been given.
Companies that would be affected are majors StatoilHydro [NYSE:STO], BG Group [LSE:BG], Galp Energia [LIS:GAL] and ExxonMobil [NYSE:XOM].
