Brazil recently discovered the largest oil deposits in the country's history. This has put the country on the road to becoming a major producer, but there are still technological and financial obstacles to overcome.

The finds are in the Santos basin, 300km from Rio de Janeiro's coast, in southeastern Brazil. The Tupi field, which is the first discovery, was announced to the world in November 2007.

Brazil's federal energy company Petrobras estimates reserves at 5B-8Bboe, which would make it the largest ever deepwater oil discovery and turn the company into one of the most important oil groups in the world – that if the government does not bring a dramatic change in the way oil exploration is done in the country.

To shed light on pre-salt exploration and Petrobras' future role, BNamericas interviewed Adriano Pires, director of Brazilian infrastructure consultancy Centro Brasileiro de Infraestrutura (CBIE).

BNamericas: In a recent interview, you said the pre-salt layer oil has the potential to end Petrobras' trade deficit, which last year reached roughly US$3bn. Could you elaborate on this?

Pires: The pre-salt layer oil found by Petrobras is 28-degree API. The average oil currently being produced is 18-degree API, which is a very heavy kind of oil. The pre-salt one is in the middle of the scale, it's not like a Brent or WTI type, but it certainly adds a lot of value for the oil Petrobras might be able to sell.

Today, the company still has to import 15-20% of all the oil it refines, due to the heaviness of the typical Brazilian oil. In 2015, Petrobras estimates it will be fully producing in the Tupi oil field and it will then be able to eradicate its trade deficit, as the company will get more value in the markets. Petrobras will finally be commercially independent.

BNamericas: How did you calculate these figures?

Pires: If in 2015 Petrobras as it says starts to produce between 1M-1.5Mboe/d and this oil is really 28-degree API, it will be possible for the company to zero its annual trade deficit.

BNamericas: And how much will a barrel of oil cost by then, for the purpose of this calculation?

Pires: A barrel would be costing at least US$50.

BNamericas: The drying up of international financing, significantly lower oil prices, and technological and geological challenges to develop new oil finds makes long-term cost calculations difficult. Can Petrobras perhaps miscalculate the costs of this project, given the unseen nature of this?

Pires: Yes, it is very possible for the company to miscalculate it. There are three main challenges ahead for the exploration of the pre-salt layer.

The first is the technological one. Petrobras has acquired a lot of expertise in deepwater exploration but still, it is a new venture. The company will have to adapt and even create techniques for that.

The second challenge is economic. If there are 50Bboe in total reserves, it will naturally cost a lot to explore it. Some banks say Petrobras will need US$600bn over the next 30 years for the pre-salt exploration. Also, depending on how long the current economic crisis lasts, the project can get delayed.

Finally, the third challenge is what I call the legal one. Since 2007, when Petrobras announced the pre-salt discovery, the Brazilian government has been saying it will change the national oil exploration framework. Until now, we have not seen any new legislation on that. The Tupi field was acquired by Petrobras, Britain's BG Group and Portugal's Galp in an auction in 2000. Production there is scheduled to start only in 2015. The government should speed up the process for change, as uncertainty is the worst thing for the oil sector.

BNamericas: Low risk appetite on the part of foreign investors and recent currency derivative losses mean that large Brazilian companies are increasingly likely to rely on local banks for credit at high premium spreads. Can this be a major obstacle for Petrobras?

Pires: It will depend on the duration of the economic meltdown. Nowadays, Petrobras has been getting a variety of loans internationally and at home too. The Brazilian federal group has a privileged portfolio with the pre-salt cluster in its hands. So, in theory, any global economic recovery will make it easier for Petrobras to obtain lines of credit abroad. But that will also depend on the kind of framework the government will impose on the pre-salt activity. Will this sector get more restrictive for foreign companies? Will it become a tool for political propaganda? The answers for that might tell us if money for Petrobras will get cheaper or more expensive abroad.

BNamericas: Brazilian economist David Kupfer once said the country has created a regulation format for oil discovery only. And that now, it must change it into a framework for oil production. Do you think that is the case?

Pires: Absolutely. But I believe that our current concession system is a good one, and it can be adjusted a bit without having to relaunch a whole new framework. For a new regulation to be set congress needs to discuss it first and this can take a long time. It's perfectly possible for the current system to just incorporate a few changes.

BNamericas: What changes could be made to the concession system then?

Pires: It could be done in many ways, for example, by raising government's special participations, by raising field area retention or even taxes. All of that could be done by a presidential decree. Changes like that could bring greater revenue for the Brazilian state without wasting precious time with congress' discussions.

BNamericas: Talks are underway to turn concession contracts into production sharing agreements with Petrobras. This would mean that private companies would have to share their production with the government after recovering costs. What is your opinion on that?

Pires: It could work fine as long as the process is transparent. Perhaps production sharing agreements through auctions could be a good way of guaranteeing transparency. But if we have chosen in the past the concession system, I still think we should stick to it with minor upgrades. The concession one is much more transparent than the production sharing one.

BNamericas: Much has been said about the possible creation of a new federal company to manage the pre-salt resources. Is that necessary?

Pires: I don't think so. We have a sound structure in the country perfectly capable of managing the pre-salt oil wealth. Petrobras, oil and gas regulator ANP and the mining and energy ministry are ready to deal with that. I think that a new federal holding could actually become a new source of corruption scandals.
About Adriano Pires

Pires, who founded CBIE, is a professor at Universidade Federal do Rio de Janeiro (UFRJ). He holds DSc in industrial economics from the Université Paris XIII and bachelor's degree in economics from UFRJ. He also served as manager of Brazilian oil and gas regulator ANP's imports and exports department.
By João Carvalho

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