Lula field could turn Brazil into an oil superpower The world's next oil boom

A giant field known as Lula is the industry's final friendly frontier and Brazil's 'passport to the future'

Natural gas is being burned off until a subsea gas pipeline can reach the Lula field. Natural gas is being burned off until a subsea gas pipeline can reach the Lula field. Photo: Brett Clanton, Chronicle Photo: Brett Clanton, Chronicle Image 1 of / 3 Caption Close Lula field could turn Brazil into an oil superpower 1 / 3 Back to Gallery

ON BOARD THE CIDADE DE ANGRA DOS REIS — Brazil's quest to remake itself into a global oil superpower is gaining momentum on this giant ship anchored about 200 miles south of Rio de Janeiro in the deep waters of the Atlantic Ocean.

Crews on this tanker-like vessel recently began extracting the first barrels of oil from a giant field known as Lula, more than three miles below, that has been called the biggest oil discovery in the Americas in three decades.

Production is still at a trickle as the project ramps up. But lessons learned here will be critical in developing a vast network of nearby "pre-salt" reservoirs that are estimated to hold 50 billion to 100 billion barrels of oil — enough to turn Brazil into one of the world's top five producers of crude.

"The challenges to develop this area are very big," Humberto Americano Romanus, a senior engineer with Petrobras, Brazil's state-owned oil company, acknowledged as he stood on the Cidade de Angra Dos Reis on a hot, clear February day in the Southern Hemisphere's summer.

The stakes may be even bigger.

Expected oil wealth from the region could be a "passport to the future," as Brazil's new President Dilma Rousseff said, for what is already one of the fastest-growing emerging economies in the world.

The region also represents one of the last friendly frontiers for western oil companies, which are running out of places around the world to explore.

"It's easy to say that this is an area that the industry is very, very interested in," said Marvin Odum, director of Shell's upstream oil and gas business in the Americas.

But there remain many technical challenges to pulling barrels of oil out of fields buried beneath more than a mile of water and two miles of rock. High pressures and corrosive conditions can wreak havoc on equipment, while a thick layer of shifting salt poses the constant threat of well bores collapsing in on themselves.

Regulations a concern

In addition, Brazilian lawmakers last year passed new protectionist regulations for the pre-salt region that some experts fear will add costs and impede growth.

The situation highlights how the soaring promise of investing in a fast-growing developing nation like Brazil often collides with the frustrating reality of operating there.

Still, experts say, when it comes to oil and gas, Brazil may be too good an opportunity to pass up.

Analysts with Tudor Pickering Holt & Co., an investment bank in Houston, went so far as to title a recent report on Brazil, "The Big Kahuna of This Decade."

In recent years, the oil and gas industry has found large oil deposits hidden beneath thick layers of salt in Brazil, the U.S. Gulf of Mexico and West Africa.

Left by ancient oceans and compressed by layers of rock, the salt strata provided what Petrobras' Romanus calls a "perfect seal" for organic matter to become crude. But only recently did seismic instruments advance to the point that geologists acquired the ability to obtain good images of these pre-salt layers — so named because the layers that became oil were deposited earlier in geological time than the salt.

Announced in 2007, the Lula field - originally called Tupi - was Brazil's first major pre-salt discovery and is estimated to have 6.5 billion recoverable barrels of oil. It will figure prominently in Petrobras' plan to spend $224 billion between now and 2014 on projects that double its current output of 2 million barrels per day.

The Cidade de Angra dos Reis - a giant vessel called a floating production, storage and offloading unit, or FPSO - moved into position in October. Anchored by more than a dozen pilings plunged into the seabed, it is producing about 14,000 barrels of oil a day. But soon it will reach 100,000 barrels per day as more wells come online and a natural gas pipeline is connected in March.

Big Oil playing catch-up

Perhaps just as valuable as the oil coming from those wells will be the knowledge gained at Lula - whose name changed in December from Tupi to the Portuguese word for "squid," and perhaps not coincidentally, is the name by which popular former President Luiz Inacio Lula da Silva, a champion of offshore development, is known to Brazilians.

It was on this vessel last fall that Lula, wearing bright orange coveralls, a hard hat and safety glasses, held up his crude-stained hands for the cameras to mark the start of oil production at the field.

Petrobras CEO Jose Sergio Gabrielli de Azevedo said the idea at the Lula field is to proceed slowly, determine how the pre-salt reservoirs behave and then apply the best recovery methods.

"The only way to learn with new reserves is producing," he told reporters in a recent group interview at Petrobras corporate headquarters in Rio de Janeiro. "That's what we are doing."

Meanwhile, the world's biggest oil companies - after largely missing out on pre-salt discoveries in Brazil - find themselves playing catch-up.

Britain's BP, France's Total and China's state-backed oil company recently made deals to enter the region, while others - including Shell and Chevron Corp., which have small presences in Brazil today - are aiming to expand in coming years.

But revamped oil laws that give the Brazilian government greater control over pre-salt fields could end up deterring some future foreign investment.

Previously, oil companies had competed to lease offshore concessions, much like in the U.S. Gulf of Mexico, with winners gaining the right to explore and produce in the areas and paying royalties to the government on output.

Oil laws revised

That changed last year when Brazil's Congress approved a new production-sharing system that requires operators to give part of their production from pre-salt fields to the Brazilian state. Proceeds will go to a fund set up to invest in education, technology and other domestic programs.

The bigger shift: Petrobras is now required to be the lead operator of all pre-salt fields, with a minimum 30 percent stake in multi-company partnerships formed to develop them.

That's on top of existing regulations that require more than half of equipment and services on offshore projects be sourced from Brazilian companies.

Oil companies said they are still getting clarity on new oil laws for Brazil's pre-salt region. Rights to explore more than half of the region could be auctioned later this year.

Shell's Odum said that if contract terms are stable and transparent, "there's a reasonable chance we would want to participate in that."

Ali Moshiri, president of Chevron's Africa and Latin America exploration business in Houston, said the new requirements are stricter, but not deal-breakers.

Petrobras' Gabrielli said he is aware that the new regulatory framework is a departure from the previous way of doing things. Yet he's also keenly aware of the huge prize lying in Brazil's pre-salt fields, and knows major oil companies will have trouble staying away.

Flashing a grin, he says, "I bet with you that they will come."

brett.clanton@chron.com