By Jason Simpkins

Managing Editor

Money Morning

With Exxon Mobil Corp.'s (XOM) new oil discovery off the coast of Brazil – the latest in a series of such offshore finds and potentially the largest Western Hemisphere discovery in three decades – the South American nation has taken another giant step in its quest to become a global energy superpower.

Exxon's Azulao-1 well tapped a reservoir that reportedly contains as much as 8 billion barrels of recoverable oil, says Luiz Lemos, a partner at TozziniFreire Advogados, a Brazilian law firm that represents foreign energy companies.

"This is very huge,” Lemos told Bloomberg News.

So is the potential benefit for Brazil. If Lemos' estimate is accurate, this new Azulao find will rival the nearby Tupi oil field as the largest discovery on this side of the planet since Mexico's Cantarell field was discovered in 1976.

Lemos' estimate is unconfirmed, but Exxon Mobil Chief Executive Officer Rex Tillerson described the find in January as "a huge potential resource.”

Exxon first notified Brazilian regulatory agency National Petroleum Agency that it discovered hydrocarbons in the reservoir, identified as BM-S-22, on Jan. 16. The world's largest oil company operates the block with a 40% stake. Hess Corp. (HES) also holds a 40% interest and Brazilian state energy company Petroleo Brasileiro SA (ADR: PBR), known as Petrobras, holds the remaining 20%.

It was Petrobras that first triggered the rush on Brazil's energy sector when, in November 2007, the company announced the Tupi discovery – an underwater field that could contain as much as 80 billion barrels of oil equivalent.

Petrobas actually downplayed the findings of the Tupi oil field before announcing last November that the reserve contained between 5 billion and 8 billion barrels of light oil and gas.

Petrobras will begin extract its first crude oil from Tupi on May 1. Initial output from the Tupi field is expected to be around 15,000 barrels per day, then rising to 30,000 barrels a day during a later stage of testing, and eventually reaching about 100,000 barrels per day by 2010, Reuters reported.

If Tupi lives up to analysts' expectations, it will be very encouraging not just for development of Azulao, but also the Carioca reserve, another massive field expected to hold a large bounty of petroleum.

Last year, Haroldo Lima, the head of Brazil's National Petroleum Agency, said Carioca could hold 33 billion barrels of oil and gas. Upon hearing the news, brokers and analysts rushed to tell their clients that Brazil, as one minister put it just months ago, was about to become the "new Saudi Arabia."

Experts say that even 10 billion recoverable barrels of oil – whether they come from Tupi, Carioca, Azulao, or a combination of all three – would be a remarkable find and enough to catapult Brazil into the world's oil-producing elite. Brazil currently has about 12 billion barrels of proven reserves, and could soon find itself nestled between Nigeria (with 36 billion barrels) and Venezuela (80 billion).

Foreign Oil Majors Flock to Brazil

As rich and expansive as Brazil's oil reserves may be, they are also very difficult to access. The Carioca field, for instance, is 170 miles offshore, more than 6,000 feet below the surface of the water, and trapped beneath a shelf of salt 500 miles long and 125 miles wide.

There is no question that extraction will be costly, but even at today's energy prices there's no shortage of domestic and foreign companies ready to invest big money Brazil's energy sector.

In fact, Manuel Ferreira de Oliveira, chief executive officer of Portugal's Galp Energia SGPS SA, said March 4 that production at the Tupi sub-salt oil field in Brazil is viable — despite the slide in international oil prices.

"Production at Tupi is competitive, even at the actual level of oil prices," Oliveira told the Estado news agency, on the same day that his company released its fourth-quarter earnings. "The projects in Brazil are going to gain strength this year and the next."

Exxon said Thursday that it would continue investing in exploration and production at "record levels,” despite the economic downturn and plunging oil and gas prices that have reduced spending by some competitors.

Exxon will invest $29 billion this year, and reiterated plans to invest between $25 billion and $30 billion annually over the next five years.

The company is currently spending $79 million a day to search for oil fields, construct platforms and renovate refineries Bloomberg reported.

China is also looking to become a long-term partner in Brazil. China Development Bank last month agreed to lend Petrobras $10 billion to help finance deepwater oil exploration off the coast of Brazil.

Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Last month, Petrobras announced plans to invest $174.4 billion in exploration and production.

Energy demand in Brazil is "already starting to recover," Petrobras CEO Gabrielli told Reuters during an interview at a Brazilian investment conference. "Even the fall in demand during the last quarter of 2008 was within a range we could expect for that season."

In addition to Exxon and Petrobras, the companies that stand to profit the most from Brazil's energy renaissance are offshore drilling companies such as Transocean Ltd. (RIG) and Diamond Offshore Drilling Inc. (DO), which was recently recommended by Contributing Editor Horacio Marquez in his weekly "Buy, Sell or Hold” feature.

Devon Energy Corp. (DVN) also made headlines last week when it notified regulators that it found traces of natural gas in the Barreirinhas Basin. Larry Nichols, chief executive officer of Devon Energy, said Monday that prices for natural gas are close to recovering from their recent drubbing.

"When the recession ends and the economy starts booming, we're going to have less natural gas than we do today and prices are going to spike back up,” Nichols said.

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