Brazil's role as a global energy producer is likely to increase dramatically over the next ten years. The country is already a relatively important oil producer, and following recent announcements of major offshore deep-water discoveries, the largest Latin American country will move from being self-sufficient to becoming a net exporter. If the government's early estimates are confirmed—that the broader area where the recent discoveries were made might hold as much as 70bn-100bn barrels—Brazil will be able to boast of holding among the world's ten-largest oil reserves in the medium to the long term.

Given the early stage of exploration, these initial calculations sounded too optimistic and were seen as politically driven, coming amid concerns about potential energy shortages. However, most industry analysts seem to agree that Brazil's place in the geography of oil is set to change. The Tupi oil field, whose discovery was announced in November 2007, has potential recoverable reserves of 5bn-7bn barrels, according to Petróleo Brasileiro (Petrobras, Brazil's state-controlled oil company). This is equivalent to between 35% and 55% of Brazil's current existing reserves, estimated at around 14bn barrels.

The euphoria sparked by Tupi's discovery is explained by indications that this field may be just a large piece of the major pre-salt layer (oil reservoir found under an extensive layer of salt deep below the sea level) in the Santos basin, which extends from Rio de Janeiro (in the south-east of Brazil) to Santa Catarina (in the south). Although drilling in deep water is expensive and risky, Petrobras—which is the operator of the field and holds a 65% working interest in partnership with the UK's BG Group (25%) and Portugal's Galp Energia (10%)—has developed the know-how and technology to carry out this kind of exploration.

Development of Tupi will be costly: oil analysts estimate investments of between US$70bn and US$120bn. This will require Petrobras (which will have to spend 65% of the total amount) to substantially increase its planned investments of US$112bn for 2008-12. But the payoff would be particularly big, since Brazil's oil mix, which is currently dominated by the production of heavy oil, is likely to change substantially as pre-salt accumulations are believed to have light, good-quality oil.

While Petrobras is set to hugely benefit, there are also risks involved, not least that oil prices currently at historically high levels could decline substantially by the time commercial production starts, probably around 2012-13. However, currently this risk seems to be only moderate. The Economist Intelligence Unit forecasts that tight global oil supply and strong demand from emerging markets will keep Brent oil prices at very high levels of US$73 per barrel in 2012. (We reckon that the price will come down a bit in 2009-10, with a lot more Saudi oil capacity coming on stream, but we expect prices to edge up again from 2011 onwards because of doubts about further increases in supply.)

Another major risk is that the field's potential falls much short of current expectations. But, although Petrobras's early estimates of new recoverable reserves of 70bn-100bn barrels may prove exaggerated, there seems to be scope for optimism. There have been several signs that the government's calculation of huge estimates were not exclusively politically motivated. First, the administration of President Luiz Inácio Lula da Silva announced the removal of 41 oil-exploration blocks in the same area of the Santos Basin from an upcoming auction immediately after Tupi's discovery.

Furthermore, on February 7th both BG and Galp suggested in their annual reports that their calculations of Tupi's possible reserves are larger than even Petrobras's estimates. Also, the announcement in early January 2008 of the discovery of the Jupiter gas field in the Santos basin, which, according to Petrobras, may have the same size as Tupi, has contributed to further cautious optimism among oil analysts.

Gas dependence

Currently Brazil is almost self-sufficient in oil. After reaching self-sufficiency in 2006, the country's oil-trade balance slipped into a deficit estimated at US$400m in 2007 owing to a surge in domestic demand amid strong economic growth. As for gas, which has become a more widely used source of energy in Brazil, most of the country's needs are met by importing from Bolivia and, on a smaller scale, from Argentina.

This has made Brazil vulnerable to regional developments, such as the nationalisation of the natural-gas sector by the Morales government in Bolivia in 2006 and recent production bottlenecks faced by that country, which are likely to affect its supply to Brazil. Domestically, there is growing concern about the possibility of energy shortages in 2008-09 if a scenario of below-average rainfall materialises, although the Lula government has played down this risk.

In this context, Petrobras will be under increased pressure to advance as quickly as possible with ongoing exploration works in the Santos basin. There are high expectations that new announcements concerning the reserves' potential in the pre-salt layer will be made in the first half of 2008. At the very least, Tupi will almost certainly bolster Brazil's self-sufficiency in oil production and may also transform the country into a net exporter. Jupiter, according to the government, is likely to lead to self-sufficiency in gas in the medium term as well.

Further, if the huge potential of Tupi and its sister fields is eventually confirmed, Brazil's importance as an oil producer will increase even more. This could change the regional, and even the global, balance of energy power. The Lula government would certainly try to capitalise on this in the run-up to the 2010 presidential election, whoever from his party runs for the presidency. Preparations for those elections will begin after the October 2008 municipal elections are concluded.