BRAZIL'S CHIEF PETROLEUM REGULATOR INADVERTANTLY CONFIRMS

UNCLAS SECTION 01 OF 03 RIO DE JANEIRO 000091

SIPDIS

SIPDIS

SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC AND GREG MANUEL
EB/ESC JAMES EIGHMIE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOE FOR CAROLYN GAY AND RHEA DAVIS

E.O. 12958: N/A
TAGS: ENRG EPET EIND EINV BR
SUBJECT: BRAZIL'S CHIEF PETROLEUM REGULATOR INADVERTANTLY CONFIRMS
RUMORS OF MEGA OIL FIELD IN SANTOS BASIN

REF: A) RIO DE JANEIRO 35, B) 07 SAO PAULO 0953

Sensitive but unclassified, please protect accordingly.

1. (SBU) Summary. Brazil National Petroleum Agency (ANP) Director
Haroldo Lima is under fire and, some speculate, may lose his job for
confirming what petroleum industry insiders have believed for some
time -- that, at a depth of around 4000 meters in the Santos Basin
off the coast of Sao Paulo, Brazil potentially has a mega oil field
estimated to contain between 30-40 billion barrels of oil. If these
reserves are confirmed, Brazil could jump into the top 10 oil
countries by reserves, surpassing nations such as Nigeria and Libya.
Though the possibilities have generated a great deal of excitement,
industry observers caution that the technological challenges
involved are extensive and expensive to overcome, meaning that any
developments will, at the very least, be slow in coming. In light
of the potential gains, there are signs that GOB is looking for ways
to maximize the government share of these historic finds and to
allow Petrobras to position itself to be the leading developer in
the new fields. End Summary.
Making News and Moving the Markets
--------------

2. (U) Speaking as part of a seminar panel on April 14, ANP
Director Haroldo Lima announced that Brazilian state oil company
Petrobras is sitting on the world's biggest oil discovery in 30
years. ANP quickly released a statement distancing itself from
Lima's remarks, saying that he had been speaking outside of his
official capacity. Brazilian semi-public state oil company
Petrobras declined to confirm the estimate, saying only that studies
on the find are still underway. Still, shares of Petrobras closed
up 6 percent on the day.

3. (U) According to Lima, Petrobras, which operates the BM-S-9
block ("Carioca"),has a significant stake in a massive sub-salt
structure that could contain more than 33 billion barrels of oil
equivalent and is estimated to be five times the size of the
recently announced, large Tupi discovery (5-8 billion barrels)(ref
B). He went on to comment that Carioca has the potential to be the
third biggest active field in the world. Brazil's Securities and
Exchange Commission harshly criticized Lima, saying that he should
have known the effect his comments would have on the stock market.
In the near-term, ANP and Lima will focus their energies on damage
control but Lima could very well be fired over this slip-up within
the next few days.

4. (U) Lima, 67, is an electrical engineer from the state of Bahia.
Before being named Director of ANP in 2005, Lima was a five-term
federal deputy in the Brazilian Congress. He is a member of
Communist Party of Brazil (PCdoB),which supports the Lula
Administration. Though Lima did not come to ANP with a strong
background in petroleum, industry generally gives a positive
assessment of his performance as Director. Under Lima, ANP has held
four bidding rounds for oil and natural gas exploration and
production blocks. Lima understands that regular and transparent
bidding rounds are fundamental to maintaining international
investment in the petroleum and gas industry. In a recent interview
in ISTOE Magazine, Lima called for the creation of a 100%
state-owned company to receive all the oil extracted from Brazil and
partners would receive monetary payments.

How Much Oil Are We Talking About?
--------------


5. (SBU) For years, industry insiders have conjectured that there
might be a lot more oil at deeper geological intervals than those
where Petrobras, Shell and Devon produce today in Brazil. Talk of
"another Campos Basin below the Campos Basin" and large potential in
Santos Basin has been circulating through the oil community for a
while. In 2005, Petrobras began drilling the Parati well in the
Santos Basin, the first well to reach hydrocarbon-bearing reservoirs
below a 2 mile-thick layer of salt. The well was the most expensive
ever in the country, but it was key as it confirmed that there was
indeed oil below the salt that might be put into production. Since
then, Petrobras drilled three other wells in the area (along with
four others in different areas off of Brazil's coast) and all found
relatively light oil (28-30 API) below the salt. The Tupi
announcement in November 2007 was the crowning event of a long
process.


6. (SBU) However, industry insiders never considered Tupi as the
largest structure in the region. With the latest technology
available, subsurface maps of what the area below the salt layer
might look like have indicated that it is only the smaller of two
relatively large "hills" under the salt. If oil bearing, the larger

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structure might hold a quantity of oil estimated to be between 30-40
billion barrels. Located to the south of Tupi, the larger structure
has yet to be given a public name but is being referred to by the
industry as "Sugarloaf."


7. (SBU) Petrobras tested one well in the Sugarloaf structure last
year in the BM-S-9 block (Carioca) and is still drilling another.
It operates the block in partnership with BG Group (30%) and Repsol
(25%). In an official release, Petrobras stated that the second
well has not yet reached the sub-salt level. In the absence of more
conclusive data on the block's potential, Petrobras is remaining
tight-lipped. Through its work in Brazil and in Mexico's deep-water
reserves, Petrobras has developed expertise and a reputation as a
leader in cutting edge deepwater drilling technology.


8. (SBU) While Petrobras is getting the majority of the press play
right now, it should be noted that other companies are also well
positioned should a discovery at Sugarloaf be confirmed. The
BM-S-22 block, just south of Petrobras' Carioca block, is thought to
be the apex of the structure and is operated by Exxon (40%) in
partnership with Hess (40%) and Petrobras (20%). Galp, BG, and
Shell also have minority stakes in neighboring blocks. Exxon Brazil
President John Knapp told Mission Brazil officers that the industry
as a whole is extremely excited about pre-salt opportunities in
Brazil, but cautioned that the government and press euphoria does
not sufficiently take into account the serious technological and
financial challenges of drilling so deep. Knapp also expressed some
concern that, in this euphoria, the GOB may be tempted to change its
current concession model which industry views as fair, transparent,
and effective in order to allow the GOB and Petrobras to take
maximum advantage of the finds, possibly at the expense of the
international oil community.

Next Steps for the Government of Brazil
--------------


9. (SBU) As previously reported (Ref A),the Government of Brazil
withdrew 41 prime blocks in the Santos Basin from auction shortly
after the Tupi announcement in November 2007. Pending a
determination of how to best develop the Santos Basin pre-salt
reserves and capture the most revenue, no further bidding will take
place. This has international industry concerned since, in the
absence of new exploration opportunities, they could be forced to
leave Brazil. ANP has formed a task force and contracted
international consulting firm Wood MacKenzie to study how other
countries handle such contracts. ANP has also expressed interest in
sending a delegation to the U.S. to study how the USG handles
contracts in the Gulf of Mexico and in Alaska.


10. (SBU) While Petrobras CEO Sergio Gabrielli has made public
comments that Brazil should look into amending its Petroleum Law,
industry insiders and academic experts agree that the most likely
outcome is for Brazil to maintain its current concessions
arrangement and increase the government's take, or "special
participation rate" (maybe to as high as 80 percent). There is
likely not enough support within the Congress to support such a new
Petroleum Law, and little confidence in Congress' ability to come up
with a palatable new framework. The benefit of increasing the
special participation rate is that it can be achieved by
Presidential Decree.


11. (SBU) Petrobras would also likely oppose any change towards a
production sharing or service contract regime. It appears as though
Gabrielli's strategy is to stall the auction process for a few years
so that Petrobras can be better positioned, financially, to bid
competitively on the prime blocks. As it is, Petrobras is
confronting serious resource constraints on Tupi, and getting
Sugarloaf into production may be beyond its current capabilities.
There is a worldwide shortage of geologists, engineers and
equipment, and the depth of these discoveries (2000 plus meters of
water and up to two miles of salt) would require the most advanced
(and most expensive) drilling technology on the market. (Note:
There are only a few drills capable of drilling at such depths. Per
ref B, two of these have been reserved to begin work at Tupi in

2009. End Note.)


12. (SBU) Supported by key players within the Brazilian government,
such as Presidential Chief of Staff and Chairman of Petrobras' Board
of Directors Dilma Rousseff, Petrobras is shifting resources to
develop Tupi as quickly as possible. The government views the new
sub-salt discoveries as a good source of future political leverage,

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and is about to embark on a US$50 million publicity campaign to
spread the news about Brazil's apparent new oil riches. If Dilma
Rousseff indeed runs for the presidency in 2010, it is possible that
these oil and gas developments combined with the government's
large-scale planned infrastructure projects could boost her profile
as a candidate.

Comment
--------------


13. (SBU) The potential discovery of additional oil deposits in the
Santos Basin is certainly good news for Brazil. Unfortunately, the
bad news is that there is insufficient drilling equipment to bring
these resources on line quickly and there remain significant
technological hurdles to drilling in such extreme conditions. If
the best estimates have the Tupi field producing no sooner than 2013
even with the full support of Petrobras and the rest of the GOB,
developing "Sugarloaf" may indeed take some time. Undoubtedly,
however, these discoveries have the potential to make Brazil a
player in international energy markets and may have an impact on
Venezuela's role for the region as well. The GOB's decisions on how
to develop the area will have further impact on U.S. companies'
ability to participate in these exciting new finds. End Comment.


12. (U) This message was cleared/coordinated with Embassy Brasilia.

MARTINEZ