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IBP1075_12 BRAZIL IN THE GLOBAL ENERGY WORLD Frank D.

Kim1 and Shapour Vossoughi2

Copyright 2012, Brazilian Petroleum, Gas and Biofuels Institute - IBP
This Technical Paper was prepared for presentation at the Rio Oil & Gas Expo and Conference 2012, held between September, 1720, 2012, in Rio de Janeiro. This Technical Paper was selected for presentation by the Technical Committee of the event according to the information contained in the final paper submitted by the author(s). The organizers are not supposed to translate or correct the submitted papers. The material as it is presented, does not necessarily represent Brazilian Petroleum, Gas and Biofuels Institute’ opinion, or that of its Members or Representatives. Authors consent to the publication of this Technical Paper in the Rio Oil & Gas Expo and Conference 2012 Proceedings.

Abstract
Brazil is the 10th largest energy consumer in the world and the third largest in the Western Hemisphere, behind the United States and Canada. Total primary energy consumption in Brazil has increased significantly in recent years; and over the past decade, Brazil has made great strides in increasing its total energy production, particularly oil. Brazil has the second-largest crude oil reserves in South America (behind Venezuela), and is one of the fastest growing oil producers in the world. According to United States Energy Information Administration (EIA), Brazil had 12.2 billion barrels of proven oil reserves in 2008. In 2007, Brazil's state owned Petroleo Brasileiro S.A. (Petrobras) announced that it had discovered an estimated 5-8 billion barrels of recoverable reserves (including both oil and natural gas) in the Tupi field, located in the Santos Basin. In 2008, subsequent discoveries were announced, to include Jupiter and Carioca (aka Sugar Loaf). Although Petrobras has yet to confirm the size of the discoveries, some industry analysts estimate the total extent of recoverable oil and natural gas reserves in the entire pre-salt layer have approached 40 to 80 billion barrels of oil equivalent. The reserves occur below a salt zone that is estimated to be 7,000 meters below the ocean surface. However, Brazil faces many challenges to recover the hydrocarbons to include technical, political, fiscal, and infrastructure hurdles. In spite of the challenges ahead, these discoveries transformed the nature and focus of Brazil's oil industry, economy, and future; and the potential impact of the pre-salt discoveries upon world oil markets is vast. The purpose of this paper is to discuss how the recent discoveries will affect Brazil's future and the impact it will have on the global energy world.

1. Introduction
Deep and ultra deep water fields were first discovered in Brazil in 1984. In 1997, the Brazilian Government passed Law 9478; establishing regulatory framework and opening its doors to foreign competition. Until then, Petrobras held a monopoly on oil-related activities in the country while the government retained control of key energy complexes and price controls. Arguably, this liberalization of the energy sector contributed to a rampant rise in petroleum activities in Brazil. In 1980, oil production was approximately 250,000 barrels per day. From 1984 on, Brazil made its first deep and ultra deep water oil field discoveries to include Marlim. Marlim was originally discovered by well 1-RJS- 219-A in February 1985. At the time of discovery, the Marlim reservoir had an oil-in-place volume of about 9 billion barrels and an estimated 1.7 billion barrels of oil in total reserves (Offshore-Technology, 2009). This contributed to a steady increase in Brazilian oil production through 1997. From 1997 to present, the production rates dramatically accelerate. In 2008, Brazil produced approximately 2.35 million barrels of oil per day. 1.1 Oil In November 2007, Petrobras announced the discovery of the Tupi oil field located approximately 300 km off the coast of Brazil in the Santos Basin (in block BM-S-11). The ultra deep water field was discovered in a geological

______________________________ 1 MBA, Petroleum Management - UNIVERSITY OF KANSAS, Lawrence, Kansas, USA (Presently with USA Navy) 2 Ph.D., Chemical and Petroleum Engineering – UNIVERSITY OF KANSAS, Lawrence, Kansas, USA

Rio Oil & Gas Expo and Conference 2012 formation under a layer of salt. Deep water fields are underwater fields with depths between 300m and 1,500m in depth. Ultra-deep water fields are underwater fields with depths in excess of 1,500m. Current estimates of the field forecast Tupi to contain 5-8 billion barrels of oil equivalent. The Tupi field lies below a water depth of 2,140 meters, then 3,000 - 4,000 meters of sand and rocks, and another 2,000 meters of salt layer. According to Petrobras, the crude oil has a gravity of 28-30 °API, which corresponds to a specific gravity around 0.88 and has a sulfur content of less than 0.5 percent sulfur by weight. In April 2008, the Brazilian National Agency of Petroleum (ANP) disclosed another (much larger) discovery in Santos Basin, called the Carioca oil field (Carroll and Caminada, 2008). The Carioca discovery was made in block BMS-9. Although Petrobras has yet to confirm the discovery of this colossal find, Carioca is believed to contain 33 billion barrels of oil. If these estimates hold true, this would put Brazil into the top ten countries of largest proven reserves. The EIA forecasts that Brazil will be a net oil exporter by the end of 2009 and with these new found discoveries; Brazil can become a dominant exporter of oil in the global energy world. 1.2 Ethanol The recent discoveries in the Santos and Campos regions will not hinder Brazil’s progression to ethanol. Brazil is one of the largest producers of ethanol in the world and the world’s largest exporter of ethanol. In 2007, Brazil produced 390,000 barrels per day of ethanol, up from 306,000 in 2006. The EIA forecasts that Brazil’s ethanol production will reach 440,000 barrels per day in 2008 and 530,000 barrels per day in 2009. Ethanol in Brazil is derived from sugar cane, which is abundant in Brazil due to the country’s tropical climate. Over the years, Brazil has become accustomed to the use of ethanol. Over half of all cars in the country are flex-fuel based and eighty percent of new cars sales in Brazil are flex-fuel vehicles. Flex fuel vehicles can run on 100 percent ethanol or on an ethanol-gasoline mixture. As a result, ethanol demand has surged in Brazil (and globally). Additionally, Brazil has sought to increase ethanol exports. In 2007, Brazil exported 12,600 barrels per day of ethanol to the United States, down from 30,000 barrels per day in 2006 but well above levels seen prior to 2005. The increase in exports to the United States has been driven by the phase-out of methyl tertiary butyl ether (MTBE) in the United States, which effectively replaced MTBE with ethanol as an additive to gasoline. In addition, Brazil’s ethanol exports face high tariffs in some markets, such as the 54 cent per gallon tariff in the United States. Besides the United States, Brazil exports ethanol to Europe and Japan. 1.3 Electricity According to the EIA, Brazil had 90.7 gigawatts of installed generating capacity in 2005. The largest source of electricity generation is hydropower (84 percent), with smaller amounts from conventional thermal, nuclear, and other renewable sources. Brazil’s heavy reliance on hydroelectricity makes it vulnerable to random periods of below-average rainfall. Conventional thermal generating sources provide only a small part of Brazil’s electricity supply; however Petrobras estimates that natural-gas fired generating capacity in Brazil could increase to 13,000 megawatts by 2017. Natural gas offers an alternative to the variability of hydropower but is largely dependent upon the availability of domestic and imported sources of the fuel. Currently, Brazil imports natural gas from Bolivia and Argentina. With the recent discoveries in the Santos Basin, industry analysts estimate Brazil could become self-sufficient in meeting domestic natural gas needs (Gentile, 2008). In recent years, Brazil has run an overall power surplus, allowing exports to its neighbors. In 2007, Brazil began exporting electricity to Uruguay. In 2008, Brazil also made a pact to exchange energy with Argentina. 1.4 Natural Gas Currently, natural gas consumption is a small part of Brazil’s overall energy mix. In 2005, natural gas constituted 7 percent of total energy consumption in Brazil; however, natural gas demand is rising. In 2006, Brazil consumed 683 billion cubic feet of natural gas, up from 657 billion cubic feet in 2005. High oil prices and efforts to diversify electricity generation from hydropower to gas-fired power plants have helped to increase the domestic demand for natural gas. In January 2008, Petrobras announced the discovery of a large natural gas and condensate field (called Jupiter) in the Santos Basin in block BM-S-24 (Petrobras, 2008). Although un-confirmed, some industry analysts estimate Jupiter to be similar in size to Tupi (Duffy, 2008). According to Petrobras, Tupi alone could contain 5-7 trillion cubic feet of recoverable natural gas. If proven, the discovery could increase Brazil’s total natural gas reserves by 50 percent and reduce the amount of natural gas it imports from Argentina and Bolivia. The new discoveries complied with the increase in domestic demand for natural gas will lead to increased infrastructure spending. Currently, Brazil’s natural gas infrastructure consists of over 1,550 miles of pipelines, mostly in the southeast and northeast parts of the country. The network consists of main systems in the southeast, northeast, and the state of Espirito Santo; however, these systems are not interconnected, which has hindered development of domestic 2

Rio Oil & Gas Expo and Conference 2012 production and consumption. Additionally, a lack of natural gas transportation infrastructure in the interior regions of the country has hindered exploration and production. To accommodate this, Petrobras has spearheaded projects to update its gas pipeline infrastructure. In June 2006, China’s Sinopec began construction on the 730-mile Gasene pipeline linking the northeast and southeast networks. In 2005, construction began on the Gas Unificacao, or Gasun pipeline to link the southwest to the northeast. Additionally, in 2008, Petrobras announced that it would construct a 150mile natural gas pipeline linking the Tupi field to its Mexilhao development.

2. Global Implications
The recent discoveries in the pre-salt layer in Brazil could have vast implications on the global energy markets. The demand for hydrocarbons is driven by various factors. These factors include: economic growth, population growth, industrialization, and the availability alternative energy sources such as ethanol, hydropower, or wind power. The EIA estimates that over the 2006 to 2030 period, the world’s real GDP growth on a purchasing power parity basis is projected to average 3.5 percent annually (EIA, 2009). Holding other factors constant, this economic growth will be accompanied by an increased level of industrialization; especially in less developed countries. This in turn will increase the demand for energy and oil. Additionally, the world’s population is expected to grow in the same period. The United States Census Bureau estimates that by 2020, the world will have added 800 million people (U.S. Census Bureau, 2009). Holding other factors constant, this population growth will also increase the demand for energy and oil. 2.1. Implications to the United States In January 2009, Petrobras released its five year Strategic and Business Plan for the period 2009-2013. The plan highlighted ambitious goals that could have substantial implications for the United States. According to José Sergio Gabrielli de Azevedo, CEO of Petrobras, Petrobras is the largest Brazilian investor in the United States as the company has invested more than $4 billion in both production and refining operations with sales to the United States exceeding $8.9 billion in 2008 (Wertheim, 2009). Petrobras currently operates a floating production storing and offloading (FPSO) unit in the Gulf of Mexico and almost half of Petrobras’ hydrocarbon exports from Brazil go to the United States. As the United States is the world largest consumer of energy, Petrobras and the ANP expect integration with the U.S. markets to grow with increased Brazilian production in light of the recent finds in the pre-salt region (Wertheim, 2009). According to the Strategic and Business Plan for the period 2009-2013, Petrobras has set very ambitious production goals. The plan notes that Petrobras plans to increase production from 2.3 million barrels per day to 5.3 million by 2020 and to expand refining capacity from 2 million barrels per day to more than 3 million in the same time span while becoming the fifth-largest integrated energy company in the world (Petrobras, 2009a). Petrobras also estimates that by 2020, 5 million barrels per day (of oil) will come from fields located in Brazil; of which, 3.3 million barrels per day will come from reserves above the salt layer, while 1.8 million barrels per day will originate from the pre-salt areas (Wertheim, 2009). Petrobras also expects to have refining capacity of 3.2 million barrels per day by 2020. If this holds true, Petrobras will have nearly 2 million barrels of oil per day available for exports – perhaps to the United States. 2.2. Private Investment in Brazil Brazil opened its energy sector to private investors in 1997. Since then, the ANP has held annual bidding rounds to private investors (ANP Brazil, 2009). These rounds have attracted large numbers of private participants which helped to increase the oil production in Brazil; however, the recent findings have raised concerns that the Brazilian government may limit the degree of private participation in the future. Since the Tupi discovery, the ANP removed 41 blocks in the pre-salt region from the ninth bidding round along with additional blocks from the tenth bidding round. Currently, companies that produce oil or gas in Brazil pay 10% in fixed royalties. They pay an additional special tax for large fields between 10% and 40% of revenue depending on volume, location, depth and age of the field. Brazil's oil regulatory agency may propose to hike the special participation tax to a range of about 40% to 60% (Radowitz, 2008). Other sources speculate turning 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 (EIUVW, 2009). Ultimately, this would discourage some private companies to participate in Brazilian oil production activities. Currently, seven companies hold concessions for the development in the sub-salt region: Petrobras, BG, Galp, Repsol, Shell, Exxon and Amerada Hess. In Tupi alone, Petrobras has a 65% operating stake. The U.K.’s BG Group PLC holds 25%, and Portugal's Galp Energia holds the remaining10%. BG also has stakes in other pre-salt blocks.

3. Technical and Operational Challenges in the Pre-Salt Region
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Rio Oil & Gas Expo and Conference 2012 Brazil, Petrobras, and the other institutions involved with the recent discoveries in the pre-salt region have many challenges to overcome to extract the hydrocarbons. Although the challenges are complex and vast, this paper will broadly categorize the hurdles into four main aspects: geophysical, financial, logistics, and recovery. 3.1. Geophysical According to Petrobras, in order to reach the oil reservoirs in the Santos Basin, they will need to pass through 2,000 meters of water, 1,000 – 3,000 meters of layered sediments, and another 2,000 meters of salt. In the case of Tupi at BMS-11, the reservoir is estimated to be 7,000 meters below sea level. Preliminary tests of BMS-11 have shown the following qualities (Formigli, 2007):  Reservoir rock sediments are lithologically comprised of heterogeneous layered carbonates vice turbidites.  Oil API: 28-30°  Oil Viscosity around 1 cP  Gas to Oil Ratio (GOR) between 140 and 220 m3 / m3  Initial pressure 580 kgf / cm2 (equivalent to 56,878.57 kilo Pascal’s)  CO2 in the associated gas (8 – 18%) Petrobras is considered an industry leader in ultra deep water drilling and exploration. Although extreme depths impose intense pressures and high temperatures; depth is not Petrobras’ biggest concern. A significant concern for Petrobras is that the company has no prior experience with the type of carbonate rock (microbial carbonate, also known as microbialites) present in the Tupi area reservoirs. Due to their lack of existing models and parameters, they are unsure of how the oil will behave when recovery is attempted (Petrobras, 2009b). Additionally, drilling through the salt layer also poses a significant challenge. Lithologically, salt is very ductile and impermeable. Due to this lack of inherent strength, the wellbore can deform or shift while drilling (Redden, 2009). This is just one of many issues with drilling through a salt layer. Shaker (2008) noted inherent drilling risks caused by the interaction between the salt and surrounding sediment. An underlying geophysical principle in salt basins is that the magnitude and direction of the principle stresses are controlled by sediment load, salt thickness, and salt migration history. Shaker noted that salt has unique petrophysical properties that contribute to changes in pore pressure gradients in the host sediments above and below the salt layer. Essentially, because salt is buoyant, it magnifies the principle stress above the salt layer and decreases the principal stress below the salt zone. From his observations, Shaker (2007) highlights pros and cons in subsalt exploration. Pros:   Cons:  

Salt enhances the retention capacity in the sub-salt (pre-salt) layer and the sealing capacity in the supra-salt layer. Because of salt’s low density, drilling does not require high “mud” density while drilling.

Drilling problems such as unstable wellbores due to kicks may occur above the salt layer due to high principle stress and pressure gradients. Shaker (2007) notes several drill casings are needed to drill through this zone. The moderate to weak pressure gradient and sealing capacity in the pre-salt layer can cause seal failure and weak water drive in the production phase.

Petrobras plans to meet these challenges through its Center for Research and Development otherwise known as CENPES. The objective of CENPES is to meet the technological demands that drive Petrobras. CENPES is staffed with more than 1,500 employees, 22% of whom hold master's degrees and doctorates. Its research and development unit has 30 pilot plants and 137 laboratories (Petrobras, 2009c). Within CENPES, Petrobras created the Pre-Salt Technological Program (PROSAL). PROSAL projects include evaluation of the most effective drilling “mud” fluids, application of cement resistance, geomechanical modeling, and well control in the salt zone (Formigli, 2007). The salt formation introduces another challenge in exploration. Salt’s structure and stratigraphy can make seismic images difficult to interpret. Salt is difficult for geologists because it absorbs seismic energy and does not yield typical visualization results. Additionally, the Santos Basin is vast in size. Blocks BMS-8, 9, 10, and 11 (Tupi Area) have an approximate area of 20,000 square kilometers. To explore this area, Petrobras had to contract the largest 3D seismic marine survey in the world (Petrobras, 2009b). According to the company, their efforts allowed them to obtain seismic database to help understand the geological composition of the basin which culminated in the proposal of more reliable exploratory locations (Petrobras, 2009b). 3.2. Financial Hurdles Aside from geophysical challenges, Petrobras and Brazil face huge hurdles related to the costs to extract the oil from the ultra deep water fields. Petrobras estimates that each well in the Santos basin will cost $100 to $120 million to 4

Rio Oil & Gas Expo and Conference 2012 develop (Patel, 2009). Industry experts also estimate staggering costs to develop the basin. Cambridge Energy Research Associates (the Cambridge, Massachusetts-based consulting firm headed by Daniel Yergin) estimates the Tupi-area fields will cost $200 billion to $240 billion to develop (Carroll, 2009). Other analysts such as Credit Suisse estimate $600 billion (Wortheim, 2009). Petrobras cannot confirm or deny any estimates; however, in January 2009, Petrobras released its five year strategic plan for 2009 through 2013. According to the plan, Petrobras plans to invest $174.4 billion from 2009 through 2013. According to Petrobras, the company was able to raise $30 billion to fund its investments. The company secured a 10-year loan worth $10 billion from the China Development Bank. Previously, Petrobras had already secured credit lines worth $2 billion from the US Ex-Im Bank, $12.5 billion from the Brazilian National Development Bank (BNDES), and $6.5 billion from a group of international banks. The remaining investment will be funded by its own cash flow. The projected net cash flow over five years is $148.6 billion (including dividends) (Wortheim, 2009). Petrobras also believes that the breakeven cost is approximately $45 dollars per barrel of oil. This figure is considered aggressive by the International Energy Agency (IEA). The IEA estimates the break even cost (per barrel) for deep water and ultra deepwater recovery is $65 dollars per barrel. Although oil prices tumbled in 2008, current oil prices and mid to long term forecasts support feasibility of Petrobras’ latest five year development plan and associated costs. Of note, there has also been indication that the Petrobras’ latest plan will be revised in January 2010. Although speculative, the revised plan would include an additional $29 billion for the development of offshore fields in the pre-salt deposits (Patel, 2009). 3.3. Logistics The logistical challenges in the pre-salt findings are primarily caused by the isolated location of the reservoirs. The Tupi, Jupiter, and Carioca, accumulations are approximately 300 km off the Eastern coast of Brazil. Considering the scope of the projects, this would entail multiple logistics runs to support operations in the pre-salt area. Petrobras is in process of developing production models to support these operational requirements. Petrobras seeks to improve equipment autonomy in order to reduce the number of helicopter flights and boat trips. To achieve this, they are analyzing the possibility of implementing mid-way supply centers in order to reduce transportation issues (Wortheim, 2009). The depth of the reservoirs also complicates matters as Tupi is comprised of 80 percent crude oil and 20 percent gas (Carroll, 2009). Although further work needs to be done to establish Jupiter's exact dimensions; the field is believed to contain 5-8 billion barrels of oil equivalent (Duffy, 2008). According to Petrobras, Jupiter is located 37km from Tupi and 5,100m below the surface of the Atlantic Ocean. For Petrobras, natural gas is an important consideration because they have to decide whether to reinject it back into the reservoir or transport it to another destination where it can be used. One scenario for Petrobras is to build a natural gas pipeline from the well back to the shore; however, this is a daunting task since the pipeline would need to span 300km in water depths of 2,000m. Another scenario would be to transport the natural gas via liquefied natural gas (LNG). To condense LNG, natural gas is cooled to its liquefaction point (-161 degrees c). Once liquefied, it occupies a minute fraction of its gaseous volume. In liquid form, the gas can be transported economically over long distances in specially designed LNG tankers. LNG could also be produced offshore via floating production, liquefaction, storage and offloading vessels (McMichael, 2009). Another option to consider would be Gas-to-Liquids (GTL) where natural gas is converted to a liquid form. It differs from LNG in that the GTL process converts natural gas directly to a hydrocarbon liquid. Two German chemists named Franz Fischer and Hans Tropsch developed a method of producing a synthesis gas (Syngas: CO+H2) from naturally occurring gas. They discovered Syngas could be used to manufacture a range of hydrocarbon liquids (diesel/ petrol) with the aid of a special catalyst such as cobalt or iron (Infield, 2009). The GTL process has two main advantages. The process produces a hydrocarbon liquid ready to be sold into the market. The second advantage of the process is that it yields clean fuels as the Fischer- Tropsch process manufactures diesel with zero sulphur. Another option to bridge the logistical challenges is a Gas-to-Wire (GTW) process. In the GTW process, power is generated onsite by produced gas. Since there is no need to transport the produced gas, GTW can be a safe and efficient transmission of energy, with reduced environmental impact. Ultimately, Petrobras faces considerable physical constraints. They will have to work at great distances from the coast and over huge depths. They plan to reduce the size and weight of the equipment and increase the levels of automation and remote control in their operations (Wortheim, 2009). Over time, Petrobras will be able to better ascertain the logistical requirements accompanied by the recent discoveries in the pre-salt region. They should have better knowledge of reservoir dynamics which will give them a better basis to their exploration and production projects. 3.4. Recovery and Production Petrobras faces additional recovery and production hurdles from the isolated location of the pre-salt discoveries. Because Petrobras often drills in unusually deep waters, they often scrutinize future equipment requirements. In the Tupi region, they plan to recover and produce oil via platforms (rigs) and floating production, 5

Rio Oil & Gas Expo and Conference 2012 storage and offloading vessels (FPSO). FPSOs are vessels designed to transfer oil or gas produced from nearby platforms; process it, and store it until the oil or gas can be transported to a tanker or via pipeline. Because of their abundant offshore exploration activities, Petrobras attempts to contract rigs and FPSOs for periods of five years or longer (USSEC, 2008). For the Tupi discoveries, Petrobras plans to utilize dynamic positioning FPSOs. In dynamic positioning FPSOs, a computer controlled system automatically maintains the FPSOs position and heading by using organic propellers and thrusters. This feature helps to support operations at sea where mooring or anchoring is not feasible due to deep water. Staying ahead of the demand requirements has been a focal point of Petrobras’ production activities. The company evaluates the need for rigs, renews drilling contracts, and contracts ahead for rigs as needed (USSEC, 2008). In June 2008, Bloomberg reported that Petrobras leased about 80 percent of the world's deepest-drilling offshore rigs and plans to hire 14,000 engineers, geologists and drillers within the next three years to support the discoveries in Tupi and adjacent fields (Carroll, 2009). A consequential effect of the depth and isolated location of the reservoirs is that the oil will be exposed to low temperatures and high pressure which can lead to the formation of gas hydrates and paraffin in the oil. This can inhibit the recovery process. Gas hydrates are created when water and gas combine to form a crystalline substance that looks like ice. This occurs when excess methane or other gases are present. The hydrates can result in the blocking of pipelines. The stubborn clumps are formed under conditions of high pressure and low temperature (Winge, 2009). Petrobras has several alternatives to control the formation of hydrates. The two main procedures are to add heat in the transport pipeline or to inject a chemical additive that reduces the freezing temperature of the oil. Although other speculative alternatives may exist, the addition of thermal energy or chemical additives is most common but cost intensive. The formation of paraffin can also reduce the flow efficiency of pipelines. Paraffin wax is an organic compound consisting of mainly normal alkanes. Under standard conditions, all components of oil are soluble. Consequently, oil functions as a Newtonian fluid. Once the ambient temperature drops below the oil’s cloud point, the heavier hydrocarbons in the oil precipitate to form solid wax crystals (Abdul Kadir, 2009). The cloud point of a fluid is the temperature at which dissolved solids are no longer completely soluble and precipitate as a wax crystal; giving the fluid a cloudy appearance. The presence of these wax crystals changes the flow behavior of the oil to a non-Newtonian state. Wax deposits can lead to increased pipe roughness, reduced effective diameter, more frequent pigging requirements, and potential blockage (Abdul Kadir, 2009). Petrobras has similar alternatives (compared to hydrates) to control paraffin formation. The two main procedures are to add heat in the transport pipeline or to inject a chemical additive that increases the pour point of the oil. The pour point of oil is the temperature below which crude oil becomes plastic and will not flow. Pour points for oil range from 32° C to -57° C (Encyclopedia Britannica Online, 2009).

4. Key Entities
The Brazilian Petroleum Industry is dominated by four state owned – state controlled entities. Those four entities are the Ministry of Mines and Energy (MME), the National Council for Energy Policies (CNPE), the National Agency for Petroleum (ANP), and Petrobras. These entities have different roles in the petroleum industry. The MME serves as the manager of the petroleum sector and is accountable for the administration of the sector. The CNPE (which includes key members of the MME) serves as the policy arm of the petroleum sector. The ANP serves as the regulatory arm of the petroleum sector. In large part, the ANP implements and regulates policies set forth by the CNPE. Companies such as Petrobras serve as the execution agent of these polices. 4.1. Background Brazil’s petroleum industry officially took this organizational structure on August 8th, 1997 under Law 9478 (National Energy Policy). The key objectives of Law 9478 were to liberate oil production; create the CNPE and ANP. Prior to the enactment of Law 9478, Brazil’s petroleum sector operated under a monopoly where the key participants in the sector were the MME and Petrobras. 4.2. Ministry of Mines and Energy (MME) The Ministry of Mines and Energy (MME) was created in 1960. It is directly linked to the Presidency of the Republic and responsible for the management of the Brazilian energy sector and to promote the adequate supply of energy in the country. Prior to then, issues dealing with mines and energy were under the authority of the Ministry of Agriculture (MMEB, 2009). The MME is also responsible for the National Petroleum Agency (ANP) and Brazilian Electricity Regulatory Agency (ANEEL). Additionally, it shares the boards of the state fuels' company - Petrobras and the state electric company - Electrobras. 6

Rio Oil & Gas Expo and Conference 2012 4.3. National Council for Energy Policies (CNPE) The National Council for Energy Policies (CNPE) serves as the policy arm of the Brazilian petroleum sector. The CNPE was created through the Law 9478 and is organized through Presidential Decree 3520. The council is linked to the Presidency of the Republic; administered by the Minister of Mines and Energy; and is responsible for advising the President of the Republic on national policies intended to exploit the energy resources of the country. The CNPE is chaired by the Minister of Mines and Energy and composed of members of the Ministry of State of Planning and Budget; Ministry of State of Finance; Ministry of State of Environment, Hydraulic Resources and the Amazon; Ministry of State of Industry, Commerce and Tourism; Secretary of Strategic Affairs of the Presidency of the Republic; a representative of the States and the Federal District; a Brazilian citizen, specialist in the energy sector. 4.4. National Petroleum Agency (ANP) The National Petroleum Agency (ANP) is the regulatory arm of the Brazilian petroleum sector. The ANP was created through the National Energy Law and is organized through Presidential Decree 2455. The purpose of the ANP is to promote regulatory measures and to ensure compliance with national policy. It does this through publication of its own ordinances; direct action – such as entering into contracts on behalf of hydrocarbon related dealers; or through agreements with other public agencies. The ANP has a wide span of power and control and consequently, assumes many responsibilities. Among some of their tasks, the ANP:  Promotes geological studies to identify potential sources of oil;  Guarantees supplies of petroleum and natural gas products (and biofuels) and to protect the interests of consumers with regard to price, quality and availability of those products;  Grants concessions for the exploration, development and production activities;  Promotes and oversees bidding rounds for the concession of exploration, development and production activities;  Calculates the value of royalties to be paid to municipalities, states, and the government;  Establishes criteria for the calculation of the fees for the transportation via pipelines;  Authorizes refining, processing, transportation, import and export activities;  Cooperates with other entities of the energy sector in relation to matters of common interest, to include providing technical assistance to the CNPE;  Regulates and authorizes the activities related to the domestic supply of fuels and bio-diesel. The ANP is headed by a board composed of a director general and four directors. The directors are appointed by the President and approved by the Senate to fulfill four-year terms. The four directorates are the Attorney General, Executive, Audit, and Magistrate. Their duties are defined through internal bylaws stipulated in ANP Ordinance No 160 in accordance with Presidential Decree 2455 and the National Energy Policy. 4.5. Petroleo Brasileiro S.A. (Petrobras) Petroleo Brasileiro S.A (Petrobras) is an integrated, state controlled oil and gas company and is also the largest company in Brazil. As a state controlled company, Petrobras assists the Brazilian government to ensure that the supply and pricing of crude oil and oil products in Brazil meets Brazilian consumption requirements. The company was incorporated in 1953 to operate Brazil’s hydrocarbon activities. The company began operations in 1954 and sustained a monopoly for approximately forty years. In 1997, the Brazilian government disbanded the monopolistic petroleum sector and established competitive markets for crude oil and natural gas through the National Energy Policy. As a result of the law, Brazil deregulated prices for crude oil, oil products, and natural gas by the end of 2002. Although Petrobras was incorporated as a state-controlled company, the Brazilian government maintains control over Petrobras (and its budget). Petrobras submits its proposed annual budgets to the Ministry of Planning, Budget and Management; the Ministry of Mines and Energy; and the Brazilian Congress for approval. As of December 31, 2008, the Brazilian government owned 32.2% of Petrobras’ capital stock and 55.7% of the company’s voting shares (USSEC, 2008). As an integrated company, the company operates five business segments: exploration and production, supply, gas and energy, distribution and international. During 2008, its domestic oil and gas production averaged 2,176 million barrels of oil equivalent per day. Petrobras’ domestic oil and gas exploration and production efforts are primarily focused on three major offshore basins in southeastern Brazil: Campos, Espirito Santo and Santos (USSEC, 2008). Petrobras has operations in 23 countries outside Brazil. During 2008, it conducted exploration and production activities in 19 countries outside Brazil (Argentina, Bolivia, Colombia, Ecuador, Mexico, Peru, Venezuela, the United States, Angola, Nigeria, Tanzania, Mozambique, Senegal, India, Portugal, Iran, Pakistan, Libya and Turkey). The company also has ultra deep water exploration operations in West Africa and the United States Gulf of Mexico. Petrobras’ largest operating region outside Brazil is Argentina, which represented 45% of its international production in 2008 (Petrobras, 2009d). 4.6. Outlook 7

Rio Oil & Gas Expo and Conference 2012 Since the discoveries of the pre-salt oil reservoirs, Brazil faced many new and challenging realities. Some analysts estimate that the pre salt region could contain as much as 50-80 billion barrels of oil. In July 2009, Brazil’s President, Luiz Inacio Lula da Silva reported to Bloomberg that 71 percent of the pre-salt exploration and production licenses have yet to be auctioned (Cortes, 2009). Given the stark reality of Brazil’s new found wealth, President Lula da Silva formed an Energy Commission to analyze adjustments to the current regulatory framework. According to the National Energy Policy, the existing law generates revenues from four taxes: royalties, the area retention rate, the signature bonus and the special participation. Royalties are limited to 10% of the oil and gas production. The area retention rate is determined by the ANP and is based on the blocks’ area. The signature bonus is the upfront tax that the concessionaire pays for the exploration and production right acquisition. Finally, the special participation tax is based on production, but is applied only to extraordinary reserves worthy of high profit potential. On August 27, 2009, the MME announced a new regulatory model for the pre-salt discoveries. The regulatory framework proposes to alter the current taxation system to a production sharing concept where revenues will be collected once the production costs have been deducted (Rabuffetti, 2009). According to the MME, any concessions already granted by the ANP will be honored under the current taxation system (MME, 2009). The new policy also proposes to create a new company (unofficially) named Petrosal to be responsible for the contract management of shared production and marketing of oil in the pre-salt region. Finally, the policy proposes to create a new social fund to manage the new revenues. The goals of social fund are to invest in social programs, education, science and technology, and to fight poverty (MME, 2009). A production sharing agreement is a contract between a multinational oil company and a host government, in which the corporation provides capital investment in exchange for control over an oilfield and access to a large share of the revenues. The production sharing model is used worldwide because it allows investors to own part of the production; thus potentially reducing their risk while increasing their assets. Under these circumstances, production sharing models normally make it easier to attract international investment (SGI, 2009). This attractiveness may not be the case in Brazil. Although the new system has yet to be approved by the Brazilian congress, investors are apprehensive of the outcome. Royal Dutch Shell PLC, has put exploration investments in Brazil on hold to assess the new rules for the pre-salt oil region (Cortes, 2009). Under the proposed system, Petrobras will be the operator of all contracts for exploration and production of the reservoirs in the pre-salt region. Petrobras will receive a minimum participation of 30% of the net gains obtained in the business (Vellozzi, 2009). Additionally, the proposed new state oil company (Petrosal) would gain much power as Petrosal would control over half the votes on the operating consortium. Petrobras stated in August 2009 that Petrosal would have veto rights over development of the fields (Rabuffetti, 2009).

5. Foreign Entities
Petrobras has dynamic ties with foreign entities, particularly in Latin America and with China. Internationally, Argentina is the most significant, representing 45% of Petrobras’ total international crude oil and natural gas production and 32% of the companies proved international crude oil. In Argentina, Petrobras operates primarily through its subsidiary, Petrobras Energia S.A. (PESA). The company owns the Pichi Picún Leufú hydroelectric plant, the gas-fired thermoelectric plant Genelba, and has an interests in various other companies throughout the energy value chain. The company also owns and operates three petrochemical plants in Argentina and two refineries. Petrobras also has significant operations in Bolivia. Operations in Bolivia represented 24% of international production in addition to 31% of its international proved crude oil and natural gas reserves (as of December 31, 2008). A disruption to this operation stemmed from Bolivia’s Supreme Decree 28,701; which came into effect in May 2006. The decree effectively nationalized all natural hydrocarbon resources in Bolivia and forced all companies that produce gas and oil in Bolivia to transfer ownership of the entire production to Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). Another blow to Petrobras was the decree allowed the Bolivian government to nationalize the shares of Petrobras Bolívia Refinación S.A., in which Petrobras had an indirect interest of 100%. This effectively gave YPFB controlling interest in Petrobras Bolívia Refinación. Consequently, on June 25, 2007, a share purchase agreement for the shares of Petrobras Bolívia Refinación was signed; which transferred all shares of Petrobras Bolívia Refinación to YPFB for the amount of $112 million. To add insult to injury, Bolivia adopted a new constitution on January 25, 2009 that prohibits private ownership of the country’s oil and gas resources. The new constitution will likely result in Petrobras relinquishing all of its proved reserves in Bolivia (Petrobras, 2008b). On February 19, 2009 Petrobras signed two memorandums of understanding with Chinese institutions and an export oil contract with UNIPEC Asia Co. Ltd., a subsidiary of China Petrochemical Corporation (Sinopec). The memorandums involved three main parties: China Development Bank Corporation (CDB), China Petrochemical Corporation (Sinopec) and Petrobras. The memorandums resulted in a $10 billion loan from the China Development Bank to Petrobras in exchange for future oil allocations to China from Brazil. Under the deal, Petrobras will supply Sinopec with 150,000 barrels per day for the first year of the deal and then 200,000 barrels day for the next nine years. 8

Rio Oil & Gas Expo and Conference 2012 Of note, China will not receive any stake in any Brazilian oil field or any contracts to provide services in oil fields. The loan carries an interest rate of 6.5% and will be repaid in cash, not oil (Oster, 2009). Petrobras also announced that the goal of the memorandums was to drive economic development and trade between China and Brazil.

6. Conclusion
Brazil and Petrobras have ambitious goals to propel Brazil into the new millennium. It hopes to double its hydrocarbon output by 2020 through its discoveries in off shore oil fields; however Brazil faces many challenges. The oil fields are hundreds of kilometers off the coast and are secured thousands of meters below sea water, sediment, and salt formations. As of now, Brazil faces untried and untested models on multiple fronts to recover the hydrocarbons. Detecting the oil is a challenge in itself as the salt layer and depth can be in-cooperative with seismic detection techniques. The depth and location also complicates the logistics to recover the oil. These challenges ultimately lead to substantial investments to recover the hydrocarbons. Although Petrobras believes that they can be cost effective at a price of $45 per barrel of oil, industry experts are skeptic of Petrobras’ cost assessment. Petrobras believes it has cleared its initial financing hurdles to initiate its massive recovery efforts. The company was able to raise $30 billion to fund its investments. It did this through a 10-year loan worth $10 billion from the China Development Bank a $2 billion credit line the US Ex-Im Bank, $12.5 billion from the Brazilian National Development Bank, and $6.5 billion from a group of international banks. They also believe the remaining investment can be funded with cash flows generated from the new oil fields. However, Petrobras already has indicated increased spending estimates to develop the new discoveries in the pre-salt region. At this point, it is unclear how much more Petrobras will need to invest to reach its target goals. It is clear that Brazil has many challenges as a consequence of its new found discoveries. Even so, the Brazilian government responded to these challenges with open arms and hopes capitalize on its opportunity. In August 2009, the Ministry of Mines and Energy announced a new regulatory model for the pre-salt discoveries. The new model proposes to alter the current taxation system to a production sharing model; create a new company outside of Petrobras to be responsible for the contract management of shared production and marketing of oil in the pre-salt region; and create a new social fund to manage the new oil revenues. The goals of social fund are to invest in social programs, education, science and technology, and fight poverty. The new discoveries may alter the dynamics of the global commodity markets and propel Brazil into the forefront of geopolitical issues. Brazil is a key exporter to the United States; however China has openly stepped up to open relations with Brazil. Brazil will also find added leverage over its Venezuela and MERCOSUR – South America’s version of the European Union. Its full members are comprised of Argentina, Brazil, Paraguay, and Uruguay. Its associate members are Bolivia, Chile, Colombia, Ecuador, and Peru. Though many issues are still unclear, dynamic change is ahead for Brazil.

7. References
ABDUL KADIR, A. A. Managing paraffin wax deposition in oil well. Universiti Teknologi Malaysia, 07 Oct 2009, http://eprints.utm.my/4089/1/SKMBT_60007072317380.pdf ANP BRAZIL, Welcome to Brazil round 1. 30 Sep 2009. http://www.anp.gov.br/brasilrounds/round1/HTML/Menu1_en.htm CARROLL, J. Brazilian oil finds may cost $240 billion to develop (Update 1). Bloomberg, 05 Jun 2009. http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a8V0f9Nf5R.s CARROLL, J., CAMINADA, C. Petrobras discovers world's third-largest oil field. Bloomberg, 15 Apr 2008. http://www.bloomberg.com/apps/news?pid=20601086&sid=aUWwKQhtYbbM&refer=news CORTES, K. Lula Presents pre-salt plan to create company called petrosal. Bloomberg, 31 Aug 2009. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aMLL.7oeeFGM DUFFY, G. Huge gas field found off Brazil”, BBC News, 22 Jan 2008. http://news.bbc.co.uk/2/hi/americas/7201744.stm ECONOMIST INTELLIGENCE UNIT VIEWS WIRE (EIUVW), The next oil giant?, The Economist, 19 Mar 2009. http://www.economist.com/daily/news/displaystory.cfm?story_id=13348824 ENCYCLOPEDIA BRITANICA ONLINE, Boiling and freezing points. 13 Oct 2009, http://www.britannica.com/EBchecked/topic/454269/petroleum/50704/Boiling-and-freezing-points#ref=ref502593 ENERGY INFORMATION ADMINISTRATION (EIA), International Energy Outlook 2009. 30 Sep 2009. http://www.eia.doe.gov/oiaf/ieo/world.html FORMIGLI, J. Pre-salt reservoirs offshore Brazil: perspectives and challenges. Petrobras, 30 Nov 2007. www.petrobras.com.br/ri/pdf/2007_Formigli_Miami_pre-sal.pdf 9

Rio Oil & Gas Expo and Conference 2012 GENTILE, C. Analysis, Brazil strikes gas again. UPI.com, 23 Jan 2008. http://www.upi.com/Energy_Resources/2008/01/23/Analysis-Brazil-strikes-gas-again/UPI-59031201106964/ INFIELD, Introduction to liquefied natural gas (LNG) and gas to liquids (GTL). 03 Oct 2009. http://www.infield.com/lng_gtl.htm MC MICHAEL, B. LNG afloat. Energy Profile, 30 Sep 2009. http://www.energy-profile.com/files/LNG.pdf MINISTERIO DE MINAS E ENERGIA BRASIL (MMEB), Historico do Ministerio de Minas E Energia. 13 Oct 2009. http://www.mme.gov.br/mme/menu/institucional/ministerio.html MINISTRY OF MINES AND ENERGY (MME), Modelo Regulatório do Pré-Sal. 27 Aug 2009. http://www.mme.gov.br/mme/menu/pre_sal.html OFFSHORE-TECHNOLOGY, Marlim Oil Field, Campos Basin, Brazil., 25 Sep 2009. http://www.offshoretechnology.com/projects/marlimpetro/ OSTER, S. China wields credit clout again to lock in Brazilian oil. The Wall Street Journal, 20 May 2009. http://online.wsj.com/article/SB124274623930634997.html PATEL, T. Petrobras may lift its $174.4 billion investment plan (Update 2). Bloomberg, 17 Sep 2009. http://www.bloomberg.com/apps/news?pid=20601086&sid=aK6bv_c28Pxk PETROBRAS, Important gas and condensate field discovered in the pre-salt layer. 21 Jan 2008. http://www2.petrobras.com.br/ri/spic/bco_arq/DescobertaJupiter-Ing.pdf PETROBRAS, Petrobras strategic and business plan 2009-2013. 26 Jan 2009a. http://www2.petrobras.com.br/ri/ing/ApresentacoesEventos/ConfTelefonicas/pdf/PN_2009-2013_Ing.pdf PETROBRAS, One challenge after another. Petrobras Magazine – edition 56, 20 Sep 2009b. http://www.hotsitespetrobras.com.br/petrobrasmagazine/Edicoes/Edicao56/en/internas/pre-sal/#main PETROBRAS, Centro de pesquisas da Petrobras. 05 Oct 2009c, http://www2.petrobras.com.br/portal/frame.asp?pagina=/tecnologia2/port/centro_pesquisasdapetrobrasapresentacao. asp PETROBRAS, Petroleo Brasileiro S.A. - Petrobras (PBR) NYSE Arca. Reuters, 14 Oct 2009d. http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=PBR RABUFFETTI, M. Brazil to boost state control of offshore oil. AFP, 31 Aug 2009. http://www.google.com/hostednews/afp/article/ALeqM5g792z9Zswt2MVCI2cFXFxgwaAFfA RADOWITZ, B. Oil finds prompt Brazil to change rules. Rigzone, 18 Apr 2008. http://www.rigzone.com/news/article.asp?a_id=60529 REDDEN, J. Despite new technologies, critical subsalt challenges remain. Offshore, v. 61, issue 1, 30 Jan 2009. http://www.offshore-mag.com/index/article-display/350470/s-articles/s-offshore/s-volume-69/s-issue-1/s-gulf-ofmexico/s-despite-new-technologies-critical-subsalt-challenges-remain.html SHAKER, S. S. Subsalt exploration risks in deep water. World Oil, 30 Sep 2008. http://www.worldoil.com/Article.aspx?id=40906 SHAKER, S. S. The double edged sword: The impact of the interaction between salt and sediment on sub-salt exploration risk in deep water. CSEG Recorder, 30 Oct 2007. http://www.geopressureanalysis.com/salt_de_sword_cseg_secure.pdf STRATFOR GLOBAL INTELLIGENCE (SGI), Brazil: A new energy law emerges. 14 Oct 2009. http://www.stratfor.com/analysis/20090622_brazil_new_energy_law_emerges US CENSUS BUREAU, Total midyear population for the world: 1950-2050. International Data Base, 30 Sep 2009. http://www.census.gov/ipc/www/idb/worldpop.php UNITED STATES SECURITIES EXCHANGE COMMISSION (USSEC), Form 20-F Petrobras annual report. 31 Dec 2008. http://www.google.brand.edgaronline.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=6623911-14341354631&SessionID=bqOeWWLzxzXYg97#Y76586E20VF_HTM_TOCPAGE VELLOZZI, S. Brazilian Government announces new development model for pre-salt oil fields. Reuters, 31 Aug 2009. http://www.reuters.com/article/pressRelease/idUS181843+31-Aug-2009+PRN20090831 WERTHEIM, P. Brazil’s Petrobras defies global credit crunch. Oil and Gas Financial Journal, 01 Jul 2009. http://www.ogfj.com/index/article-display/9450648007/s-articles/s-oil-gas-financial-journal/s-volume-6/s-Issue_7/sCover_Story/s-Brazil_s_Petrobras_defies_global_credit_crunch.html WINGE, C. Cold war against hydrates. Gemini, 07 Oct 2009. http://www.ntnu.no/gemini/2003-06e/28-31.htm

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