News broke April 14 that Brazilian energy firm Petroleo Brasileiro (Petrobras) found another large oil deposit off the coast of Rio de Janeiro. The find, named Carioca, is expected to significantly increase Petrobras' already sizeable reserves. The company's reserves, structure and potential investments, taken together, give Petrobras the ability to become a truly continental energy company. In terms of reserves and production, Petrobras is already competitive with the world's industrial oil majors. Sales of oil for Petrobras have more than doubled since 2004, and the Brazilian firm has larger provable reserves than Chevron. Petrobras' reserves have experienced several large-scale increases, as the company recently has made impressive oil and natural gas finds. The largest discovery — the Tupi field off the coast of Rio de Janiero — is unproven but could yield up to 5-8 billion barrels of oil, giving Brazil the second-largest proven reserves on the continent (only Venezuela's reserves are greater). A field named Jupiter was discovered in January, yielding a similar amount of natural gas. No total has been confirmed yet for the Carioca find.

A Sustainable Latin American Oil Company

Petrobras' success in exploration and production during the last few years has much to do with the company's background. Like many other state oil companies in Latin America, Petrobras originated as a way for its home country to reap the benefits of its natural resources rather than allowing revenue to leave the country. What separated Petrobras from other state-owned oil firms was the small amount of easily accessible oil Brazil started with — about 2,700 barrels per day (bpd). Because of this, Brasilia never became dependent on oil revenue and allowed the company to operate with greater independence than other South American state oil companies. Petrobras' main goal from the outset was exploration, research and development. Its real success began in the mid-1990s, when then-President Fernando Cardoso began reforming the company. He eliminated Petrobras' monopoly on Brazilian oil, exposing it to foreign competition. The company was forced to redouble its efforts to beat out foreign competitors, and it chose to focus on deep-well technology. Cardoso also began privatizing portions of Petrobras, listing portions of it on the New York Stock Exchange. This not only served to raise capital for further exploration and technology developments, it also exposed the company to strict U.S. accounting standards. This course of evolution is in sharp contrast to the paths other Latin American state oil companies have taken. The two top oil exporters in the Western Hemisphere have long been Venezuela and Mexico, whose oil companies have long histories of government involvement. Venezuela was the world's leading oil exporter for four decades before the rise of Saudi Arabia. This continual inflow of oil dollars allowed Venezuela to buy more imported items, which hurt the domestic production of goods. The state has continually leaned on oil revenues for social programs to aid the country's poor. Venezuelan President Hugo Chavez made state oil firm Petroleos de Venezuela (PDVSA) part social program and part oil company. However, after a strike in 2002, all PDVSA workers were replaced with Chavez loyalists, and oil majors ExxonMobil and ConocoPhillips withdrew from Venezuela in 2007. This means a large amount of oil industry expertise has left the country, and Chavez has found the void difficult to fill. As a result, PDVSA's output has decreased in the last several years, despite its large reserves and the potential that oil sands hold. Mexico's economic diversification has been superior to Venezuela's, since Mexico did not become a large oil exporter until the discovery of the Cantarell field in the 1970s. Unlike Venezuela, Mexico has thriving exports and excellent agricultural production. Nevertheless, Petroleos Mexicanos (Pemex) currently finances close to 40 percent of the government budget. Pemex enjoys none of the independence Petrobras has; Mexico's constitution strictly forbids foreign investment, and the company is directly under the Ministry of Finance. Reforms are almost in place, pending congressional deliberation, but Pemex has a long way to go before it can increase output and refocus on technology and exploration. In this sense, Petrobras has the best of both worlds. It is a largely independent company based on market fundamentals; it can offer joint ventures and foreign investment with reduced political risk. It is also exposed to competition, which has driven it to spend a significant portion of its budget on research and development and become a technological leader in the industry — its research and development budget has increased more than 3.5 times in the last three years alone, growing to $851 million in 2007. Petrobras also has specialized contracts with major universities in the area to bring Brazil's best students on board. At the same time, Petrobras has the government's ear and can use government influence in a way that no private company can (for example, the U.S. government cannot make strategic decisions that favor Chevron over ExxonMobil). The Brazilian government can throw its political weight behind Petrobras' interests abroad, as it did in 2006 when Bolivian President Evo Morales backed off from fully nationalizing Petrobras' natural gas fields in Bolivia because of pressure from Brasilia.

Petrobras' Dominance

Petrobras' success has not been limited to its oil production at home. The company also has major natural gas holdings in Bolivia and Argentina, and it has investments in exploration in the Orinoco, Colombia and Ecuador. But the time has come for the firm to cement its power on the continent through refining capacity and distribution. It has already begun this process with the potential purchase of Valero's refinery in Aruba, which would give Petrobras another 255,000 bpd in refining capacity. The company has also begun bidding on distribution throughout South America; in March, Petrobras expressed interest in Exxon's retail gasoline stations in Argentina. One of the greatest benefits of being a state-owned company could be Brazil's political interest in making Petrobras an energy presence across the continent. This will not only boost Petrobras' growth; it will also establish Brazilian influence abroad through investments and energy supply control. Petrobras will also benefit from Brazil's self-sufficiency in energy. Brazil became a net exporter of oil in 2007, when daily output finally exceeded the country's 2.3 million bpd domestic demand (in comparison, Venezuela produces about 2.7 million bpd and only demands 600,000 bpd). Brazil's self-sufficiency will help Petrobras compete hemispherically and globally, allowing the firm to seek profits for shareholders rather than serve Brasilia's demands. But most important to its establishment as a continental energy power is Petrobras' potential refining relationship with PDVSA. PDVSA finds itself in a difficult position. It is politically opposed to its main oil buyer (and, thus, main economic contributor): the United States. If Brazil could refine and sell Venezuela’s crude to the United States, it would remove political tensions and instability from the transaction. Such a deal would also put Brazil in a position of energy dominance, as South America's second-largest producer of crude and potentially the largest exporter of refined oil. Ground has already broken on a refinery venture between the two countries, especially designed for Venezuela's grade of heavy crude. The refinery could process up to 400,000 bpd of Venezuelan crude — roughly 18 percent of Venezuela's exported oil. If Petrobras can learn PDVSA's heavy crude refining technology from this venture and then build more such refineries, it would be able to process any kind of fuel that might turn up in future exploration. This relationship could even lead to an acquisition of PDVSA's Citgo operations in the United States, which would give Petrobras major inroads into the U.S. market. Although unlikely, a full purchase of U.S. Citgo refineries, which process around 750,000 bpd, would lead to a 34 percent increase in Petrobras' refining capacity and possible ownership of 7,000 retail outlets. Considering Petrobras' $15 billion in planned investments for 2008, it is in the perfect position to take advantage of a Venezuelan government heavily in debt, with inadequate financing to expand its own refining capacity of 1.2 million bpd. Venezuelan and Brazilian leaders already have expressed interest in further joint ventures, and Chavez has put a name to this potential alliance: "Petrosur." This relationship highlights another advantage Petrobras has: The rest of Latin America is likely to respond more warmly to a Brazilian company's expanded operations than to a U.S. or European oil major. With an excellent amount of domestic oil resources, a corporate structure prone to growth and an expanding refining and distribution capacity, Petrobras seems poised to take over as a truly continental energy company. This trajectory will hold as long as Brazilian President Luiz Inacio "Lula" da Silva's leftist social policies do not affect energy prices at home. If Petrobras can continue to serve Brasilia's political interests in the region, the future looks bright for both.