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Editorial comment

This week, Brazil announced plans to build US$ 880 billion of infrastructure over the next six years, in the second of its Growth Acceleration Programmes, PAC 2. President Luiz Inacio Lula da Silva - the ‘PACman’, to coin a phrase - announced the second phase of his economic stimulus plan and explained its aims, which include increasing the country’s energy capacity, along with the construction of two million new homes.

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Over the past few years, we have seen Brazil pursue an ambitious schedule of domestic and international energy projects. Petrobras has been pushing an aggressive pipeline construction programme, and there have been major developments offshore Brazil, especially in the subsalt regions.

Since Brazil’s large subsalt discoveries in 2007, the prospects for Brazil’s oil wealth have rocketed. The country’s largest fields hold up to 13 billion barrels of reserves, but it is the unproven potential of the subsalt reserves in the Campos and Santos basins that hold the most promise. Upon discovery of the 5 – 8 billion barrel subsalt Tupi well in the Santos basin, President Lula declared that “God is Brazilian”, referring to the oil riches bequeathed to Brazil’s people. It is hoped that the extra production from subsalt wells can cover Brazil’s domestic demand gap and make Brazil an important exporter of oil.

However, it requires huge investment and much effort to extract subsalt reserves, nestled as they are under 2 km of salt, 3 km of sand and rock and 2 km of water, hundreds of kilometres from shore.

President Lula is determined to plough subsalt profits back into Brazil for social and economic amelioration. New legislation for subsalt discoveries will stipulate a national content clause (existing concessions remain untouched), and all new finds will be managed under shared production regimes.

Nevertheless, the various technical challenges of the subsalt regions create a need for foreign expertise and participation. Some 107 000 km2 (72%) of potential subsalt areas are currently not under concession and a host of vessels, equipment and offshore pipeline services will be needed to develop infrastructure in the region. Petrobras has committed to creating incentives for international companies to establish operations in Brazil, and incentives for association between national and international companies.

Brazil is keen to keep its current investor-grade credit rating. Finance Minister Guido Mantega has said that PAC 2 will guarantee Brazil sustained economic expansion of around 5% annually, which will put the country “among a half dozen nations with the highest growth rates in the world.” It is this economic security, coupled with the breathtaking potential in the subsalt regions, that it hopes will attract a proportion of foreign business.

As such, BP announced early in March that it has purchased Devon Energy assets worth US$ 7 billion, part of which includes eight blocks of offshore territory in the Campos basin.

The flurry of activity upstream puts even more pressure on Brazil’s existing energy infrastructure. A key obstacle to growth in Brazil is lack of infrastructure - from roads and railways to docks, airports and pipelines. Infrastructure investment has tended to wax and wane in the past, in fact, a substantial percentage of PAC 1 projects are still unfulfilled, mired in bureaucracy. Brazilian infrastructure must be able to handle new growth, and that means a bigger domestic natural gas pipeline network; improved offshore infrastructure, especially to new subsalt wells; and new LNG terminals. In addition, there is always the potential for more bio-ethanol pipelines for export to the US and the EU.

Does PAC 2 have too much to do? Can Brazil reach its ambitious goals all by itself? 

Look out for our fourth annual special magazine supplement dedicated to the Brazilian oil and gas industry later this year.

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