Brazil dances with OPEC

The country, likely to become a major exporter of crude, is serious about joining the cartel which - in the long term - could push up prices.

Subscribe to International
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Steve Hargreaves, CNNMoney.com staff writer

brazil.03.jpg
Brazil's massive new Tupi field, located off the country's mid-coast, could turn the nation into a big oil exporter and an OPEC member.
Oil stocks in focus
Citigroup downgrades giant BP, even as crude prices trade near all-time highs.

NEW YORK (CNNMoney.com) -- OPEC, the 13-nation cartel that has a huge influence over oil prices, may be expanding farther into South America.

News that the largest economy in Latin America (see correction below) was considering joining OPEC began to swirl late last year shortly after Brazil announced the discovery of huge offshore oil and gas deposits that could turn the country into a major oil exporter.

Politicians, including President Luiz Inacio Lula de Silva, said the country would consider membership in the Organization of Petroleum Exporting Countries as soon as the export potential from the new fields is evaluated.

Analysts say Brazil is serious about joining, and its membership could push crude prices higher as more oil would be under OPEC control, but that membership and significant crude exports from the country won't happen anytime soon.

Brazil's interest in joining OPEC is the political clout that membership brings.

Governments - especially democracies like Brazil - like to do things that make them popular with their constituents.

"To the extent they are able to present themselves as an international powerhouse, that plays favorably at home," said Christopher Garman, head of the Latin American division at Eurasia Group, a political risk consultancy.

OPEC membership would also give Brazil a tremendous boost in clout on the world scene, with a seat at the table of an organization that controls some 40% of global oil production. If oil prices fall, Brazil could help prop them up by voting to cut production in all OPEC countries, a far more powerful lever than simply cutting production on their own.

"It gives them [Brazil] a united voice," said Fadel Gheit, a senior energy analyst at Oppenheimer. "The more clout they get, the more they are able to influence oil prices."

Brazilian membership would also bring more oil to OPEC, at a time when oil resources from non-OPEC sources - such as Mexico and the North Sea - run dry.

Brazilian membership in OPEC would likely add a moderate voice to the cartel, said Garman.

He said the country is noted for embracing free markets and welcoming foreign investors, and it would likely vote alongside countries like Saudi Arabia to keep production high as opposed to with OPEC hawks like Iran or Venezuela.

But talk of Brazil joining OPEC may be premature since the country faces big obstacles before becoming a major oil exporter. It currently uses about as much oil as it produces.

Still, the new discoveries could turn the country into an export powerhouse. The Tupi oil field off the country's central coast is thought to contain 5 to 8 billion barrels of oil and gas, and would boost the country's total reserves by about 50%.

And Brazilian officials have said other offshore fields could ultimately leave the country with 80 to 100 billion barrels of proven reserves, one of the largest in the world. By comparison, Saudi Arabia, the largest holder of traditional oil, is thought to have about 256 billion barrels.

But getting at the oil won't be easy.

Not only does it lie under miles of ocean, it's also deep in the earth under miles of salt.

While the country's national oil company, Petrobras, is well respected within the industry for its deep water drilling prowess, Gheit said the fields will be many times more difficult to develop than even the deep water resources in the Gulf of Mexico, which are challenging even old oil vets like BP (BP) and Chevron (CVX, Fortune 500).

Add to this the current shortage of skilled workers, drilling equipment and Brazil's own growing internal demand, and analysts say it will be at least a decade before the country can export sizable amounts of crude.

Then there's the question of whether Brazil would want to subject itself to OPEC quotas.

OPEC generally requires member countries to cut production when prices fall.

If you're a country with a fast growing oil industry like Brazil, "You don't want to abide by the speed limit of OPEC," said Gheit.

Correction - An earlier version of this story said Brazil was the second largest economy in Latin America. To top of page

Photo Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors