It's time for the U.S. to make new friends, more specifically friends with oil-exporter status. Mexico, historically one of the top three sources of U.S. oil imports, is now seeing significant declines in oil production and is projected to lose its status as a net energy exporter by 2025. The U.S. clearly has a gap to fill, and Brazil, where recent discoveries exposed substantial offshore oil and gas reserves in a pre-salt layer extending from Santos Basin to Espírito Santo, is eager to fill it. On May 14, 2009, the Woodrow Wilson Center's Canada, Mexico, and Brazil Institutes welcomed Otavio Cintra, vice-president of Petrobras America for downstream, Duncan Wood of ITAM, and independent energy consultant Joseph Dukert to discuss the implications of Mexico's projected decline in oil production and the emergence of Brazil as a potential major supplier of oil to North America.

Brazil's Emergence as an Oil Supplier

Much unlike Mexico's state-owned petroleum company, PEMEX, whose technological shortcomings are translating into falling production levels, Brazil's semi-public energy company, Petrobras, has an extremely promising portfolio marked by its superior technological capabilities. Cintra reported that in the deepwater oil production market, Petrobras is a global leader responsible for 22% of production. Petrobras also leads in off-shore floating production, operating 45 systems as of May 2009.

The future bodes well for Petrobras' petroleum production. Noting the recent discoveries of offshore oil and gas reserves in the Espírito Santo Basin, forecasters predict Petrobras will grow at a rate of 7.5% per year until 2020, significantly higher than the substantial 5.6% annual growth rate of the past eight years. According to Cintra, preliminary indications suggest Tupi and Iara, two of the recently discovered fields, contain 8-12 billion barrels of recovery reserves, almost equivalent to Petrobras' current domestic reserves.

Still, Brazil has to develop equipment and human resource capability before it can fully exploit the pre-salt discoveries. Petrobras and other Brazilian companies are not lacking in qualified engineers. The shortage regards skilled blue-collar workers needed to build platforms and ships and to operate machinery. At the end of 2008, estimates indicated that there were 130,000 jobs for skilled workers open in Brazil.

Challenges of the Pre-Salt

To address the challenges of developing human capital, Petrobras sponsors several training programs for its own employees and for the supply chain workforce. Prominp, Brazil's Program for the Mobilization of the National Petroleum and Natural Gas Industries, is coordinated by Petrobras and the Federal Government. Cenpes is Petrobras principal research center. Cenpes is currently expanding research and other activities that will be fully dedicated to increasing production in the pre-salt fields.

To address infrastructural challenges, Petrobras has several strategies in place that, according to Cintra, will create huge opportunities in the Brazilian markets for suppliers, service, and engineering companies. Petrobras plans to contract large numbers of suppliers and service providers in order to stimulate supply and market competitiveness. Aggressive building programs for rigs, support vessels, and production units are fueling demand for supply boats to support manufacturing and transportation activities.

Oil discoveries in Brazil and Petrobras' development will have many ramifications in the U.S. Brazil views the U.S. as the main market for its export crude and plants to export more to the U.S. in the coming years. Petrobras recently acquired a refinery in Pasadena, Texas and is currently analyzing the possibility of revamping this unit. In 2008, Brazil averaged exports of 258,000 barrels per day to the U.S. In January 2009, this figure had increased to an average of approximately 450,000 barrels daily. Petrobras believes that in 2015, exports to the U.S. will have doubled thanks to pre-salt production.

The above statistics suggest that Brazil, as a potential net energy exporter in the years to come, is a friend the U.S. would like to work with in close cooperation. Still, even though there is ample reason to look to Brazil as an oil supplier, Brazil needs to triple its current exports in order to at least begin to fill the gap Mexico's exports now fill. Such drastic increases in Brazilian production are contingent upon continued investment in human capital and technology, something Petrobras seems committed to doing. In addition to investment, a friendly energy partnership between Brazil and the US mandates that the countries engage each other more frequently in order to coordinate economic and political interests.

The Decline of Mexico's Energy Sector

In contrast, Mexico will be unable to sustain its current level of oil exports to the United States, said Duncan Wood. Mexico has consistently been one of the top three sources of U.S. oil imports. According to Wood, Mexico's oil exports to the United States rose steadily throughout the 1980s and 1990s before peaking in 2004. Since then, slowing production from Mexico's Cantarell oil field and the absence of significant new discoveries have led to a decline in Mexico's oil production and exports. In fact, Wood said that oil production at Cantarell has declined so much that it no longer represents Mexico's largest source of oil—Mexico's Ku-Maloob-Zaap (KMZ) oil field overtook Cantarell as the country's largest producer in March 2009. This is extremely significant since Cantarell produced three times as much oil as KMZ just two years ago.

Wood maintained that while Mexico has significant oil reserves left in the Gulf of Mexico, Pemex, Mexico's state-owned petroleum company, does not have the technology necessary to recover the oil. He also said that the Mexican government has staked much of its hopes for the country's future oil production in its Chicontepic oil field. Although the Mexican government believes Chicontepic will be able to produce between 550,000 and 700,000 barrels of oil per day by 2017, Wood said that the complex production, high investment, and new technologies required to extract the oil may make reaching such a target extremely difficult.

Wood described the future of Mexico's energy sector as increasingly bleak. He estimated that rising energy demand and shrinking production will result in Mexico losing its status as a net exporter of energy by 2025. Consequently, the United States will have to turn to other suppliers in the near future to make up for the expected shortfall in Mexican oil exports.

The Future of North American Energy Security

Mexico's declining oil production does not pose a threat to North American energy security, said Dukert. He explained that Mexico's oil production does not represent a large enough share of the world market to drastically affect the price of oil even if its oil production sharply declines. Dukert also pointed out that while Mexico's oil production is falling, the country's natural gas sector is thriving and likely to produce a record output of the resource in 2009. This record output, combined with the increasing capacity of Mexico's domestic natural gas generation, will enable the country to free up some of its oil production for export. In addition, North America's continued development and use of renewable energy sources will also lessen the continent's need for oil, said Dukert.

Dukert argued that while Mexico's decline in oil production may not pose an imminent threat to North American energy security, each NAFTA member faces similar energy challenges and calls to reduce carbon emissions. Canada, noted Dukert, has peaked in conventional oil production and the country's ability to increase its oil exports to the United States relies heavily on the continued development of Alberta's oil sands, which poses its own set of environmental challenges. Consequently, Canada, the United States, and Mexico would benefit from working collaboratively on energy and environmental issues through existing trilateral institutions, such as the North American Energy Working Group, to help ensure the continent's economic prosperity and energy security is maintained.

A question addressed throughout the conference focused on whether Brazil's recent oil discoveries might enable the country to increase its exports to the North American market. Panelists noted that Brazilian oil exports to the United States are already increasing. Cintra suggested that Brazil will be in a strong position to bolster its oil exports in the near future, thanks in part to substantial offshore oil and gas discoveries made in Brazil's Espirito Santo Basin. Cintra noted that Petrobras' current oil production in Brazil alone is expected to increase from current levels of 2.05 million barrels per day to 3.92 million barrels per day by 2020. He acknowledged, however, that Petrobras will have to overcome several challenges in order to meet future production targets, including maintaining a sufficient workforce for construction and operations, and having the necessary capital and investment available to develop new oil sites

Drafted by Carey Carpenter, Summer Intern, Brazil Institute, and Ken Crist, Program Associate, Canada Institute