The discovery, however, may represent just a fraction of a new oil and gas frontier that lies below existing fields, according to company officials. Petrobras believes the new frontier covers the Espírito Santo, Campos, and Santos basins in deeper horizons, in what it calls pre-salt rocks.

Petrobras has performed drilling to reach pre-salt layers. Based on data obtained from these wells, Petrobras believes the pre-salt rock formations are 497 miles long and 124 miles wide at water depths of 6,560 to 9,840 feet. Petrobras aims to start a pilot project at Tupi in 2010 or 2011, gradually reaching production of 110,000 barrels per day – a mere fraction of the discovery’s potential. The Brazilian company operates Tupi with a 65 percent stake, partnering with BG Group, 25 percent, and Galp Energia, 10 percent.

But the project will not be easy or cheap. The Tupi reserves lie under 7,060 feet of water, nearly 10,000 feet of sand and rocks, and another 6,600 feet of salt. Luckily, Tupi is near Petrobras’s main operations, so the company will not need to invest heavily in new infrastructure. And as Latin America’s undisputed leader of deepwater exploration and production, Petrobras certainly has the expertise and investment capacity to develop the potential.

Despite the project’s long-term outlook, it has already provided a boost to Petrobras, which saw its share price jump 26 percent in New York on the day of the announcement. Some investors are calling the find one of the biggest oil discoveries in the last 20 years, second only to the Kashagan field in Kazakhstan.

Brazil’s government was thrilled with the discovery, saying the find could put Brazil in league with the likes of Saudi Arabia. While that may be a long shot, OPEC membership conceivably is not far off for the South American country. President Luiz Inácio Lula de Silva is open to joining the cartel, as Tupi could allow Brazil to become a major exporter, particularly to the U.S. Although Brazil is already a net exporter of oil, roughly 80 percent of the crude it produces is heavy, forcing the country to import more-expensive light oil for domestic refineries. With Tupi, Brazil could use the discovery’s light oil for domestic refining and export its heavy crude, to its refinery in Pasadena, Texas.

Further, Tupi could force Petrobras to rethink the development of the domestic Abreu e Lima refinery, designed to process heavy crude. Groundwork started in September, and it is due to start operations in 2010. The refinery is being built in conjunction with Venezuela’s state oil company PDVSA. Petrobras may need to invest to expand capacity for light oil refining.

But not everybody is thrilled about Tupi, as the find motivated Brazil’s government to pull 41 blocks near the discovery from November’s hydrocarbons licensing round. Although the government still offered 271 blocks in the auction, investors felt many of the best opportunities were omitted at the last minute. Petrobras, which is supposed to compete evenly for opportunities in Brazil, in this case will enjoy its privileged position as the country’s national oil company. It may appease investors – and help raise funds – by offering them pieces of the Tupi development, a process that will likely last decades.