By Stephen Eisenhammer and Marta Nogueira
RIO DE JANEIRO, April 8 (Reuters) - Royal Dutch Shell's agreed purchase of smaller rival BG Group willcreate a powerful player in Brazil's budding subsalt region withthe money and technology to drive forward delayed projects withtroubled partner, state-run Petrobras.
Buying BG will make Shell by far the second-largest producerof oil in Brazil, with a dominant position in one of the globe'shottest offshore prospects. Analysts expect BG to produce nearly500,000 barrels of oil and gas equivalent in Brazil by 2020.
The development of the deep-sea subsalt, heralded as theworld's largest oil discovery in decades when found eight yearsago, has disappointed with delays and cost over-runs.
These hit BG's cash flow in recent years, helping to make itvulnerable to the type of takeover announced Wednesday.
"BG has struggled to shake off the perception that, indeveloping Brazil and Australia, it bit off more than it couldchew," Investec analyst Neill Morton wrote in a note to clients.
Shell, as the world's second-largest oil company, certainlyhas the teeth to chew and swallow BG's Brazil assets, but thechallenge will be its relationship with Petroleo Brasileiro SA, as the state-run company is formally known.
"The wrinkle in this (deal) is that Shell would be thenon-operating partner of Petrobras, which is currently inturmoil," Iain Reid, analyst at BMO Capital Markets, said in anote.
Things look set to worsen before they improve, withPetrobras ensnared in a massive corruption scandal that hasimplicated the firm's executives, politicians and Brazil'slargest construction companies.
The fallout has already started for partners, withPortugal's Galp Energia saying last month that four ofits major offshore oilfield projects will be delayed at least ayear due to the corruption probe.
Tensions are also likely to be exacerbated due to differingbreak-even costs, said Carlos Rocha, cost and technologydirector at research firm IHS in Brazil.
Rocha estimates that while Petrobras has abest-case-scenario breakeven price of $42 per barrel in thesubsalt, those of its partners are just above $50 due to greaterexposure to the international oil price and higher local costs.
With a diverse portfolio and healthy cash flow, Shell can bepatient, but it also has the size and experience to push thingsalong.
"Shell has a long history in Brazil. It knows what it'sgetting into," said a source who works with the company inBrazil.
(Writing by Stephen Eisenhammer; Editing by Ted Botha)
