"The evaluation of production tests confirms the first significant result by an international operator since the opening of the oil production and exploration sector in Brazil," Shell said.

Shell said a short-term production test at the BS-4 block in the Santos basin, some 200 km off the Rio de Janeiro state coast, showed "favourable flow" and indicated estimated reserves of 300-500 million barrels, although it said the commercial viability still had to be confirmed.

Shell has a 40 percent stake in BS-4 with Brazil's former oil monopoly, Petrobras, having a 40 percent stake as well. Texaco Brazil, a subsidiary of ChevronTexaco Corp, has the remaining 20%.

Brazil opened up its crude reserves for foreign exploration and production in 1997 and many foreign firms are in the exploration phase, while Petrobras still remains the nation's only producer.

The announcement comes at a good time with some experts having been worried by the low level of commercially viable discoveries by newcomers. They feared foreign companies may lose some of their interest in Brazil, which next June plans to hold its fourth licensing auction for oil exploration and production.