Brazil:The oil sector and the resumption of economic growth – Opinion

September 16, 2019

Brazil has a unique opportunity: combining the development of its oil potential with a long-term strategy for resuming economic growth. To this end, it is essential to establish the guidelines of its petroleum policy, improving rules and regulatory instruments, in order to explore the technological challenges associated with offshore exploration, with the purpose of maximizing revenue and employment multiplier effects and favoring Brazilian insertion in the world economy.

Oil is a geopolitical commodity, determining the geopolitical insertion of national states in the global economy. Its market price is very volatile, fluctuating according to policies adopted by the OPEC and OECD countries. The economic revenues generated by oil production are very high, due to the huge gap between the technical cost of producing a barrel of oil ($ 4-5 in the Middle East; $ 30 in Brazil) and its price ($ 50 to $ 70).

The distribution of these revenues between the owners of underground oil resources and market players has historically been the result of much dispute. In the Brazilian case, the sectoral regulation specifies that the portion of the owner of the resources (Union) is collected in the form of royalties, special participations and signature bonuses. Market players, after reimbursing their technical production costs (capex plus opex), benefit from the difference between the market price and the installments paid to the Union.

Estimating future oil income and its distribution between the Union and the agents is a complex task, especially as it has to assume both future oil production and its price. Scenario methodology is traditionally adopted by government and companies to formulate petroleum policies. In our case, we adopt two futures price scenarios and only one for domestic production, as there is consensus that Brazilian oil production should continue to grow in the coming decades to reach at least six (6) million b / d by 2040.

Our estimate is that oil revenues should range between $ 126 and $ 179 billion over the period 2020-2040. Of this total, approximately 30% will go to public coffers and another 70% will be appropriated by market players.

This substantial amount of financial resources can be allocated to support short- or long-term economic policies. Countries that opted for the short term focused their oil policy on maximizing tax revenues, the massive importation of goods and services by operators, and the use of skilled foreign labor. The oil literature teaches us that the short-term focus induces competition among agents for profits, culminating in the oil curse. That is, when the underground oil resources are depleted, the economic benefits of the oil boom period disappear, with its harmful social and environmental effects emerging.

Alternatively, when the focus of oil policy turns to the long term, as in Norway, the end result is accelerated economic growth. In this option, oil income is used to encourage the articulation of the expansion of oil production with the local productive apparatus through the induction of regional industrial clusters with the active participation of global suppliers of goods and services. Structured public funds with government shares of income are intended to foster technological innovations in suppliers, with the support of university groups and local research centers. Oil exports are used as a geopolitical instrument to support the favorable insertion of the national economy in the global world.

Our oil policy is unfortunately focused on the short term. Moreover, the regulatory instruments adopted to guide the long term are being mismanaged. The problems of these instruments have already been clearly identified, including by the TCU: (i) requirement of local content in projects of operators that are economically unfeasible; (ii) lack of articulated technical-economic logic of suppliers to meet these requirements; (iii) focus on penalties for operators, when it is correct to offer incentives to suppliers.

Despite these problems, it is important to recognize that the local supply of goods and services for operators’ projects is quite relevant. Studies by operators, research institutes and the ANP’s local content database indicate that the Brazilian supplier park is able to competitively meet between 50% and 60% of operators’ demand. It is important to note that the Brazilian industrial park, which already has scale to meet most of these demands, should have increasing scale gains with the strong expansion of domestic offshore.

The home supply park’s Achilles heel is its limited capacity for innovation. In this regard, it is essential to take advantage of the installation in Brazil of research centers from various global suppliers to develop an active policy of their articulation with local small and medium suppliers. To this end, the country can not do without Petrobras, especially its research center (Cenpes), as the main source of technological innovations for the offshore oil.

The expansion of hydrocarbon production is consensually accepted as the main opportunity for the resumption of growth of the Brazilian economy. In the troubled current context, Brazil is in a favorable position to achieve favorable insertion in the global economy. Its energy matrix enables it to meet the goals agreed at the Paris meeting. The secure supply of oil, indispensable for a non-conflicting energy transition, will be disputed by our trading partners. In short, Brazil has the right conditions to exercise leadership in the global transition to a sustainable society.

At the domestic level, the country has a national operator with recognized technological competence and extensive experience in articulating oil production with the domestic supply park. The substantial and rising income associated with the expansion of production puts oil policy before a choice: short-term focus with the prospect of reaping the oil curse or long-term economic development policies.

If the choice is for development, it is necessary to reinvigorate the Pedefor (Supply Chain Competitiveness Stimulation Program, Development and Enhancement of Oil and Natural Gas Suppliers). In this case, it is crucial not to deny the story. “To destroy the institutions to which the play of historical influences has embodied and which translate the mechanism of their constant actions is to destroy the Nation.” (Benjamin Disraeli)

Source: Brasil Energia/Adilson de Oliveira

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