Oil and Gas in the Capitals

	Vol. 232 No. 3
DAYSE ABRANTES, CONTRIBUTING EDITOR, LATIN AMERICA

Brazil’s new president hopes to fuel social spending with presalt oil

Brazilian President Dilma Rousseff. Courtesy of Roberto Stuckert Filho.

During October’s presidential elections in Brazil, not even Dilma Rousseff—who won by a landslide—was the star of the show. The wealth of oil and gas reserves down in the presalt shined on TV, in the printed press, on radio and the Internet. Rousseff repeated, ad infinitum, that presalt resources would provide the primary means to eradicate Brazil’s crushing poverty. However, presalt will generate little revenue until the end of 2014, the last year of Rousseff’s term in office.

Despite its oil wealth, powerful industries and a diversified economy, Brazil’s population of some 190 million people still includes 28.8 million living below the poverty line, according to the prestigious Getulio Vargas Foundation.

Although no field from the string of presalt discoveries is yet producing commercially, presalt riches have generated a feverish feeling of pride and nationalism among the Brazilian population. Walk down the streets, and everyone is commenting on presalt, mostly hoping their kids will get a job.

Estimates by Petrobras, the state-controlled oil company, show that in 2014 the presalt finds will probably be producing 241,000 boe per day. This amount will represent only about 8.1% of the 2.98 million boepd that Petrobras is forecast to produce overall that year. The company further estimates that presalt production in 2014 will generate about $8–$9 billion.

However, these estimates are very tentative. Who knows what a barrel of oil will be worth in 2014? Who would have guessed a couple of months ago that a peaceful 18-day revolution would overthrow Egypt’s President Hosni Mubarrak?

Rousseff, who was mines and energy minister in President Luiz Inacio Lula da Silva’s first cabinet and was also the chairwoman of Petrobras’ board from January 2003 to March 2010, has promised on national television to put the presalt resources to work for the Brazilian people, saying, “The resources of the presalt will be distributed in the environmental areas, science and technology, culture, education, health and combating poverty.”

After the elections, many analysts said Rousseff was helped by the fact that her defeated opponent José Serra had been a cabinet minister of President Fernando Henrique Cardoso, who tried to privatize Petrobras. It was also speculated that her victory was largely due to her success in convincing Brazilians that her opponent would hand over the presalt jobs and riches to private, international oil companies.

President Lula left office last December with an 80% public approval rating. His efforts to generate jobs and revenue for Brazilians contributed greatly to this shining public image. With regard to presalt, these efforts manifested in a requirement that oil platforms have a high rate (at least 60%) of “local content”—that is, oil equipment produced in Brazil.

The facts, however, are rather different, according to studies from the consultancy Booz & Company and the Brazilian Industry Association of Machinery and Equipment (ABIMAQ). Their research suggests that the Brazilian sector supplies only 10% of the capital goods (machinery and equipment) used in a platform.

“Energy modules, pumps, valves, compressors, tubes and other products with higher added value are imported from countries such as the US, South Korea, China and Germany,” said José Velloso, vice president of ABIMAQ.

Brazilian companies can, in the best of the scenarios, supply half of the equipment and services that will be needed for presalt oil production projects until 2020, ABIMAQ forecasts. Although this would mean an increase to $200 billion in the local industry’s share of presalt contracts, to accomplish it would require the local sector to eliminate bureaucratic bottlenecks and become more competitive in automation systems and in equipment such as air compressors, control valves, and diesel and gas motors.

Velloso added that among Brazilian suppliers, a series of factors undermine their capacity to compete, including: high tax loads (not paid by foreign companies), higher labor costs, astronomical interest rates, and little incentive to invest in new technologies. “The result is that Brazilian equipment costs from 30% to 40% more than similar equipment which is imported,” Velloso said. In the case of valves, for example, the Brazilian product may cost up to three times more than an equivalent valve made in China.

A study by the National Organization of the Petroleum Industry (ONIP) concluded that foreign companies will probably retain $240 billion worth of orders out of a potential $400 billion in presalt-related orders in the next 10 years.

The fact that Rousseff has retained Petrobras president José Sergio Gabrielli, first appointed by Lula in 2003, indicates that she will broadly follow Lula’s oil policies.

A former economics professor who maintains close ties with the ruling Workers’ Party, Gabrielli has been credited with providing returns for shareholders while meeting government goals of using Petrobras to spur economic development. He also has political ambitions, having run for governor and lost in Bahia, his home state.

Thus, Gabrielli, like Rousseff, has a political stake in increasing Brazilians’ share of the presalt bounty. How this will play out in the real world, especially with the country’s new production-sharing regime, remains to be seen. WO