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Brazil: Platform for growth

By Joe Leahy

On the Cidade de Angra dos Reis oil platform, surrounded by the deep blue South Atlantic, a Petrobras engineer turns on a tap and watches black liquid flow into a beaker.

It looks and smells like ordinary crude oil. Nevertheless, for Brazil, this represents something much more spectacular. Pumped by the national oil company from “pre-salt” deposits – so-called because they lie beneath 2,000m of salt – 300km off the coast of Rio de Janeiro, it is some of the first commercial oil to flow from the country’s giant new deepwater discoveries.

Already estimated to contain 50bn barrels, and with much of the area still to be fully explored, the fields contain the world’s largest known offshore oil deposits. In one step, Brazil could jump up the world rankings of national oil reserves and production, from 15th to fifth. So great are the discoveries, and the investment required to exploit them, that they have the potential to transform the country – for good or for ill.

Having seen out booms and busts before, Brazilians are hoping that this time “the country of the future” will at last realise its full economic

potential. The hope is that the discoveries will provide a nation already rich in renewable energy with an embarrassment of resources with which to pursue the goal of becoming a US of the south.

The danger for Brazil, if it fails to manage this windfall wisely, is of falling victim to “Dutch disease”. The economic malaise is named after the Netherlands in the 1970s, where the manufacturing sector withered after its currency strengthened on the back of a large gas field discovery combined with rising energy prices.

Even worse, Brazil could suffer a more severe form of the disease, the “oil curse”, whereby nations rich in natural resources – Nigeria and Venezuela, for example – grow addicted to the money that flows from them.

Petrobras chief executive says neither the company nor the country’s oil industry has so far been big enough to become a government cash cow. But with the new discoveries, which stretch across an 800km belt off the coast of south-eastern Brazil, this is going to change. The oil industry could grow from about 10 per cent of GDP to up to 25 per cent in the coming decades, analysts say. To curb any negative effects, Brazil is trying to support domestic manufacturing by increasing “local content” requirements in the oil industry.

Without a “firm local content policy”, says Petrobras CEO, Dutch disease and the oil curse will take hold. However, “if we have a firm and successful local content policy, no – because other sectors in the economy are going to grow as fast as Petrobras”.

The other long-term dividend Brazil is seeking from the discoveries is in research and development (R&D). Extracting oil from beneath a layer of salt at great depth, hundreds of kilometres from the coast, is so challenging that Brazilian engineers see it as a new frontier. If they can perfect this, they can lead the way in other markets with similar geology, such as Africa.

For its part, Petrobras is spending $800m-$900m a year over the next five years on R&D, and has invested $700m in the expansion of its research centre.

Ultimately, Brazil’s ability to avoid Dutch disease will depend not just on how the money from the oil is spent. The country is the world’s second biggest exporter of iron ore. It is the largest exporter of beef. It is also the biggest producer of sugar, coffee and orange juice, and the second-largest producer of soya beans.

Exports of these commodities are already driving up the exchange rate before the new oil fields have fully come on stream, making it harder for Brazilian exporters of manufactured goods. Industrial production has faltered in recent months, with manufacturers blaming the trend on a flood of cheap Chinese-made imports.

“Brazil has everything that China doesn’t and it’s natural that, as China continues to grow, it’s just going to be starved for those resources,” says Harvard’s Prof Rogoff. “At some level Brazil doesn’t just want to be exporting natural resources – it wants a more diversified economy. There are going to be some rising tensions over that.”

Adapted from Financial Times - March 15 2011 22:54. Available in: <http://www.ft.com/cms/s/0/fa11320c-4f48-11e0-9038-00144feab49a,_i_email=y.html> Retrieved on: June 17, 2011.

According to paragraphs 9 and 10, investing in R&D