Presalt Oil Discoveries and the Long-Term Development of Brazil / by Mark Langevin

Pablo Fajnzylber, Daniel Lederman, and Julia Oliver of the World Bank recently published, “Presalt Oil Discoveries and the Long-Term Development of Brazil,” a World Bank Economic Premise publication.  Fajnzylber and his colleagues provide a concise overview of the growing importance of oil and gas exploration and production in Brazil and provide several key recommendations that are at the heart of policy discussions in Brasília. Accordingly they conclude,

“Brazil has an opportunity to leverage oil-related innovation as a means to push forward a pro-diversification policy agenda. Growth in Brazilian oil production and exports will likely lead to Dutch disease effects, including an increased concentration of the country’s exports and heightened macroeconomic volatility. To minimize these impacts, the government could improve the conditions for other tradable industries by accelerating the accumulation of human capital and facilitating investments in science and technology. It could address current infrastructure bottlenecks and other legal and regulatory hurdles that limit the competitiveness of Brazilian industries, notably the manufacturing industry.

As the Brazilian government makes new, oil-financed investments, it should ensure that they are of high quality. Of particular importance are improving procedures for selecting, appraising, and evaluating investment projects. The government could also improve its monitoring and evaluation (M&E) systems, which are key to ensuring successful execution and implementation of all public investment projects.

Finally, the government could pace the exploitation of the new oil reserves. While the presalt discoveries could place Brazil on strong footing in the 21st century, maximizing those opportunities may call for moderating the pace at which the new wealth is extracted. Gradualism in the exploitation of the oil reserves can help ensure the quality of oil-financed public expenditures by allowing all levels of government to develop appropriate plans and M&E mechanisms. Slower ex- traction can also buy time for the nonoil industrial sector to absorb positive externalities from related public investments. Lastly, gradualism can help reduce pressures to prevent real exchange rate appreciation.”

These recommendations shed some light into the frustration surrounding the recent stock performance of Petrobras, as it ramps up investment in the pre-salt fields, but disappoints investors seeking quick returns.  As a state controlled company, Petrobras is in the unique, and challenging position of delivering dividends to stockholders who finance investment and public policy that aims to gradually exploit these gigantic reserves to insure broad based economic development.  The pace of exploitation has to eventually achieve some political equilibrium between private investors, policy makers, and Petrobras management.  If Petrobras and its partners show substantial gains in production over the coming years, as well as earnings, then everyone will be happy, but if predictable obstacles and the inherent uncertainly of drilling for ultra deep oil and gas frustrate production, then expect that the politics of petroleum might lead to substantial changes in both policy and Petrobras management.