Pre-salt: What now?


CommoditiesThis event marked an important moment for the Brazilian oil industry, because recent discoveries in the world oil scene have been rare and also because Brazil has always carried the title of eternal latecomer in the race for oil. The Brazilian oil industry was, until then, a classic case of sudden success but with limited potential.

So when their country arrived on the pre-salt scene, Brazilians began to dream of fabulous trajectories of economic development financed by the excessive reserves that surely rested under the water, just waiting to be converted to a new “oil El Dorado.” Brazil would enter the select club of oil exporting countries, and the benefits of being part of this club would be many, including the possibility of obtaining abundant oil rents and participating in OPEC.

But the entry into that club would not be without costs. First, because inevitably the process is slowed by the technological difficulties of producing oil, no matter how abundant, at a depth of several thousand meters and in some places more than 200 miles offshore. Second, because it remains unknown in which direction the world energy grid will go and so it is unclear whether Brazil could recoup the hundreds of billions of dollars spent on pre-salt exploration and production. And certainly in many countries oil hasn’t been the blessing to the economy that one would expect. Many countries that export oil or other natural resources have in the past suffered from “Dutch disease,” when the inflow of foreign currency raises the exchange rate and makes the rest of the economy less competitive. This is true in Venezuela and could easily be the case in Rio de Janeiro, which has experienced a downward economic trend since it ceased to be the nation’s capital 60 years ago. (To mitigate these risks, a series of measures such as taxes on imports or funds of oil reserves would need to be adopted.) Finally, there is the high political cost that the discussion at the federal regulatory level invariably brings to a country like Brazil, where often the direction of the economy is decided behind the scenes and does not always follow the most honest negotiation procedures.

Clearly, mere entry into the “oil club” would not magically yield economic development. On the contrary, it would be a long and arduous road. It was surely in this context of elevated costs that the prospect of pre-salt was discussed, and on Monday the 31st of August 2009, after two years of heated debate, the governor of Brazil announced his proposal to manage pre-salt oil. The proposal includes changing the regulatory framework from the current model to concessions for a shared model—one in which the state owns the reserves and the operator pays a portion for the oil pr.....




Register for free to read full article


More in this section:

Chavez And The Diminishing Return - Part One
Since coming to power in 1998, Hugo Chavez of Venezuela has not only transformed the political landscape of his own country and influenced the populist movement of South America, but he has also dramatically impacted investment and its outlook. Chavez’s power base has made the prospect of investing (and even preserving) money in Venezuela a complicated affair, and unfortunately it is becoming an increasingly difficult riddle. Chavez during the height of the boom in oil prices found hims...<read full article>

Chinese Boycott of Argentina Soybean Oil
By Bernard Lapointe In early April China’s Ministry of Commerce banned imports of soybean oil from Argentina as a part of a wider trade dispute. The dispute initially stemmed from Argentina’s move to place a trade barrier on imports from China, which then spiraled into China taking retaliatory measures, including the boycott of Argentina soybean oil. According to a report from an Argentine newspaper (Ambito) dated April 6, Chinese Ambassador to Argentina, Gang Zeng stressed that t...<read full article>

Chinese Brazilian Trade Ties Continue to Grow
By Bernard Lapointe In April, China and Brazil signed various trade agreements with the objective of boosting two-way trade between the two countries. In particular Presidents Hu and Da Silva signed a 5-year action plan to increase trade and energy cooperation. Since China joined the World Trade Organization (WTO) in 2002, Brazil’s exports to China have grown at 23% per annum, faster than during the 1989-2009 period at 18%. Brazilian imports from China have grown at 26% per annum sinc...<read full article>