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Industrialization under increasing uncertainty

Industrialization under increasing uncertainty. André Furtado, DPCT/IG/UNICAMP , Campinas, Brazil TECHNOLOGY, MANAGEMENT AND POLICY GRADUATE CONSORTIUM AND RISK GOVERNANCE RESEARCH WORKSHOP Lisbon , Instituto Superior Técnico, June 23-25 . Outline.

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Industrialization under increasing uncertainty

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  1. Industrialization under increasing uncertainty André Furtado, DPCT/IG/UNICAMP, Campinas, Brazil TECHNOLOGY, MANAGEMENT AND POLICY GRADUATE CONSORTIUM AND RISK GOVERNANCE RESEARCH WORKSHOP Lisbon, Instituto Superior Técnico, June 23-25

  2. Outline • BrazilianDeindustrialization – EmpiricalEvidence • Pre-saltRiskandOpportunity • Petrobras PresentSituation • Petrobras Changing Path • Industrial andInnovation Policies • InstitutionalInstability • Final Remarks

  3. Brazilian Deindustrialization- Empirical Evidences • Brazilian deindustrialization is controversial: • It is happening at an earlier development phase • The share of manufacturing industry is falling since the end of the 80’s in current prices • There is a change in relative prices against industry since the opening up of the economy in the 90’s • Industrial employment that has decreaseddramatically in the 90’s, started to rise again in the present century

  4. BrazilianDeindustrialization- EmpiricalEvidences Source: IPEADATA

  5. Industrial Employment Source: CNI

  6. Brazil Development Challenges • Brazil is a natural resources rich developing country • Since 2003, mineral commodities prices increased impressively  development opportunity • Industrialization based on commodities • However, there are great risks: • Deindustrialization due to currency overvaluation • Consumerism • Populism

  7. Pre-saltChallenge • Pre-salt Discoveries are creating a New Risks and Opportunities for the Brazilian Economy • Opportunities of Pre-salt for Brazil: • Self-sufficiency in Oil • World Oil Exporter • Increase Industrial Activity based on Natural Resources • World Leader in Offshore Technology • Risks of Pre-salt for Brazil: • Fuel Prices Control Policy • Institutional Bargaining • Limited industrial capacity of suppliers

  8. Petrobras Present Situation • Pre-salt promises are impressive: • Total oil and gas reserves are expected to reach 100 billons of bep (barrels of oil equivalent) • Petrobras is investing since Pre—salt discoveries 5 times more than previously • Pre-salt production reached 470 thousands barrels per day in June 2014 • However, there is an increasing lag between investment growth and the total oil production and proven reserves expansion, which is strangulating Petrobras

  9. Petrobras Investments (US$ millions 2012) Source: Petrobras

  10. Fonte: Petrobras

  11. Petrobras Critical Situation • Troubles with Oil Extraction • The recent drop in Brazilian oil output is related to the rapid fall of mature fields, partially due to lack of investment • Pre-salt production expansion wasn’t enough to balance mature fields decline • Investments in downstream are deferred (Recife and Rio refineries) • Bioethanol production drop increased gasoline imports • Oil products consumption increased steeply during the last years • Federal Government is holding back gasoline and diesel oil prices

  12. Petrobras OilProduction in Brazil Fonte: Petrobras

  13. BrazilOilandGasProductionbyFirm (february 2014) Source: ANP, 2014

  14. Oil Products in Brazil: Production, Imports, Exports and Total Consumption Fonte: EPE – BalançoEnergético

  15. Petrobras Changing Path • Since 2010, Petrobras is trying to introduce a more realistic administration • Targeting the Upstream (70% of total Investments) • Slowdown in the Downstream (New Refineries are posponed) • More realistic production previsions, which is expected to reach 2.5 millions bbl/day in 2015 and 4.2 millions bbl/day in 2020 (2011-2015 Work Plan expected 4.9 millions) • To reach its main planned targets, Petrobras is mobilizing its own staff to follow up local suppliers

  16. Petrobras Work Plans Source: Petrobras

  17. Pre-salt Evolution • In spite of its high priority, the number of Pre-salt projects were reduced (32 until 2020) • Libra field is out of that figure (9 platforms) • First new platforms for Pre-salt must start 2016 • In 2020, Pre-salt will reach 47% of Brazilian oil production (aprox. 2 millions bbl/day) • Foreign Suppliers like FMC, Baker Hughes, Schlumberger have installed new labs close to the University of Rio related to Pre-salt

  18. Industrial and Innovation Policies • In 2003, Ministry of Energy created PROMINP with Petrobras, which is program to promote local suppliers • ANP (Oil National Agency) established since 2003 local content requirement in the bids. • New initiatives: • PetrobrasProgredir Program: facilitate supplier access to bank loans • BNDES P&G Program: contribute to the development of oil and gas supply chain : • BNDES P&G Automatic, for cash flow funding • BNDES P&G Estruturante, to create and widen local productive capacity, facilitate firm restructuring, foreign expansion, support of technological capabilities and innovation • Inova Petro Program(BNDES-FINEP-Petrobras), to fund oil and gas suppliers technological development (R$ 3 billions from 2012 to 2017) • Gathers a set of funding instruments from BNDES and FINEP, with Petrobras technical supervision

  19. Institutional Instability • Rent seeking behaviour of society, and especially of political elites is a main feature natural resources course • Federal Government tried to change institutional framework because of Pre-salt: • Production sharing system • Petrobras became the single operator • Social Fund to promote Brazil development • The Fund Project was a good idea, however the result was very different from the original idea: • Congress reduced impressively the share of royalties and of other taxes allotted to Oil Producing Municipalities and States • Between 2008 and 2013 several law Project were vetoed by the President, but the veto was rejected by the Congress • Final arrangement assign to Education (75%) and Health (25%) • This arrangement is creating a great stress for Oil Municipalities and States, and also for Science and Technology Ministry

  20. Final Remarks • Brazilian industry, which was for long time the locomotive of the economic development, is loosing space in the Brazilian GDP • Part of this situation is due to macro-trends of the economy • The Pre-salt example shows the risks for the Brazilian Economy of the present phase: • Petrobras is grieved by Federal Government price policy • Mature fields production is decreasing very sharply • Low returns investment in Downstream • Local Suppliers are not following Petrobras and others companies investments • Pre-salt royalties dispute among regions and several government priorities created institutional instability

  21. Final Remarks • Will Brazil take advantage of Pre-salt opportunity to become a large oil exporter? The production leap will be smaller than what was previously expected, however until the end a decade Brazil must become an oil exporter • Will Brazil make an industrial and technological leap in offshore technology? The industrial and technological change is happening, but more slowly than firstly expected. There are some promising signals like new industrial and innovation policies and the decision of some foreign suppliers to built research close to Rio University.

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