Industrialization under increasing

uncertaintyAndré 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

Brazilian Deindustrialization – Empirical Evidence Pre-salt Risk and Opportunity

Petrobras Present Situation Petrobras Changing Path Industrial and Innovation Policies Institutional Instability

Final Remarks

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 decreased dramatically in the 90’s, started to rise again in the present century

Brazilian Deindustrialization- Empirical Evidences

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

0

5

10

15

20

25

30

35

40

Manufacturing Value Added in Brazilian GDP

% o

f GDP

Source: IPEADATA

Industrial Employment

1992.011993.011994.011995.011996.011997.011998.011999.012000.012001.012002.012003.012004.012005.012006.012007.012008.012009.012010.012011.012012.012013.012014.010

20

40

60

80

100

120

140

Brazil: Employement in Industry

100

= 2

006

Source: CNI

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

Pre-salt Challenge 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

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

Source: Petrobras

Petrobras Investments (US$ millions 2012)

Fonte: Petrobras

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

Petrobras Oil Production in Brazil

Fonte: Petrobras

Brazil Oil and Gas Production by Firm (february 2014)

Oil (bbl/day) Gas (Mm3/day) Total Production (boe/day)

Petrobras 1,923,432 76,186 2,402,640Statoil Brasil 76,632 95 77,231Shell Brasil 43,566 656 47,690Parnaíba Gás 144 6,101 37,954Chevron Frade 16,230 166 17,279OGX 15,820 57 16,180HRT 10,521 33 10,729Total Brasil 2,089,694 83,248 2,613,326

Source: ANP, 2014

Fonte: EPE – Balanço Energético

Oil Products in Brazil: Production, Imports, Exports and Total Consumption

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

Petrobras Work Plans

Source: Petrobras

  2010-2014 Plan 2012-2016 Plan 2014-2018 PlanUS$

millions% US$ millions % US$ millions %

Exploration and Production

118.8 53.0 141.8 60.1 153.9 70.0

Refineries 73.6 32.8 65.5 27.8 38.7 18.0Gas and Energy

17.8 7.9 13.2 5.6 10.1 5.0

Petrochemicals 5.1 2.3 5.0 2.1   0.0Distribution 2.4 1.1 3.6 1.5 2.7 1.2Biofuels 3.5 1.6 3.8 1.6 2.3 1.0

Others 2.9 1.3 3.0 1.3 3.2 1.4Total 224.1 100.0 235.9 100.0 220.6 100.0

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

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:

Petrobras Progredir 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

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

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

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.