Brazil needs more stakeholders to the Pre-Salt Layer project
October 16, 2013, 12:19 pm

It has taken decades for Brazil to develop an integrated manufacturing sector that has helped the country grow and become one of the largest economies in the world. But the manufacturing sector has been losing dynamism in recent years.

At a time when Brazil is focusing more on commodities, the world is experiencing a profound transition toward a new geography of production and innovation. Supported by unorthodox policies, new technologies, and rising labour costs in China, the American manufacturing sector is flourishing again.

Meanwhile, Asian and African countries are investing in mass manufacturing encouraged by the growth in domestic and regional markets, rising labour costs in China, and the fact that multinational companies are seeking geographical diversification for production.

China, in turn, is undertaking a profound technological upgrade. Its exports are moving up the value chain and they are now competing with advanced economies in highly sophisticated capital goods markets.

In the energy sector, the US is becoming a powerhouse thanks to newfound shale gas and oil. This energy revolution is already affecting and will bring even more substantial impacts on the new production map. In innovation, the globalisation of R&D in the private sector is beginning to follow the path of the globalisation of production.

Brazil can and should aspire to participate more actively in the new economic geography, says Arbache [Getty Images]

New equations, new challenges for Brasilia

This new economic geography is already redesigning the global economy. The resultant pressure on the Brazilian economy is likely to increase due to the growing competition for low and high value added goods, as well as for FDI, R&D centres and human capital.

Brazil is actually already feeling the pain – the Brazil-US trade balance for manufactured goods has changed from the historically positive for Brazil to negative, while the falling costs of energy in America is already displacing Brazilian investments in energy-intensive industries.

How does Brazil feature in the new economic geography of production and innovation? Does it have opportunities for investments in innovation, productivity and high value added goods and services to compete globally and participate more actively in global value chains?

Indeed, several growth opportunities associated with domestic and international economies are attracting investment and fostering the development of the Brazilian manufacturing, including the increasing consumer goods demand from the growing middle class and the large infrastructure projects that are taking place. However, much beyond these and other opportunities, Brazil can and should aspire to participate more actively in the new economic geography. Areas such as oil and gas, agribusiness, biodiversity, biotechnology and green technologies can be remarkable frontiers and drivers of development.

The prized pre-salt reserves

But Brazil might just strike gold with the exploration of the prized pre-salt layer, its critical opportunity for investment, technological advancement, as well as consolidation of high value added goods and services.

The oil reserves possess several technical restrictions that prevent extraction or make it extremely costly with the available technologies. The deposits are located in a vast area 200 km wide by 800 km long. The wells extend thousands of metres below sea level, and it is necessary to overcome a depth of over two km, a layer of more than one km of sediments, two km of salt, and other thick and dense sedimentary formations.

Furthermore, the distance between the coast and future drilling sites is 300 km on average, which greatly increases the cost and logistical complexity of transporting people, equipment and oil in the gigantic proportions required by the pre-salt layer project. Other major obstacles are the cost and safety required for operating in extreme conditions, as well as technologies required to prevent and mitigate risks and environmental impacts. Overcoming all these challenges will require investments of tens of billions of dollars in new technologies. To some extent, these challenges are similar to those faced by the US in the space race with the Soviet Union because, owing to the lack of space exploration technology.

The technology needed for exploration, logistics and risk mitigation for the pre-salt layer have not been mastered, yet, there is a huge range of investment opportunities for Brazil.

It is estimated that at least $354 billion will be invested in the oil and gas industry between 2013 and 2016, which represents about 59 per cent of the total industrial investment prospects for this period. For sure, the oil and gas will lead to a significant increase in GDP and government revenues.

However, the real ‘black gold’ that may emerge from the pre-salt layer is neither the oil nor the royalties, but rather the solutions to scientific and technological challenges, logistics, equipment and materials required by the oil industry. If developed in collaboration with universities and research centres in Brazil and absorbed by the domestic industry – national and international – such knowledge and skills could have profound effects on other industrial sectors with unprecedented economic and social impact.

“It is estimated that at least $354 billion will be invested in the oil and gas industry between 2013 and 2016” [AP]

There is significant social value and economic justification for fostering such activities because they are new technological frontiers. Therefore, the Brazilian government should participate in the risks involved and encourage participation of the private sector. This development frontier has enormous potential for innovation, growing returns, both static and dynamic, productivity gains, creation of high quality jobs and development of skills that can be deployed in other sectors.

Beyond participating in the new economic geography, the pre-salt layer can also contribute decisively for Brazil to face other long-term challenges. One of them is associated with the need to identify and implement new sources of growth. To the extent that the pre-salt layer can leverage investments in innovation and productivity, it can help Brazil grow more and more sustainably.

Brazil’s social and fiscal challenges over the coming years also need to be taken into account. On the one hand, despite substantial progress in reducing poverty and inequality, Brazil is still a very unequal country with millions of poor people. On the other hand, the rise in old age dependency ratio due to the rapid demographic transformation in an economy with even low productivity level and growth, and savings will have significant consequences when financing the growing and unavoidable expenditures in health and social security. The systemic effects of the pre-salt layer in terms of creating wealth will be critical to generate the resources needed to finance that agenda.

For the pre-salt layer to be a gateway to the new economic geography, significant efforts will be needed in terms of knowledge, development policies, generation and transfer of technology, as well as capacity-building in universities, research centers and industry, and policies that foster the spillover of technological, industrial and service sectors advances to other sectors. Efforts will also be needed to coordinate government, domestic and foreign firms, universities, legislators and the civil society around this agenda.

One inescapable challenge to the pre-salt layer is the management of the complicated political economy agenda associated with oil royalties and government revenues. Several expectations were raised regarding the fiscal resources of the pre-salt layer, and, therefore, there is a lot of pressure to rapidly develop the oil production, which can be detrimental for technological development in Brazil. Dialogue with Brazilian society will be needed for it to see the pre-salt layer less as an immediate source of income, and more like a transformative project capable of integrating the country in the new economic geography.

The pre-salt layer is indeed not a panacea, but it has all the characteristics and potential to become a frontier for technological and industrial development and to be a gateway for Brazil into the future. Because of that, we believe that the project deserves a lot more attention from the Brazilian society.