Text IIOff the Deep End in BrazilGerald Herbert With crude s...

Text I

Brazil: Platform for growth

_{By Joe Leahy}

On the Cidade de Angra dos Reis oil platform,

surrounded by the deep blue South Atlantic, a

Petrobras engineer turns on a tap and watches black

liquid flow into a beaker.

5____It looks and smells like ordinary crude oil.

Nevertheless, for Brazil, this represents something

much more spectacular. Pumped by the national oil

company from “pre-salt” deposits – so-called because

they lie beneath 2,000m of salt – 300km off the coast

10 of Rio de Janeiro, it is some of the first commercial

oil to flow from the country’s giant new deepwater

discoveries.

Already estimated to contain 50bn barrels, and

with much of the area still to be fully explored, the

15 fields contain the world’s largest known offshore oil

deposits. In one step, Brazil could jump up the world

rankings of national oil reserves and production, from

15th to fifth. So great are the discoveries, and the

investment required to exploit them, that they have

20 the potential to transform the country – for good or for ill.

Having seen out booms and busts before,

Brazilians are hoping that this time “the country

of the future” will at last realise its full economic

potential. The hope is that the discoveries will provide

25 a nation already rich in renewable energy with an

embarrassment of resources with which to pursue the

goal of becoming a US of the south.

The danger for Brazil, if it fails to manage this

windfall wisely, is of falling victim to “Dutch disease”.

30 The economic malaise is named after the Netherlands

in the 1970s, where the manufacturing sector withered

after its currency strengthened on the back of a large

gas field discovery combined with rising energy prices.

Even worse, Brazil could suffer a more severe

35 form of the disease, the “oil curse”, whereby nations

rich in natural resources – Nigeria and Venezuela, for

example – grow addicted to the money that flows from

them.

Petrobras chief executive says neither the

40 company nor the country’s oil industry has so far

been big enough to become a government cash cow.

But with the new discoveries, which stretch across an

800km belt off the coast of south-eastern Brazil, this is

going to change. The oil industry could grow from about

45 10 per cent of GDP to up to 25 per cent in the coming

decades, analysts say. To curb any negative effects,

Brazil is trying to support domestic manufacturing

by increasing “local content” requirements in the oil

industry.

50____Without a “firm local content policy”, says

Petrobras CEO, Dutch disease and the oil curse will

take hold. However, “if we have a firm and successful

local content policy, no – because other sectors in the

economy are going to grow as fast as Petrobras”.

55___The other long-term dividend Brazil is seeking

from the discoveries is in research and development

(R&D). Extracting oil from beneath a layer of salt at

great depth, hundreds of kilometres from the coast, is

so challenging that Brazilian engineers see it as a new

60 frontier. If they can perfect this, they can lead the way

in other markets with similar geology, such as Africa.

For its part, Petrobras is spending $800m-$900m

a year over the next five years on R&D, and has

invested $700m in the expansion of its research

65 centre.

Ultimately, Brazil’s ability to avoid Dutch disease

will depend not just on how the money from the oil

is spent. The country is the world’s second biggest

exporter of iron ore. It is the largest exporter of beef.

70 It is also the biggest producer of sugar, coffee and

orange juice, and the second-largest producer of soya

beans.

Exports of these commodities are already driving

up the exchange rate before the new oil fields have

75 fully come on stream, making it harder for Brazilian

exporters of manufactured goods. Industrial production

has faltered in recent months, with manufacturers

blaming the trend on a flood of cheap Chinese-made

imports.

80____“Brazil has everything that China doesn’t and it’s

natural that, as China continues to grow, it’s just going

to be starved for those resources,” says Harvard’s

Prof Rogoff. “At some level Brazil doesn’t just want

to be exporting natural resources – it wants a more

85 diversified economy. There are going to be some

rising tensions over that.”

_{Adapted from Financial Times - March 15 2011 22:54. Available in:}

_{<http://www.ft.com/cms/s/0/fa11320c-4f48-11e0-9038-00144feab49a,_i_email=y.html>}

_{Retrieved on: June 17, 2011.}