Is the pre-salt oil competitive? Economic and environmental long run impacts from the incentives to the pre-salt – a general equilibrium approach

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Please cite the paper as:
Maria Juliana Iorio de Moraes, Angelo Costa Gurgel, (2014), Is the pre-salt oil competitive? Economic and environmental long run impacts from the incentives to the pre-salt – a general equilibrium approach, World Economics Association (WEA) Conferences, No. 1 2014, Is a more inclusive and sustainable development possible in Brazil?, 5th May to 12th August 2014

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Abstract

The Brazilian oil production reached 2.7 million of barrels per day in 2011 and the projections are to more than double that until 2020.  Petrobras expects more than 40% of this production to come from the pre-salt layer. The estimated reserves of oil and natural gas from the pre-salt amount 50 to 70 billion barrels of oil equivalent, and, if proved, will position the country among the top ten nations in the world in terms of oil reserves. To turn these projections in production, the investments in capital will be massive.

However, the realization of its production will depend on the oil price in the incoming years, on substantial investments and on the country efforts to reduce its CO2 emissions. Considering such uncertainties and the importance of the oil sector to the country economy, this study aims to evaluate the competitiveness of the pre-salt oil and also to estimate the macroeconomic, sectoral and environmental impacts in the long run, until 2090, from the expected expansion in the oil extraction in the country.

To do so, we use the recursive dynamic general equilibrium model EPPA – Emissions Prediction and Policy Analysis, developed to investigate energy and climate scenarios and policies. We adapted the model, to include the pre-salt sector as a backstop technology, in order to represent the economic costs and benefits of its development as well as its capacity to compete with other energy technologies in an endogenous fashion.

The results show that the oil production from the pre-salt layer in Brazil would be competitive only after 2030 under free market assumptions. To achieve the production expected by the Brazilian government in the next years it is necessary to introduce economic incentives, considered as subsidies in the model, in order to drive investments and productive resources to the sector. This strategy, however, deviates scarce resources in the medium and long term, mostly capital, from other sectors of the economy toward the pre-salt sector, generating a lower GDP and consumer welfare when compared to a “business as usual” scenario without the presence of such subsidies. The incentive to the pre-salt oil production also produces an increase in the world cumulative greenhouse gas emissions at the end of the model horizon.


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6 responses

  • Natália Magno says:

    The paper concludes that in the short-term, the exploitation of pre-salt will bring more costs than benefits to the country. Thus, considering the environmental aspect, Brazil will not utilize in a effective way this natural resource. The explotation of pre-salt will bring resources to be invested in education and technology, but there isn’t experience to draw oil from the reservoirs located below the pre-salt layer. In this way, we are still developing methods for safe exploitation and for developing to clean energy. Considering these arguments, how we can explore effectively and safely the pre-salt layer?

  • Caio Pereira says:

    Is it possible to measure the impact of Pre-Salt in cities near the exploration and thereafter this impact in the energy consumption? The effect in short and medium terms (2015-2028) would probably proceed as cited in the article like the Dutch disease or the investment in infrastructure made to reached the objective traced by Petrobras could positively influence the growth of these cities? Does it make sense to apply the same methodology presented in the article to measure the impact in energy consumption by the cities nearby the exploration?

  • Felipe J. Monari says:

    Can we compare the pre-salt incentives with the past ethanol incentives? I mean: to make it competitive, could the government create isolated actions trough the energy industry at all, in order to equilibrate the sector despite the fact that other sector might be affected? As we can see nowadays at the Petrobras and Ethanol industry, it is not a system, there are reactive interferences adapted to the moment to get immediate but not long-time results.

  • Angelo Gurgel says:

    Dear Natalia Magno,

    Thank you for your comment. The results we have found in our research suggest that the overall costs of the pre-salt oil exploration (including the opportunity costs and the competition for resources with other sectors) are too high compared to the potential benefits it will bring to our economy. Considering the several uncertainties related to the pre-salt oil (size of reserves, costs to perform deep-oil drilling technology, future oil prices, possible future constraints to CO2 emissions), our suggestion, based on our findings, would be to wait a decade before investing massively in the exploration of this resource. As this suggestion is hard to be taken at this point, we recommend investments on research and technology to decrease the costs of deep-oil exploration. Anyway, the choice to explore the pre-salt oil is not a movement toward development of clean energy.

  • Angelo Gurgel says:

    Dear Caio Pereira,

    The model we have used does not have detailed representation of a city of small region near the oil exploration. In this regard, you may find the paper by Haddad and Giuberti (2011), cited in our study, useful to answer your questions. Below is the full citation of this paper:

    HADDAD, E.A.; GIUBERTI, A.C. Economic iImpacts of pPre-sSalt on a rRegional eEconomy: The Case of Espirito Santo, Brazil.- Jönköping, Sweden. 50th Anniversary European Congress of the Regional Science Association International, 2011

  • Angelo Gurgel says:

    Dear Felipe Monari,

    Thank you for your comment. I believe there are several important differences between the investments in the pre-salt oil and the investments in the ethanol industry in the past. Some of these differences that come to my mind:
    a) Oil is a non-renewable energy source, but ethanol is;
    b) as so, oil use has negative externalities to the environment, but ethanol has positive ones;
    c) The historical context behind the decision to develop the ethanol industry was very distinct from the one in recent years; at that point, the energy crises behind the OPEP oil price control was an important driver of the decision to invest in the ethanol industry; more recently, the automobile industry in Brazil saw the opportunity to develop flex fuel vehicles based on its competitiviness compared to gasoline, without explicit incentives from the government, which could have decreased our oil dependence. Also, there is an increasing international and national pressure to take climate change seriously, what means to reduce the use of fossil fuel energy. All these are evidences that the timing and incentives to invest in ethanol and pre-salt oil were (or are) very different;
    So, in summary, there are several differences behind costs and benefits of these choices (ethanol and pre-salt), what make it very hard to compare the public investments on them.
    I totally agree with you that there are too many reactive short run interferences on these sectors, and very few (or none) long run strategic planning.