Power Generation, Oil and Gas:

The Challenges Ahead for an Emerging Power

Steward to an incredible bounty of natural resources, Brazil must carefully nurture its energy industry to build sustainable growth.

In the second panel session at the 2012 Brazil Conference hosted by Johnson's Emerging Markets Institute, Brazil: A Pathway into the Future, panelists discussed both the country's extraordinary economic opportunities presented by the discovery of the offshore pre-salt oil layer and its production of renewable energy.

Brazil's oil industry benefits greatly from the "pre-salt layer," an oil-rich geological formation on the continental shelf off the coast of Brazil. Producing about 2 million barrels of oil per day, Brazil has become one of the largest producers in the world, and is poised to become one of the biggest exporters as well, said José de Sá, MBA '94, partner at international management-consultant firm Bain & Company. Key to the oil and gas industry's development, he said, is fostering the value chains associated with the country's ample fossil-fuel resources. The limiting factors, at present, are an under-qualified workforce - such as a lack of needed engineers, noted de Sá, who is a chemical engineer - as well as the technology and research and development needed to support the value chains.

To optimize companies all along the value chains in the oil and gas space, the national government created the Programa de Mobilização da Indústria Nacional de Petróleo e Gás Natural (Prominp) and Organização Nacional da Indústria do Petróleo (ONIP), and offers financial incentives to defray the costs associated with the industry, said de Sá. He strongly urged any parties interested in investing or working in this space to focus on finding the right partner or joint venture. "Brazil is a complex country to play in, and this sector is particularly complex."

David Panico, MBA '04, managing director of investment banking for Citi, pointed out that while relatively low interest rates are somewhat suppressing returns on investment at present, Brazil's energy environment is poised to grow. The country receives about 45 percent of its energy from renewable sources (compared with a world average of about 13 percent from renewables), and the government is demonstrating its commitment to attracting investment in renewables via financing and tax exemptions to investments in infrastructure projects.

In the renewable arena, a primary focus is on wind energy, said Panico, adding that the country currently generates about 1.7 GW out of about 140 GW of identified capacity. Brazil's energy consumption is expected to grow from about 60 GW now to about 75 GW in 2016; the government, said Panico, is sponsoring a "healthy oversupply of energy" to reduce the price to the end customer, whether residential or industrial. Brazil is a large producer and consumer of ethanol from sugarcane, producing 20 percent of the world's supply of ethanol, and currently receives about 2 percent of its electricity from bioelectricity, said Leticia Phillips, a representative from UNICA. Gasoline in Brazil is currently 20 percent ethanol, and 51 percent of the cars in the country are "flex fuel," meaning they can take either gasoline or ethanol. Ninety-one percent of new-car sales are for flex-fuel cars.

Professor Wes Sine, who moderated the session, asked the speakers whether the country's vast natural resources are a curse or a blessing, pointing out that economists have demonstrated correlations between a country's underdevelopment and its possession of significant natural resources. "Oil by itself doesn't help the country very much in terms of developing a diversified economy," said de Sá, "but there are good examples of countries that understand that resources can drive fundamental value for a country, if you build a localized value chain." Added Panico: "We are conscious that we cannot be seen only as a provider of natural resources; I believe we have learned that all of these natural advantages that we have are becoming the source of sustainable growth."

Moderator: Wesley Sine, faculty director, Entrepreneurship and Innovation Institute, and associate professor of management and organizations at Johnson