Oil boom could help Rio’s economy emerge from the recession

petrobras oil boom rio de janeiro

Oil boom could help Rio’s depleted finances. Photo: Stéferson Faria/AgP

For years now, Rio de Janeiro has been the textbook example of the financial crises facing Brazilian states. Just weeks before the Rio Olympic Games in 2016, the state declared “public calamity” – just one step away from bankruptcy. Rio’s financial collapse has led to not only public safety crises, but also protests from public servants over months of undelivered paychecks.

Yet according to a study conducted by the consulting company Tendências Consultoria Integrada, Rio’s GDP is expected to grow by 6.1 percent in 2019 – and it’s all thanks to an oil boom. If that forecast is confirmed, it will mark the first time since 2015 that the state of Rio de Janeiro has grown more than the national average.

The oil activity is expected to generate nearly 9 billion BRL in revenue for the state’s administration. Seven oil exploitation projects are planned for 2018 – twice as many as in 2016, which was a rough year for the sector. Over the next three years, 18 oil platforms will be inaugurated. Of those, 14 will be dedicated to deep-water reserves, known in Brazil as “pre-salt.”

Pre-salt oil boom

Pre-salt reserves were discovered 12 years ago. Since then, these deep-water deposits have become responsible for roughly half of Brazil’s oil and natural gas production. Brazil’s Energy Research Company (EPE), which operates under the Ministry of Mines and Energy, declare that the pre-salt reserves will amount to 74 percent of Brazil’s total oil production by 2026. EPE also predicts that Brazil’s total production should double in ten years, to 5.2 million barrels per day until 2026.

Until October 2016, Petrobras, Brazil’s state-owned oil and gas company, held a monopoly to operate these deep-water fields. Opening up these fields to competition was the most investor-friendly change in the law since 1997, when the federal government ended Petrobras’ monopoly in Brazil. The monopoly over the pre-salt reserves had become a burden to the Brazilian company, as it was obligated to explore even less-profitable deposits. Not exactly a great deal for the world’s most indebted oil company.

The implementation of additional market-friendly measures has led to a steep reduction in Petrobras’ share of Brazil’s total oil production, from 97.7 percent in 2008 to a projected 77 percent this year.

Intense activity

Despite an increase in productivity this year, it takes time for platforms to reach profitability. This is why it is more reasonable to expect the economic recovery to begin next year. In 2019, the state’s government should receive 10.7 billion BRL from oil exploitation royalties. These royalties are payments made by companies in exchange for the right to exploit reserves; they are meant to compensate states for the negative side effects of intense oil activity.

One of the contributing factors to Rio’s crisis was a nosedive in revenue from the oil business: prices were down from 2014, and production slumped between 2010 and 2013. But as revenue is now expected to increase, Rio could balance its accounts a bit better and abandon its current status of fiscal recovery (a financial aid program by the federal administration).

If the government will profit from the opportunity to promote change in Rio’s rotten public administration, it will depend on who voters elect as governor in October. Though a disdain for establishment politicians appears to be something of a national trend, Rio numbers among the states where political renewal is most anticipated. After all, several members of the political group in charge for the past decade have now been placed in jail for corruption. That list includes Rio’s former governor, Sérgio Cabral.

However, one of the leading candidates is expected to be former Rio mayor, Eduardo Paes – and he is a part of that same oligarchy.

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