Brazil's oil policy: cost vs. jobs

Brazil has prioritized local job creation over speed and lowest cost to develop its considerable pre-salt oil reserves.

Brazil has instated heavy local content rules for production of equipment such as oil platforms to ensure the development of the deep-sea reserves provides jobs and economic growth while fortifying domestic industry.

Note the euphemistic use of the word "rhythm" by Petrobras CEO Jose Sergio Gabrielli:

"The rhythm (of bidding) for those new areas will be heavily determined by the capacity of domestic industry to provide goods and services for the gigantic investment program," Petrobras Chief Executive Jose Sergio Gabrielli said in a conference call. "That is for me the driving force for the rhythm of bids in those areas."

This may seem like a poor decision from the traditional Western capitalist mindset - it will both delay the onset of production and result in higher costs than internationally open bidding would. But the Brazilian government - particularly Lula's, which has deep left-leaning roots despite its generally careful and centrist stewardship of Brazil's economy - is trying to optimize a different objective function. Local oilfield equipment manufacturing will need to spring up to supply the demand, creating jobs and potentially companies that can then compete internationally as other countries make ultra-deepwater discoveries. Viewed through that lens, the local content rules make more sense.

And while Petrobras would object if they were an independent private company, I suspect they are actually largely aligned with the government. After all, the chairwoman of their board, Dilma Rousseff, is Lula's heir apparent. And more broadly speaking, the culture of Petrobras is of a proud organ of the state. A friend who works there once described it to me as a bizarre combination of world-class technical expertise and massively inefficient and overstaffed management bureaucracy.