Together with Adriano Pires and Luana Furtado, both from the Brazilian Infrastructure Center, I researched the cost of building Petrobras’ Abreu e Lima refinery in Pernambuco, as well as the cost of the main refineries built in the world in recent decades.
The study is on the Blog do Ibre. In the post, there is a link that allows you to download an Excel spreadsheet that contains the data as well as links to access the information used in the study.
Our sample contains, in addition to Abreu e Lima, a total of 11 refineries built in recent decades. The cost measure used was the investment cost divided by the refining capacity in barrels of oil per day.
Abreu e Lima cost five times more than the average. There is an interesting case. It is the North West Sturgeon refinery, in the province of Alberta, in western Canada. Its cost was only 20% lower than that of Abreu e Lima.
Sturgeon was part of a public sector initiative aimed at increasing the diversification of the province’s economy. Initially, a relatively cheap project, with 100% private investment, ended up in a $10 billion bill stuck in Alberta’s public coffers. Sturgeon’s financial disaster is recounted by Tom Morris, former Alberta energy minister, in The North West Sturgeon Upgrader: Good Money after Bad?
If we consider the cost of refineries built exclusively observing commercial objectives, that is, excluding Sturgeon from the sample, Abreu e Lima cost seven times more than the average.
It is possible that there are reasons for Petrobras to build a refinery in Pernambuco, as it is a relevant consumer market in a region, the Northeast, very populated and with few refineries.
It is possible that the distribution cost will be greatly reduced with the installation of the refinery and partially offset the higher costs with its construction. It is difficult to imagine that this productivity gain in distribution offsets the 600% overprice in refining.
Nor does it seem to me that overpricing is associated with corruption. According to the Federal Public Ministry, “the value of the bribe ranged from 1% to 5% of the total amount of overpriced billionaire contracts.” If there were no corruption, instead of costing US$18 billion, Abreu e Lima would come out for just over US$17 billion, or a 566% surcharge.
The problem, therefore, is one of public sector governance.
One of the obstacles to the country’s progress is the difficulty we have in learning from our experiences. The debate becomes very politicized, mistakes, therefore, are not mistakes, but someone else’s fault, and there is no learning curve.
For example, during the Lula administration there was an enormous effort to build a naval industry. The project went wrong. As with the effort under the JK government in the 1950s and the effort under the Geisel government in the 1970s. In all three cases, in the next decade the shipping industry shrank amid a sea of bankrupt shipyards and lost jobs.
The evidence is that the unit labor cost in Brazil is 11 times higher than that of China in this sector. For the industry to survive, it would be necessary for there to be rapid learning, with a significant reduction in this cost. The evidence is that between 2005 and 2011 —the last year we have data—, the learning gain was nil (pages 51 to 53).
May the next national developmentalist government start its development program by greatly improving governance in the public sector.
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