Regulatory Environment and Endogenous Technological Development in the Upstream Oil and Gas Industry in Brazil

Abstract

Since its formal creation in 1953, Petrobras has operated in monopoly in the Oil and Gas (O&G) industry in Brazil. In 1997, the Congress approved the law 9478/1997 (Petroleum Law), which set a fundamental change in the legal framework and allowed other competitors to enter into the market. Since then, the government has also implemented a set of new regulations in the O&G sector to foster local content as well as investments in science, technology and innovation. Here we aim to understand how the regulatory environment affects technological development in the upstream O&G industry. Our methodology consists of two pillars. First, we provide a critical review of the literature about the broad relation between natural resources and economic development. We find that technological development is a key driver of productive linkages from the primary sector and we suggest that the regulatory environment plays a major role. Second, we adopt both quantitative and qualitative methods to analyze three specific mechanisms of the regulatory framework for the case of Brazil. Our results are two-fold. On one hand, the regulatory environment has prompted significant investments in science, technology and innovation in the O&G industry; also, it has promoted the establishment of new partnerships between the oil industry and the Science and Technology Institutions (STIs). On the other hand, some regulations as well as recent modifications have hampered investments in science and technology, especially due to a low involvement of the suppliers. An important conclusion is that, for the case of Brazil, the R&D center Petrobras has played a leading role in fostering technological development. Though, the regulatory environment needs to be revised to involve more actors in this process; more coherent and coordinated policies are needed to promote both local content and innovation at the same time. This paper differs from previous literature in two key aspects. First, whereas other scholars tend to study the macroeconomic and governance-related issues of natural resources, here we analyze their productive implications. Second, our work combines both quantitative and qualitative research methods; both questionnaires and semi-structured interviews have allowed us to collect primary data at micro-level.