courtesy Petrobras
A Trickle of Oil
To fully appreciate the position Petrobras finds itself in today, one must look back at its humble beginnings. When the company was formed in 1953, “we didn’t really have any oil,” explains Gabrielli, who joined Petrobras in 2003 and was named CEO two years later. “You have to remember, most state oil companies are created because the country already has oil that needs to be developed. In the beginning, we produced maybe 2,000 barrels per day, a fraction of the country’s needs.”
Still, the CEO says, the company’s mandate in those early years was clear: Provide oil to Brazil. “So we developed our capacity,” Gabrielli says. The challenge for Petrobras, however, was that unlike countries such as Mexico, where much of the oil was in shallow water, Brazil had oil primarily in deep water way offshore. “We didn’t have much of a choice,” Gabrielli explains. “We had to develop our own engineers and get the best equipment and information, because drilling in deep water is not easy.”
To gain access to the technological know-how and talent it needed, Petrobras started Cenpes, a research-and-development center, which, according to the company, is now the largest technology R&D facility in South America. Cenpes is home to more than 200 PhDs, many of whom have decades of experience drilling in deep water. According to the company, the center also has joint-venture contracts and research agreements with more than 100 Brazilian universities and research centers and more than 70 international institutions. In the late 1970s, Gabrielli says, Petrobras discovered its first deepwater oil reserves off the coast of Brazil in water just over 400 feet deep. “Deep then,” he says with a laugh, “but not compared with now.”
This sort of organic learning has become the Petrobras way, explains CFO Almir Barbassa, who joined the company in 1974. “We’re always adding new knowledge about deep-water exploration. Deep water is the place where the largest oil fields are, and we have the expertise to deal with this kind of environment.”
Finding oil in such depths is just one piece of the puzzle. Getting it up to the surface is another, explains José Jorge de Moraes Jr., executive manager of exploration and production. “We have to figure out how the oil will react,” he says. “What deposits are there? What will happen when the oil has to face the lower temperatures at the bottom of the ocean? We have to acquire a lot of information before we can produce on a large scale.” Those challenges notwithstanding, Smith of the Tulane Energy Institute says that if any oil company can overcome these hurdles, it’s Petrobras: “It has been a pioneer in deepwater exploration, and it’s world-class in its technology.”
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New Competition
Brazilian lawmakers ended the monopoly Petrobras had on drilling and allowed outside companies to bid and develop leases off its coast in 1997. “We have to compete with other companies now,” Gabrielli says plainly. ExxonMobil, Royal Dutch Shell PLC (RDS), Chevron Corp. (CVX) and BG Group PLC are all drilling off the coast of Brazil, sometimes on their own but often in partnership with Petrobras. “These companies are very happy with Brazil,” says Smith, “because the government has been wise enough to recognize the important role that the oil and gas industry plays in the development of the economy and to acknowledge the benefits of bringing in new ideas and technologies from other oil companies. Brazil hasn’t made it difficult for outsiders to do business there.” New laws being considered, to increase the government’s “take” from the pre-salt region, could change that, of course, Smith says. Also, the push by the government to get the deepwater oil developed quickly so that Brazil can benefit from this potential royalty bonanza puts additional pressure on Petrobras, he says. At the same time, adds Eurasia Group’s Garman, “government officials recognize that private investments will play a key role” in developing the pre-salt region. Indeed, analysts estimate that it will take nearly $600 billion to develop those fields.
Brazil loosened its ownership ties to Petrobras in 2000 when the company began trading on the New York Stock Exchange. To expand the company’s reach, explains Gabrielli, the government realized it needed to end its national monopoly and enable outside investors and competitors to play a role. With new stakeholders, a new emphasis on profits and growth, and competitive pressure for the first time, the CEO says, Petrobras has been able to double oil production and increase its reserves by more than 75 percent.
To be sure, Petrobras’ $118 billion 2008 sales are still dwarfed by industry giants Royal Dutch Shell ($458 billion), ExxonMobil ($443 billion) and BP Plc (BP) ($367 billion), but with the government still owning 40 percent of the company — and controlling 56 percent of the voting rights — Smith nevertheless calls Petro-bras “a user-friendly national oil company [NOC] to outsiders.” Adds Smith: “It’s just easier to do business with Petrobras than with other NOCs, such as those in Venezuela, Mexico, Russia or even Saudi Arabia.”
A Turning Point
While Gabrielli leads Petrobras through these remarkable times, he’s no doubt reminded of another turbulent period in the company’s past. In 2000, Petrobras had two giant oil spills in Brazil — nearly 1.5 million gallons in total — and paid $150 million in fines for the resulting environmental damage. A year later, a huge explosion on one of its offshore oil rigs killed 11 employees and caused the $350 million platform, along with the company’s reputation, to sink. Gabrielli has described the events as “environmentally devastating, alarming to investors, harmful to the bottom line, bad for the company’s image and demoralizing for employees and all Brazilians.”
JUST THE FACTS
- Founded As a state-owned oil company in 1953
- Headquarters Rio de Janeiro
- 2008 sales $118.3 billion
- 2008 Net income $18.9 billion
- Employees 74,240
- Operations More than 100 production platforms and 16 refineries worldwide, and more than 6,000 gas stations in Brazil
- Head of the class President and CEO José Sergio Gabrielli de Azevedo is a professor on leave from Brazil’s Federal University of Bahia.
Restoring the company’s reputation required some big thinking and quick action. Then-CEO Philippe Reichstul created a director-level position for health, safety and the environment. In addition, Petrobras started the Program for Excellence in Environmental and Operational Safety Management (PEGASO) and dedicated $4 billion to more than 4,000 internal programs and projects designed to prevent accidents.
By the time Gabrielli joined the company in 2003 as director of finance and investor relations, the changes had begun paying dividends. Today Petrobras is a member of both the World Business Council for Sustainable Development and the United Nations Global Compact, a social and environmental policy program. The company has been listed on the Dow Jones Sustainability Index for the past four years. And in 2008, Petrobras was ranked No. 1 among the world’s oil and gas companies for sustainability by the research and rating firm Management & Excellence SA.
Gabrielli acknowledges that Petrobras’ new sustainability ethos mirrors many of his own beliefs. During his teenage years in Brazil, the country was under a military dictatorship. Gabrielli describes himself as “militant” in his opposition and says he became such an activist in the 1960s that he was arrested by the army and spent six months in jail for his protests.
Following his release, Gabrielli says, he took up with local academics and Luiz Inácio Lula da Silva, then a union leader and now Brazil’s president. In 1980, Gabrielli and Silva helped start the Workers’ Party, the controlling political party of the current Brazilian government. Not long afterward, Gabrielli began teaching macroeconomics at the Federal University of Bahia. In 1987 he earned his PhD in economics from Boston University. Upon returning to Brazil, he taught again at Bahia and was named director of its economics sciences school in 1996.
Gabrielli says it was his research and teaching that led him to believe that business has the responsibility and the power to drive social improvement. “A company can’t survive without good relationships with its employees, its supply chain, the community in which it does business and its shareholders,” he says. “Sometimes keeping everyone happy is a balancing act, but it can be done, and businesses have a responsibility to achieve this.”
The chief also feels that Petrobras, as Brazil’s largest company (with a market cap of $190 billion), has a responsibility to raise the bar with its suppliers. In 2008 approximately 70 percent of the $50 billion Petrobras spent on goods and services went to about 4,000 Brazilian suppliers, according to the company. Beyond meeting basic financial, legal and technical requirements, suppliers are scored on how well they do on environmental, health and safety measures. The higher a supplier’s score, the more business it will get from Petrobras, explains Gabrielli.
The Future
Given the amounts that Petrobras will be spending over the next five years, suppliers would be wise to pay attention. The company recently announced a massive $174 billion capital expenditure plan that will include $104 billion in exploration and production activities, $30 billion of which will go toward financing the pre-salt discoveries. CFO Barbassa estimates that the company’s net cash flow between 2009 and 2013 will be around $150 billion based on oil at $37 to $66 a barrel, near its lowest level in late 2008.
The company recently announced a $174 billion capital expenditure plan, $30 billion of which will go toward financing the pre-salt discoveries.If the price goes up by just $1 (at press time, oil was trading at about $69 a barrel), Petrobras stands to gain $500 million more in revenue, Barbassa explains. An added financial cushion is a $10 billion loan signed earlier this year with the Chinese Development Bank, according to the company. In addition, Gabrielli says Petrobras signed a separate export agreement with China Petroleum & Chemical Corp. (SNP), or Sinopec Corp., to supply China with 200,000 barrels of oil a day for the next 10 years.
During the next five years, Petrobras is also earmarking nearly $3 billion for biofuels. Gabrielli says he is keenly aware that while eliminating accidents and minimizing the environmental impact of the company’s operations are admirable goals, they don’t eliminate the amount of carbon its products release into the atmosphere. Among the projects being developed at the Cenpes research center are second-generation biofuels, including ethanol, that can be produced from agribusiness waste. The pre-salt discoveries have the potential to change the trajectory of Petrobras — and Brazil — for decades to come. But while the upside opportunities are tremendous, the risks are equally large, observers say. To start with, not every well in the pre-salt region will produce oil, despite the company’s technological expertise. Recently, Gabrielli issued statements saying that it is impossible to have a 100 percent success rate in its pre-salt drilling.
How the potential financial windfall might be used by Brazil is another area of concern. Eurasia’s Garman says the government “has shown a good level of maturity” in considering a “social responsibility” fund for the proceeds from the pre-salt discoveries. According to Eurasia Group, Brazil’s president has repeatedly stated that the country should save the pre-salt oil revenues and use them to address its social issues, particularly health care and education, rather than fund current expenses. “[Brazil has] wisely recognized the perils of depending too heavily today on the revenue that comes from its natural resources, from its oil,” says Garman.
Despite the risks — and even in the face of a still tenuous global financial recovery — Gabrielli remains upbeat. “This company right now has a very bright future ahead of it,” the chief says. “And in the coming years, we are going to be one of the top five energy companies in the world.” But first, there’s today.
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