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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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.”
