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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