Despite continual increases in the price of oil, Brazil’s largest oil producer, Petrobrás, appears to be more prepared than ever to face a world crisis on the scale of those in the 1970s and 1980s. A solid company, with international holdings and shares traded on the New York Stock Exchange, it has already achieved pioneer status this year with regard to the exploration of new sources of energy. What are the reasons for its success?
First of all, “PetroBrax” has remained loyal to its roots. The word refers to the Brazilian government’s 2002 project to change the name of the company to make it better known internationally. The idea at the time was to transform Petrobrás into a transnational energy company. The name change followed the steps of British Petroleum which, in the same year, changed the meaning of BP to “Beyond Petroleum” in its push towards globalization.
As is well known, the name change did not occur. However, the objective behind it is close to being reached. Whereas in 2002, oil extraction was at 1,320 million barrels per day, in 2007 the company was extracting 1,918 million barrels per day. This increase of approximately 45% made a crucial contribution to the greatest achievement of the company and the country in terms of energy — the long-sought goal of self sufficiency in oil. This was only made possible due to the large investments made in the sector, including the construction of the P-50 platform in the Campos Basin off Río de Janeiro.
“I don’t want to boast, but Brazil was successfully able to meet the challenges of investment and technological development. That is, Petrobrás is close to self-sufficiency for a reason,” according to Eduardo Fernández Pestana Moreira, vice-director of the Faculty of Economics, Management, Accounting and Actuarial Science of the PUC (Pontifical Catholic University) of São Paulo. The company boasted on April 21, 2006, that self-sufficiency had been achieved, although this claim is based on an estimate, not firm data, and some would dispute the company’s claim.
The characteristics of Brazilian oil, which is heavy oil, mean that light oil needs to be imported to help refining. Thus, Brazil produces more than it consumes – a sign of self-sufficiency – but exports part of the commodity and imports the same fraction of better quality oil. Walter de Vitto, petroleum and gas analyst of the consultancy firm Tendencias, notes that “if we think of petroleum as a derivative, we don’t have the refinement capacity that the country needs.”
To deal with this deficiency, the Ministry for Mining and Energy announced a project to construct a large refinery, which would cost around 8,000 million reales ($5 billion). However, the political dispute over which State the installation will be constructed paralyzed the process. One of the last large investment projects along these lines was the Henrique Lage (REVAP) refinery, inaugurated in 1980. At present, Brazil has 16 units operating at 1,965 million barrels a day.
In any case, the experts note that the country’s position in the oil market has improved. The increase in production and the investment in new extraction techniques increased the country’s bargaining power and, more importantly, its ability to deal with crises related to the instability of oil prices. The country’s president, Luiz Inácio Lula da Silva, recently declared: “When Petrobrás was created, there was an almost total dependence on the exterior. We were producing 2,700 barrels per day when demand was at 172,000 barrels. Today, on the contrary, we are experiencing the best macroeconomic environment of the last 20 years and Petrobrás has been fundamental to this.”
Strategic Reserves
What has most caught the attention of foreign investors is the capacity of Petrobrás to discover new reserves. While the world anxiously awaits the actions of OPEC, Brazil’s attention is on the final projections for the Tupí and Júpiter oil fields, which the country hopes will lay the ghost of self-sufficiency to rest.
The latter are the two largest discoveries in the sector in recent years and it is estimated that they will be capable of producing arould 8,000 million barrels of oil and natural gas. “If these projections are confirmed, Brazil’s oil reserves will be among the 10 largest in the world,” says Vitto, for whom the scenario could even be better. “That’s not counting unexplored fields which have high chances of containing oil.”
Oil finds in the pre-salt layers, which are at a depth of between 5,000 and 7,000 metres, will no doubt change the investment plans of the company for the period 2008-2012. Petrobrás is treading carefully on this issue, although its president José Sergio Gabrielli has already mentioned a bond issue on the foreign market to capture resources with which to back up its investment.
The company has created a body called Pre-Salt Executive Management. At the beginning of the second semester, it has to outline the equipment and other inputs it plans to use for the exploitation of the new oil fields. The technological challenges to putting this into practice are enormous, although experts believe that oil prices already ensure the viability of the operation.
Petrobrás has again been agile in its response, observers note. The company projects that in 2010 it will be able to launch the Tupí pilot project (which is at a depth of 6,000 metres) with an initial production of 100,000 barrels a day and close to 3.5 million cubic metres of gas a day. It is expected that in 2009 the so-called Long Duration Tests will begin (to analyze the characteristics of the rocks and predict future production rate). According to Edmilson Moutinho dos Santos, a professor at the Electrotechnical and Energy Institute at USP (University of São Paulo), the company’s record with regard to exploration with state-of-the-art technology guarantees that the deadline will be met. “It’s a question of management. Not all oil companies are in a position to carry this out because they don’t pratice technology management,” he notes.
In spite of the euphoria surrounding Tupí and Júpiter, the jewel of the crown is called Carioca. Petrobrás and the government do not hide the fact that the new field, located in the Santos Basin area of the state of Río de Janeiro, has the potential to become the largest Brazilian reserve and one of the largest in the world. Somewhat more audaciously, Haroldo Lima, the director general of the National Agency for Petroleum, Natural Gas and Biofuels (ANP), states that it is “the greatest discovery in the oil market in the last 30 years and the field will be the third largest in the world.”
Only time will tell whether the expectations of the regulatory agency will be confirmed. What there does seem to be consensus among the experts on, however, is that the discoveries place Petrobrás among the most promising companies in the world – or, as Vitto says, an excellent medium to long-term investment. “Apart from the fact that it is already an important company, it is more promising (than the companies exploiting oil in the Middle East) because it has already found significant reserves.”
Moutinho has a similar outlook, envisaging strong growth in the coming decades. “If you have some savings, here’s some friendly advice: There’s nothing better you can leave your kids than Petrobrás shares.
At present the Brazilian multinational operates in 27 countries (including Brazil), with a presence on four continents: Angola, Libya, Mozambique, Nigeria, Senegal and Tanzania (Africa); China, Singapore, India, Iran, Japan and Pakistan (Asia); Portugal, United Kingdom and Turkey (Europe); and the United States, Mexico, Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela (Americas). The strategic plan of the company forecasts investments of $15 billion in the international arena up to 2012.
Diversification
The conquest of the Southern Cone is taking place on various fronts. In Paraguay, Petrobrás is the leader in the distribution market. In Colombia it operates in distribution and exploitation and in Uruguay it is involved in gas. Argentina represents the company’s second largest volume of production (only below that in Brazil). Even in Venezuela, which is member of OPEC, the company is involved in oil exploitation and the production of petroleum, and will soon install a refinery in the region. However, none of this is on the scale of the investments in Bolivia.
In 1991, Petrobrás signed a “Letter of Intention of Energy Integration” with the Bolivian government for the construction of a bi-national gas-duct. A heavy investment of almost $1.5 billion in recent years has made it possible to bring gas extracted in the Andes to Brazil. To get a better idea of its importance, the company has a presence in six of the nine Bolivian provinces – where the gigantic fields of San Antonio and San Alberto stand out – and accounts for a quarter of all taxes collected in that country.
However, the relationship has experienced difficulties due to the policies applied since Evo Morales became President of Bolivia in 2006. In May of that year, the army occupied foreign companies’ fields. The issue was settled last October when Petrobrás signed an agreement with the Bolivian government accepting a reduction in its profit margins. Similar negotiations were held with other companies operating in the country.
At present, Brazil imports about 30 million cubic metres of natural gas a day from Bolivia – consumption needs are at around 51 million cubic metres a day. These numbers highlight the importance of the hydrocarbon operations in Bolivia, but political disagreements have set off alarm signals for similar operations with neighbouring countries, according to the experts. However, they point out that recent finds have placed the country in a more comfortable position.
“To be honest, in the long term we won’t need Bolivia,” states Moutinho, author of the book Natural gas: Strategies for a new energy in Brazil. The reason is that given the depth which the reserves are at, it is anticipated that they will contain significant quantities of gas. And to exploit petroleum, this gas has to come out. “It’s a lot of gas for many years,” says the academic, who calls for an immediate reflection on the role of this source of energy in supplying the country.
At the same time, Brazil stands out in the development of biodiesel. Petrobrás has promised to supply the product to the market, participating in ANP auctions where producers, volumes and prices are defined. The company thus fixed its sights on land, just as it had gone to the sea for oil and gas. At present, it produces raw material on a semi-industrial scale in the localities of Montes Claros (MG, Minas Gerais), Candeias (BA, Bahía) and Quixadá (CE, Ceará.) It is estimated that each locality produces around 50,000 cubic metres a year.
However, the market is still limited. Together, alcohol and biodiesel represent less than 3% of world consumption for transport. Politically correct, the so-called “clean fuel” is important as a strategic alternative and for the development of the internal economy. “Biodiesel makes sense as a regional policy … sugar cane as well. But biodiesel for the whole country doesn’t make sense,” Moutinho points out.
In the 10 Biggest
The numbers show Petrobrás to be solid. Net profits in the first trimester of 2008 were 6,925 million reales ($4.3 billion), up 68% from the 2007 figure. The company’s investments in the period amounted to 10,800 million reales ($6.75 billion), which is up 23% over the figure for the same period the year before. However, the most significant figure is the increase of 69% in market value over the last 12 months. With a market value of 300,000 million reales (187,000 million dollars), the company is among the world’s elite.
Using data from May 2008, two consultancy firms confirm this position. According to Bloomberg, Petrobrás is the sixth largest company in the world in terms of market value, whereas it was in eleventh position at the end of last year. Economática places it at number three in the Americas, behind only Exxon Mobil and General Electric (GE).
According to the Petrobrás director of finance and investor relations, Almir Barbassa, the main differentiating factor of the company is its investment in new technologies, which provided it with the new finds. “The growth in the market value of Petrobrás reflects the market’s recognition of its excellent operating and financial returns, its perspectives for growth, its capacity to operate in ultra-deep waters, the discoveries of oil and gas in the pre-salt layers, as well as a greater demand for oil and its revaluation on international markets, he states.
As far as Barbassa is concerned, the proof is in the evolution of Petrobrás’s preference shares, reflected by the ADR (American Depositary Receipts) in the New York Stock Exchange: From October 1966 to April 2008, the shares were revalued by 1,500%. Since August 2000, ordinary shares have also been traded in the North American market: By April 2008, they had been revalued by 912% in dollar terms.
The executive adds that “the performance of Petrobrás shares and the recognition of the market can be confirmed by the increase in the shareholder base of the company as well as the increase in the liquidity of its shares and ADRs traded on the stock exchanges of São Paolo and New York.”
The success of Petrobrás is crucial for the country. The discoveries of reserves have placed it on the scale of an exporter, according to the experts. They are willing to bet that the exploitation of this wealth is the ingredient necessary to ensure vigorous and consistent growth over the coming decades. “When you find such wealth”, says Moutinho, “it is possible to invest in the future. We can firmly state that the Brazilian economy is going to take an important leap. While maybe not reaching the numbers of China, it is possible that sustained equilibrium growth could reach 8% over the next 20 years.”
