Petrobras, the Brazilian national oil company, made a record profit of 9.372 billion reais ($3.26) during the first six months of 2003. Moreover, these results once again rank Petrobras as the largest company in Brazil, according to the 2003 rankings for non-financial companies provided by IBRE, the Brazilian-based think tank affiliated with the Getúlio Vargas Foundation. In fact, in the 34 times these rankings have been made, Petrobras has only been displaced three times from its number-one position, and only then because the firm used a different accounting method than it uses now. To understand why Petrobras, which turns 50 on October 3, is so successful and what its challenges are going forward, Universia-Knowledge at Wharton talked with Brazilian experts on management and the oil industry.


A February report by Petroleum Intelligence Weekly (PIW), the weekly considered the Bible of the sector, ranks Petrobras as the 12th largest oil company in the world – the same position that Brazil occupies in rankings of countries that produce the so-called “black gold.”


Brazil’s net earnings of 9.372 billion reais ($3.257 billion), with a turnover during the first six months of 2003 of 47.9 billion reais ($16 billion), means that it enjoyed earnings growth of 223.1% in comparison with the same period a year earlier. Even if you compare these figures with the entire 2002 fiscal year, the results are better [than last year], because the company’s earnings that year were $2.3 billion, with revenues of $22.6 billion.


During the first six months of 2003, production at Petrobras also grew significantly, rising at a rate of 10.7% compared with the same six months of the previous year.  When both petroleum and natural gas are taken into account, production expanded from an average of 1.826 million barrels to 2.002 million barrels, including both within Brazilian territory and outside it.


“That is a substantial profit. By no means are those bad numbers. As a result, it is hard to imagine that things are going badly for Petrobras. Its products and its status as a monopoly firm in the Brazilian market assures it of a great [market] valuation,” says Professor Carlos Osmar Bertero, chief of the department of general administration and human resources of the São Paulo School of Business Administration – Getúlio Vargas Foundation (FGV-EAESP).


Breaking the State Monopoly

The point made by Bertero concerns what factors determine if the state-owned company has good results. Petrobras is a monopolistic company when it comes to the extraction of petroleum, and it is responsible for about 99% of the nation’s oil production. Although the oil monopoly officially ended in 1997 with the opening of the sector to private initiative, few companies – not even multinationals – have managed to take away business from Petrobras.


“The monopoly is formally over. Now, we can’t forget that we in Brazil had more than 40 years of a Petrobras monopoly. Naturally, that means that the company amassed a lot of power and market share, and that has continued until now. I have the impression that it is not easy to enter the Brazilian market, as a result,” notes Bertero.


Even so, Bertero remembers that the current perception that Petrobras is an efficient company is not a new one. “Even when Petrobras had a monopoly guaranteed by law, they never stopped doing something fundamental: They didn’t leave Brazil without [a supply of] oil products.” For example, Bertero cites the fact that even before the privatization process was achieved in 1999, the Telebrás organization nevertheless failed to supply the domestic market with the [telecommunications] services that it demanded. “Telebrás was a telephone monopoly that did not have telephones. It collapsed because you can’t maintain a monopoly that does not supply the marketplace, and that was exactly the case with that company. The story of Petrobras was different: There were always oil products in Brazil. Petrobras never stopped supplying the domestic market,” explains Bertero.


From Birth to Leadership

Petrobras was created on October 3, 1953, during the government of President Getúlio Vargas. Over the course of its 50 years, the company has continued to evolve. But it grew most emphatically during the 1970s, after the so-called “oil shocks” caused by the excessive price rises manipulated by the supply controls of the Organization of the Petroleum Exporting Countries (OPEC), the cartel that brings together the major producers of crude.


Petrobras’ leadership role among Brazilian companies emerged gradually over the years, beginning from the very moment when it was conceived as a means of concentrating Brazilian petroleum in the hands of the state. Nevertheless, “the country invested much more after the oil crisis in the 1970s. That was when the company began to take off, from the 1970s to the 1980s. It was then that they obtained their first results from their deep water oil exploration,” explains Aloísio Campelo Júnior, coordinator of business research at Ibre-FGV. The Brazilian economics think-tank is responsible for ranking Petrobras as the largest non-financial company in Brazil in 2003.


Moreover, as Campelo Júnior stresses, there has been a gradual evolution and change in the character of the state enterprise’s management. “From the moment when society required good management of resources, although it was a national company, [Petrobras] became a model of administration – an excellent company with efficient personnel.”


Some credit good management to Henri Philippe Reichstul, president of Petrobras from March 1999 to January 2002, during the administration of President Fernando Henrique Cardoso. “Reichstul was chosen by Petrobras with the intention of converting it into a less sluggish company, more agile in the sense that it would be directed in accordance with what would now be considered the most appropriate way to manage a company,” says Carlos Osmar Bertero. The idea was “to produce better results — more earnings, higher market value — and to better satisfy the interest of shareholders, etc.”


Campelo Júnior agrees.  From the time when the government of Fernando Henrique Cardoso took over, notes Campelo Júnior, “Petrobras began to work in an environment that would be a lot more like what went on in the oil sector in other countries. [Petrobras] benefited as an oil company, and suffered less from interventionist government policy. In recent years, its prices were more in line with those outside the country, and it has increased its production and participation in Brazilian foreign trade to such a degree that it has become the nation’s largest exporter. With the retraction in the level of domestic activity, Petrobras has had surplus production.”


Risks of a New Administration

As with any change, the passing from an old administration to a new one causes certain nervousness in the marketplace. That happened as a result of new initiatives from the government of President Luiz Inacio Lula de Silva, who took charge on January 1, 2003.


“People are saying that the government of President Lula has made several appointments in Petrobras that are different from those that are traditional in the company,” comments Carlos Osmar Bertero. “That’s what I have read in the press. What they leave out is the following: The presidency of Petrobras was almost always occupied by people who were quite familiar with the oil sector. Many of them even had some previous ties with the company. Now Petrobras has been delivered in a clear way to representatives of the government party, the Workers Party. There is nothing inappropriate about its directors being from a political party. The problem is, according to what has appeared in the newspapers, the new directors are a bit lacking in competence. This involves a risk. If this is true, then the management of the enterprise may be viewed as a bit compromised.”


Nevertheless, Bertero praises the company’s valuation, saying that, in principle, the capable management of Petrobras does not take risks, and there is no chance of a backward slide in the way the company conducts business. “In the case of Petrobras, I don’t imagine that there can be many changes in the sense of a return to the ‘old Petrobras.’ It would be hard for that to happen.”


Nevertheless, market specialists have seen some indications that the federal government is having greater influence over Petrobras. “On a day-by-day basis, you don’t see Petrobras president [José Eduardo de Barros Dutra] showing up in public to talk about fuel prices, for example. But you do see the Minister of Mining and Energy [Dilma Rousseff]” doing just that, notes Fabiana Fantoni, a petroleum industry analyst at Tendencias Consultoría Integrada, a [Brazilian] consulting firm.


According to Fantoni, losing control of policy reins in matters that are intimately related to the management of the company has left business representatives a bit worried about prospects that the government will start to interfere in the administration of the company.


However, she adds, the recent news from Petrobras has been so positive that the marketplace has paid little attention to details about the enterprise’s new management. One example involves the announcement that, over the last twelve months, Petrobras has discovered reserves equivalent to four billion barrels of oil and 419 billion cubic meters of natural gas.


Regarding Petrobras’ record net earnings for the first six months of 2003, Fabiana Fantoni suggests that those results won’t be repeated at the same rate during the last six months of this year. She believes that the results will wind up being more like those recorded over the second trimester [April-June] of 2003 which, in accordance with her forecast, wound up disappointing the market. The aggregate profit for April, May and June fell by 31% compared with results of the three previous months, settling at 3.8 billion reais, compared with 5.5 billion reais for the first three months of the year.


However, Fabian Fantoni goes on, none of this affects the strong structure that supports Petrobras. The level of investment anticipated by the state company in future years is sufficient to cover development of the sector at the same rate as the average historic growth of recent times which has varied between 8 and 10% annually, she says.


Company Profile

Currently Petrobras is a world-class company when it comes to operating wells in deep water, having been one of the first companies in the world to develop technology for the extraction of oil under those conditions. The company has reached consecutive production records in this sector. The highest record was reached this year in the Roncador field, where it is exploiting oil from a well dug into a sheet of water at a depth of 1,886 meters. The goal of the company is to arrive at depths of water that are greater than 3,000 meters.


In 1997, Brazil surpassed the mark of extracting a million barrels of oil a day. Currently, Petrobras’ active reserves exceed 10.5 billion barrels of crude and gas. The company’s average production within Brazil’s borders is 1,586,000 barrels of crude per day, according to data from last August. Add extraction of natural gas to this, and production rises to 1,841,000 barrels a day. If you include figures for extraction of crude oil and gas in units that are outside Brazil, the company’s production rises to 2,091,000 barrels a day.


In addition to Brazil, Petrobras has a presence in 12 other countries: Angola, Argentina, Bolivia, Colombia, Ecuador, Equatorial Guinea, Kazakhstan, Nigeria, Peru, Trinidad and Tobago, the United States, and Venezuela.


The company’s expectations call for Brazil to become self-sustainable in 2006, when it comes to how much petroleum it produces and consumes internally. At the moment, in 2003, according to information from the company, Brazil produces almost 90 % of the petroleum that it consumes.