The Petrobras president admits that when he was given the financial levers at Petrobras, more than a few investors were aghast. “There was a big discussion because the capital markets said: ‘Look, how crazy is this Government putting this crazy economist from Bahia to be the CFO of this big company?’ And the shares went down.”
He had countless meetings with investors in an effort to calm people’s nerves and they did get used to him. Indeed, the company’s American depositary receipts (ADRs) quoted in New York soared by more than 60 per cent in the first half of this year, although that may have less to do with Mr Gabrielli than with mounting investor excitement at some of the biggest oil discoveries for decades.
In the space of a couple of years, Petrobras has been transformed from a national oil company, respected in the oil fraternity but little known in the wider world, into a foot-stomping colossus. Petrobras is different from the national oil companies of the Middle East, such as Saudi Aramco. The State retains control with a small majority of the voting stock, but Petrobras is quoted in New York and foreign investors have a big stake. The ADR programme accounts for 30 per cent of the company, according to Mr Gabrielli.
More importantly, and unlike the Arab petrostates, Brazil has only just made its giant oil discovery — drilling in 2007 in the Santos Basin, offshore of Rio state. In water depths of two kilometres and a further five kilometres below the seabed, Petrobras and BG Group, its British partner, found Tupi, an oilfield that could produce between five billion and eight billion barrels. The reservoir lies beneath a thick layer of salt, a geological barrier that once baffled oil explorers because of the difficulty in deciphering seismic images through salt. But off the coast of Brazil, geologists are certain that the salty crust is hiding a truly vast hydrocarbon resource that may be of similar scale to the Gulf of Mexico.
Mr Gabrielli rattles off a list of names of further discoveries — Guará, Iara and Espírito Santo — and reserve numbers. “If you add up, we get between 10.6 billion and 16 billion barrels of oil from these four accumulations. It is not just oil in place but what we actually think we can get out with current technology.”
This is not just a game-changer for Petrobras but for Brazil, which is now firmly on the map as a serious oil exporter of the future. Wood Mackenzie, the Edinburgh-based consultancy, believes that Brazil will become a big oil exporter by 2015 and Mr Gabrielli is already mapping out the financial and physical logistics of a Brazilian assault on the world’s energy markets.
“By 2020, from Brazil, we are going to be able to sell between 1.5 million and two million barrels per day [bpd] in oil and oil products,” he predicts. By the end of the next decade, these latest “pre-salt” discoveries will add an extra 1.9 million bpd to Petrobras’s existing oil output of just under two million bpd; including natural gas, output rises from 2.5 million to 5.7 million bpd.
Mr Gabrielli is as keen to talk about refineries, because he has no intention of turning Brazil into a rentier economy that pumps oil until the price collapses. Petrobras wants Brazil’s arm to reach further down the supply chain to oil consumers. Petrobras does not want to sell simply crude oil, it wants to sell refined products, petrol, jet fuel and biofuels, such as sugar-cane ethanol. “We want to be an exporter of products, we are long on gasoline [petrol], we produce more than we need because 51 per cent of the fuel used in our cars is ethanol. We sell gasoline to the United States, to Africa and Central America but we are short of diesel.”
The solution is to build two new refineries in the north of the country, with capacity for almost one million barrels per day. The location enables easy access to markets in the US and Europe.
Petrobras is not stopping there but is moving aggressively into the ethanol business, challenging European and American efforts to keep out cheap Brazilian biofuel. “We want to be a big logistical company for ethanol. We are building pipelines for ethanol, we have ships that can transport ethanol. I know we have a big fight to lower the [trade] barriers. The British produce ethanol from potatoes, the French from beets. This is twice as expensive as we can produce from sugar cane.”
All this construction adds up. Mr Gabrielli estimates that the total capital expenditure projected for the next five years is $174 billion. Petrobras needs more cash and a complex transaction is in play under which the oil company will buy five billion barrels of oil reserves held by the Government. At the same time Petrobras will launch a rights issue with investors for three times the value of the five billion barrels. According to Mr Gabrielli, the market price for oil in the ground is between $1 and $27 per barrel. So, if Petrobras bought the Government’s barrels for a mere $5 each, the capital- raising would be $75 billion.
The stupendous cost of turning Brazil’s luck into dollars is beginning to cause alarm inside and outside the country. It has, for example, provoked a protectionist and nationalist backlash from the Government. A law is moving through Brazil’s Congress to limit foreign access to the pre-salt reservoirs. The new law would give Petrobras the exclusive right to be the operator of all pre-salt developments and an automatic entitlement to 30 per cent of the project. Foreigners would be able to take part and would bid for a share in the remaining project equity by stating what share the State should be allowed after recovery of costs. When it gets under way, it will be a sort of Dutch auction, in which companies that ask for the smallest amount of profit will win. Mr Gabrielli reckons that bidding will begin at the level of 60 per cent for the Government.
But costs have become controversial. In August, a Brazilian Senate committee began to investigate allegations of corruption at Petrobras, relating to the overpricing of construction contracts and tax evasion of almost $2 billion. The inquiry was launched by opposition politicians to President da Silva’s ruling Workers’ Party. Mr Gabrielli has denied the charges, although he admits that Petrobras has a problem with costs: “We have cost overruns, very often. We have to improve our controls.” The company has no choice because PetroSal, a new government organisation, has been created. It will work like an auditor but not in review. It will work in real time, sitting on the operating committee of each oil project, vetting expenditures and budgets. PetroSal will have the power to deny cost recovery and every oil company operating in Brazil is hugely nervous about it.
“They should be nervous. This is going to be a very tough time for us. It is going to be a big problem.”
Petrobras cannot avoid becoming a political football. The oil giant is a cash cow for a government that has been steadily increasing economic transfers to the poor. Mr Gabrielli reckons that Brazil was able to prevent the financial crisis from pushing the country into recession by stimulating consumption among the poorest of the population with increases in the minimum wage and welfare payments.
“I am a political man. I am not a candidate but a member of the government party and I have known President Lula since the 1970s and I have been working with him since then. I am one of his economic advisers,” Mr Gabrielli says.
He is politically astute and the company has been quick to take on domestic critics in the Brazilian press. He broadcasts on Twitter, the social networking site, and he created a corporate blog to respond to attacks.
The task of producing oil in deep water and beneath a further five kilometres of rock, salt and sand is hugely expensive. Each well costs $100 million, Mr Gabrielli says. The all-in cost per barrel offshore of Brazil is about $45 per barrel, compared with a $70 market price. It is why Mr Gabrielli reckons that oil prices will remain high. “In the long term, the oil price will be determined by the cost of the marginal barrel — between $45 and $65 per barrel.”
Resources at the frontier of the oil industry are stretched thinly. Petrobras has 26 deep-water drilling rigs under contract, vessels that cost between $500,000 and $600,000 per day. The company plans to buy a further nine rigs and has told the mainly American contractors that the vessels must be built in Brazil. “They don’t like it, but they have to compete.”
C.V.
Born: 1949, Salvador, Bahia state, Brazil Education: Masters degree from Federal University of Bahia; PhD in economics, Boston University, 1987; Research scholar, London School of Economics, 2000-01
Career: He has held several posts at Bahia University, including director of Economic Sciences, deputy director of research and postgraduate studies. At present he is Professor of Macreconomics on leave from the university.
2003: joined Petrobras as financial director and director of investor relations
July, 2005: appointed president and chief executive of Petrobras
Awards: He has received several since joining Petrobras, including: Finance Executive of 2004, Brazilian Institute of Finance Executives; Industrial Merit Medal, Rio de Janeiro Industries Federation; and Commander of the Order of Dannebrog, Denmark
