Petrobras Makes a Big Bet

Like oil? Need oil? If so, Jose S. Gabrielli de Azevedo, the president and CEO of Brazil's state-controlled oil company, Petrobras (PBR), may be your next melhor amigo (best friend).

At a time when other big oil companies are barely managing to keep their production from declining, Petrobras on Jan. 23 announced an ambitious $174 billion plan to develop new oil and natural gas fields, mostly in deep waters off Brazil's coast. This investment—undertaken in spite of a global economic downturn that makes it hard to raise money—will help offset the shortfall in production from other oil fields around the world and restrain the likely increase in oil prices after the recession ends.

Gabrielli and his company are outdoing most of the other oil majors, including Exxon Mobil (XOM), BP (BP), and Royal Dutch Shell (RDSA), let alone state-owned companies like Petroleos de Venezuela and the National Iranian Oil Co.

According to Platts' The Barrel blog, oil analyst Paul Horsnell of Barclays (BCS) recently wrote that "the scale of the current industry freeze and confidence loss seems likely to severely affect non-OPEC production." (Platts, like BusinessWeek, is a unit of The McGraw-Hill Companies.) The gung-ho approach of Gabrielli is all the more surprising, considering his background as a left-leaning economist rather than, say, a petroleum engineer.

In short, the Petrobras investment program is good news if you ever think you'll need to refill the tank of a car, truck, boat, or lawn mower. BusinessWeek Economics Editor Peter Coy sat down with Gabrielli at Petrobras' New York offices on Jan. 27 to discuss the company's strategy for financing and carrying out its massive five-year spending program. Here are some of the key points from the interview:

Petrobras has one of the most ambitious expansion programs in the world. In 2009, Petrobras is aiming to produce oil and natural gas that's equivalent in energy content to about 2.8 million barrels a day of oil. It hopes to raise that to about 3.7 million barrels a day by 2013 and 5.7 million barrels a day by 2020—a 7% annual rate of production growth from 2009 through 2020.

The planet is going to need every drop of oil Petrobras can squeeze out. According to the company's projections, production from existing fields will fall from a little over 80 million barrels a day to maybe half of that even if new techniques are used to slow their rate of decline. So just keeping global production flat is going to require lots of new fields. Says Gabrielli: "We [the world] need to replace one Saudi Arabia per three years."

The huge drop in oil prices from last summer's peak isn't diverting Petrobras from its course. "If we don't invest now, we can't get the benefits when the price goes up," Gabrielli told me.

Even if the price of oil doesn't go back up, Petrobras estimates that it can make money. The company figures the new projects will be profitable even if oil's long-term price doesn't go above $45 a barrel (which is right near the current price for Petrobras' benchmark, Brent crude). That's a surprisingly low profit hurdle, considering that many of Petrobras' projects are technologically daunting: The fields are deep beneath the sea floor, and the sea floor itself is far below the surface of the Atlantic Ocean. If such difficult projects are moneymakers for Petrobras, it raises the question of whether other oil companies are being too cautious about developing technologically challenging fields.

Financing $174 billion in projects isn't as impossible as it sounds. In fact, Gabrielli says the company has already lined up all the money it needs for 2009 and a lot of what it needs for 2010. Much of the money is coming from the free cash flow from operations and financing from the government-owned Brazilian Development Bank. Petrobras also plans to use bank loans and, later, bonds. The company is going to ask some of its equipment suppliers to provide the financing for the stuff they sell. And it plans to "securitize" some of its production—in effect, receive money now in exchange for a promise to deliver oil or gas in the future.

Diplomatically, Gabrielli refused to compare Petrobras with other large oil companies by name. But he did say Petrobras has some special advantages: It is fully integrated, from production through refining to sales at gas stations, etc. It has a big domestic market. And it is the world leader in deep-sea oil production, with 23% of global production.

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