Energy Tribune
The numbers tell the story at Petrobras. Over the past four years, the company’s stock price has increased about ten-fold. In the past decade its oil production has doubled to roughly 1.9 million barrels of oil per day. During the next eight years it expects its production will more than double, to some 4.5 million barrels per day. And along with the big jumps in crude production, the company plans major upgrades for its refineries in Brazil and other countries.
So why has a national oil company like Petrobras been so successful while its fellows have faltered? Three factors territory, technology, and governance have been the keys to its success.
First, territory. The old adage in real estate applies to the energy business: it’s all about location, location, location. And Brazil has a blessed location. Other countries have longer coastlines, including the Philippines, Japan, Greece, and Italy. But none have found significant hydrocarbon deposits in their coastal waters. Brazil (ranked 17th worldwide in coastline length) has the longest coastline in South America 4,650 miles and that coast is producing prodigious amounts of oil. Better yet, the exploration of those waters has only recently begun in earnest.
Indeed, compared to the U.S., which has been drilling offshore since the 1890s, Brazil’s offshore sector is barely emerging from adolescence. Its offshore exploration didn’t begin until 1968, when a well was drilled offshore southeastern Brazil in the EspÃÂrito Santo Basin. It was a dry-hole. The exploration of the Campos Basin, Brazil’s most important hydrocarbon province, didn’t start until 1976. And it was just over two decades ago, in 1985, that Petrobras found the giant Albacora field. Since then, about 40 fields have been found in the Campos Basin, an area covering about 60,000 square miles that lies east-northeast of Rio de Janeiro. Today, the basin has more than 1,000 oil and gas wells, about four dozen production platforms, and about 2,400 miles of offshore production pipelines. Daily production is over 1.25 million barrels of oil. The current reserves estimate for the Campos Basin is 9.2 billion barrels of oil equivalent, or about 84 percent of Brazil’s total reserves.
To put the Campos Basin in perspective, it’s larger than the giant East Texas field, which was discovered in 1930 by Dad Joiner. Since then, more than 30,000 wells have been drilled in the East Texas field. Thus, while there’s no denying that Petrobras has done remarkably well, it has done so because it sits atop world-class resources and it has just barely begun tapping its vast reserves.
Technology is the second key driver of Petrobras success. Lou Rivera remembers his trips to Brazil, during the 1980s, when Petrobras engineers were working on “concepts that were far beyond the things being talked about at major conferences. It was a Golden Age of research and innovation. Rivera, now a vice president at the Scotia Group, a Houston-based energy consulting firm, has been working in Latin America for two decades. He says that much of Petrobras’s current success can be traced back to the 70s and 80s, when the company established a geology and geophysics training and education program to incubate top-level talent. Those efforts, combined with the company’s need to develop engineering solutions applicable in the Campos Basin, sowed the seeds of the company’s later success. When Petrobras decided to begin investing in the Gulf of Mexico, Rivera says they were “teaching the industry how to go after deepwater prospects.”
While other drillers will likely argue with that point, there’s no question that Petrobras has pioneered many offshore techniques. It was an early leader in subsea-completion systems, which it began using in the Campos Basin in the mid-70s. The Brazilians were also the first to routinely use floating production vessels as an inexpensive alternative to fixed platforms. By the mid-90s, Petrobras was the world’s only significant deepwater producer. And as it began pushing into ever-deeper waters, it could no longer use divers to help install equipment on the sea floor. That forced it to develop a myriad of technologies. For instance, in 1999, the company set a world record when it installed a subsea tree on a well in the Campos Basin in nearly 6,100 feet of water.
A few years ago, a Petrobras manager explained the situation to the Society of Petroleum Engineers. “Nature didn’t give us much choice, he said. “We had to go for the oil which was much deeper than we would have liked. But the extreme depths forced Petrobras to innovate. And those innovations have made the company into one of the best, if not the best, company at developing deepwater and ultra deepwater energy reserves.
Finally, Petrobras has been allowed to succeed because of its corporate governance, which sets it apart from most other national oil companies. Indeed, the contrasts are remarkable. Venezuela’s state-owned national oil company, PDVSA, struggles to maintain production, its refineries are deteriorating, and it has alienated most of the multinational oil companies. Meanwhile, next door in Brazil, Petrobras’s production grows by leaps and bounds, it is buying and expanding its refineries, and most, if not all, of the biggest multinationals are eager to get into business with it.
Chalk it up to able management, or rather, the inability of politicians to meddle in the company’s affairs. Thanks to an appointed board of directors that operates independently, along with public ownership of much of the company’s common stock, Petrobras acts like a private corporation, not a national oil company. And that better management, along with a few giant fields and superior technology, has made Petrobras into a profit-making machine.
