POINT OF VIEW: Gabrielli steers Petrobras’s $174 billion investment plan

Feb. 23, 2009
Jose Sergio Gabrielli, chief executive and president of Brazil’s Petroleo Brasileiro SA (Petrobras), sat in the company’s new offices in the West End of London, which was blanketed under 10-in. of snow, and explained why the company would invest $174.4 billion over 5 years despite the turmoil and volatility in the financial and commodity markets.

Jose Sergio Gabrielli, chief executive and president of Brazil’s Petroleo Brasileiro SA (Petrobras), sat in the company’s new offices in the West End of London, which was blanketed under 10-in. of snow, and explained why the company would invest $174.4 billion over 5 years despite the turmoil and volatility in the financial and commodity markets.

Investors in the immobilized city were eager to understand how the company—whose innovative technology has catapulted it into an award-winning deepwater company—would proceed with one of the most important finds this century, its Tupi discovery in the Santos basin estimated to hold reserves of 5-8 billion boe.

Gabrielli had just flown in the night before from the World Economic Forum in Switzerland.

“There was a clear divide there about the financial crisis,” he said. “The financial world thinks we have come to the end, and the energy industry believes we can recover within the next couple of years.”

This is why Petrobras plans to spend an average of $34.9 billion/year, 90% of which will be in Brazil ($157.3 billion) and 10% abroad ($16.8 billion). Its domestic oil production is expected to jump to 2,680,000 b/d in 2013 when $92 billion is to be invested solely in Brazil. Of the total earmarked for E&P, some $29 billion will be allocated to Santos and Campos basin presalt projects alone, including the amounts set aside for the Parque das Baleias off Espirito Santo. By 2013, Petrobras expects to produce 3.6 million boe/d, which will include production from its foreign fields.

So, how confident is Petrobras about financing its business plan, which covers 500 projects in different stages of execution? Gabrielli explained that, based on a Brent crude price of $37/bbl this year, $40/bbl in 2010, and $45 in the future, it can generate $120 billion of cash flow from its operations. “We need $54 billion,” he says. “For 2009, we are fully financed because we have $12.5 billion from the national development bank and $5 billion from a syndicate of banks and a bridge loan through which we have 2 years to go back to the market to get long-term finance.”

In 2009, Petrobras is already prefinanced to invest $29.8 billion and in 2010 plans to invest the same amount. It has 2 years to raise $8-9 billion/year and expects the money to come from sovereign funds, countries that want long-term guarantees of oil supplies, bonds, export credit agencies, and banks.

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“There was a clear divide [at the World Economic Forum] about the financial crisis. The financial world thinks we have come to the end, and the energy industry believes we can recover within the next couple of years.”—Jose Sergio Gabrielli,
Petrobras CEO, president

“On the other hand we are taking our investments at the current prices and these have been really contaminated at the high price of oil in the last 6 months,” he adds. From July, oil has fallen from a peak of $147/bbl to prices hovering at $40/bbl today. Gabrielli is surprised, not about the oil price drop, but at its speed, and this volatility meant that Petrobras delayed publishing its strategic plan several times (OGJ Online, Jan. 14, 2009). He attributes the change to two factors.

“The US economy contracted very fast, and the reduction in gasoline demand was not expected last summer.” This coincided with the financial crisis, and there had been a large number of speculative oil traders working the first and second quarters of 2008. “The bubble has exploded,” Gabrielli said.

Industry investment

During this economic downturn, oil companies are tightening their capex plans because of the significant decline in commodity prices, constrained cash flow, and tight credit markets. But they realize that their multibillion investment plans are imperative to bringing on future supplies and dampening steep price spikes. Royal Dutch Shell PLC, for example, plans to invest $31-32 billion; BP PLC wants to spend $20-22 billion.

Gabrielli is reluctant to offer a view on when oil prices will recover but stresses that as production declines, investment is crucial, otherwise prices will go up. “How long and how fast, I don’t know.”

He is determined to capture falling costs in this recession. About 35% of Petrobras’ projects are in the planning stage. Savings can be made in high-pressure and high-temperature projects, the presalt projects, refineries, and pipelines.

“We are going to push very hard for that,” he said as the market foresees a 30% variation upwards or downwards for any project that is in its initial study phase.

The company will use standardized designs to help save money and minimize redundancies and flexibilities in project implementation. Rather than having custom-made equipment, Petrobras is prepared to accept those that are “off the shelf.”

But research and development is key to the company’s innovation, and Gabrielli insists that it won’t cut this budget. Petrobras is expanding its Cenpes research center in Rio de Janeiro, which will be finished in early 2010.

“This is a very strategic investment,” he said. “Wherever we can have standardized equipment in these small parts of projects, we’ll do so.”

Another way to save money would be to insert clauses in contracts that are more in line with market behaviors; when contracts require detailed specifications, the cost increases, Gabrielli said.

The third method of cutting costs would be to restructure the contracts with its suppliers. Typically Petrobras uses large engineering, procurement, and construction (EPC) contracts to deliver projects, but Gabrielli told OGJ that it would now want to break up its EPCs into smaller units to increase competitiveness, with its internal engineering department coordinating these. He declined to say how much he hopes the company will save using this method.

“The maximum as possible,” he laughs. “If I give you a target number, the contractors will come with that figure.”

Tupi oil development

Petrobras and its partners will start its extended well test on Tupi with results expected within the next 12 weeks, and the early production system will start at the end of 2010. BG Group has sanctioned Tupi’s first phase at $3.7.

“We also anticipate two early production systems for Iara and Guara in 2012 and 2013,” Gabrielli said.

Petrobras will drill a second well on Tupi for 16-18 months after the extended well, and the information will help it to minimize the need to drill wells in the development phase. “Minimizing drilling is a very important cost reduction for the presalt,” he said. “We need to optimize the number of wells and the set of logistics that we have for 350 km from the coast.”

The production system in the Santos basin will be a traditional floating, production, storage, and offloading vessel with horizontal wells and subsea systems. The second phase will involve the addition of subsea and floating subsea systems, using new technologies after 2017, and separation units on the bottom of the sea. This will depend very much on the data gathered after the extended well test.

Brazilian gas law

Clearly this intense interest in the subsalt layer has prompted debate about the government having a greater stake in oil and natural gas production. This is one of the proposals under Brazil’s new oil and gas law, which the government has said wouldn’t affect previous contracts.

The amendments also envisage the creation of a second state oil company that would oversee development of the reserves, as well as production-sharing agreements.

Asked when the law would be introduced, Gabrielli said “Soon. It’s not dependent on me; I’m a member of the committee, and the president of Brazil will decide when he is going to release it.” However, Gabrielli believes it will be unveiled by yearend.

Aberu e Lima refinery

The 200,000 b/d Aberu e Lima refinery in Brazil’s northeast Pernambuco state being built in conjunction with Venezuela’s Petroleos de Venezuela SA is on track to start operations in 2010-11, Gabrielli said. But the companies have disagreed on the price of the heavy Venezuelan crude that would supply the refinery (OGJ Online, Jan. 27, 2009). “We haven’t finished our discussion yet with our partner,” Gabrielli told OGJ. “We are discussing the supply contract.” He said he did not expect it to impact upon the project, and talks must be completed before production starts.

“We are going to have 100,000 b/d from Brazil and 100,000 b/d from Venezuela; if we don’t get this agreement on the supply, we’ll have to think about what we will do.” Another five refineries are under development.

Finding staff

The global oil industry has struggled to attract technical talent and develop its challenging projects following the massive layoffs during the last recession in the 1990s. Students are reluctant to study engineering at the university level because the sciences are not perceived as “sexy” subjects with lucrative career prospects, studies have said.

Gabrielli said that Petrobras cannot afford to cut jobs during this downturn, unlike BP and ConocoPhillips, which have under way cost-cutting programs, which have resulted in job losses. Pointing to the production target of 5.7 million b/d in 2020, he said that 60% of its employees have more than 18 years of experience, and 40% have less than 8 years. “Between [those groups] we don’t have anybody so we have to hire people to substitute for those retiring.”

When asked if he has any plans to retire, Gabrielli jokes that he “is the most outsourced person in Petrobras.”

But retirement for Gabrielli won’t come any time soon. It appears that during this period, the depth of his economical understanding and contacts in the financial world will be key to implementing the company’s $174.4 billion plan.


Career highlights

Employment

Jose Sergio Gabrielli is chief executive and president of Brazil’s Petroleo Brasileiro SA (Petrobras), where he has run the company since July 2005. Prior to becoming leader of Petrobras, Gabrielli was the company’s chief financial officer and director of investor relations, a position he assumed in January 2003.

Gabrielli has received a number of awards for his financial roles: In 2004 he was named Equilibrist of the Year by the Brazilian Institute of Finance Executives and was the designated Finance honoree at the 20th ANEFAC Professionals of the Year Awards ceremony. In 2005 he was named Latin America’s Best Finance Executive by the International Stevie Business Awards, and in 2007 was honored as Energy Executive of the Year by the Petroleum Economist Awards in London.

Education

Gabrielli holds a PhD in economics from Boston University. Before Petrobras, Gabrielli held several academic positions, including visiting researcher at the London School of Economics and Political Science. Gabrielli is a full professor on leave from the Federal University of Bahia.