Innovation and investment propel Petrobras toward deeper waters

Petrobras estimates that Brazil's presalt reserves contain about 50 Bboe – enough to turn the country into one of the world's top oil producers in this coming decade.

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President/CEO José Sergio Gabrielli de Azevedo offers insight into company's plans

Peter Howard Wertheim
Contributing Editor

Petrobras estimates that Brazil's presalt reserves contain about 50 Bboe – enough to turn the country into one of the world's top oil producers in this coming decade. To realize these goals, the company is moving into deeper waters and placing production equipment onto the seabed, including the latest subsea processing, separation, boosting, and gas compression technologies.

By the end of this year, some of the world's most innovative subsea technology will be tested in the Marlim field, Campos basin, with the world's "first" deepwater (postsalt) subsea oil/gas/water and sand separation system. In this test, Petrobras expects to enhance oil recovery by reinjecting water into the reservoir to boost production in the mature field. This would open the way to reducing the weight of floating production facilities. When visiting the Petrobras R&D center (Cenpes) in Rio de Janeiro Cenpes, one sees a dome featuring two rooms where operations personnel can manage unmanned platforms via computer, with the aid of huge 3D display screens.

José Sergio Gabrielli de Azevedo has achieved great success as Petrobras CEO, most notably in leading efforts to enable Brazil to realize petroleum self-sufficiency; and in the discovery and production of massive quantities of oil and gas in ultra-deepwaters below 2,000 m (6,561 ft) at the presalt.

The company's oil production rose to 2 MMb/d in 2010 from 1.7 MMb/d in 2003, when Gabrielli was appointed president, a growth of 17%. Oil and gas reserves increased 30% during the same period from 11.6 Bbbl in 2003 to 15 Bbbl at present.

Net profits rose to $19.184 billion in 2010 from $6.599 billion in 2003. Petrobras plans to spend almost $107,000 a minute over the next four years as part of its immense and recently modified spending plan.

In this exclusive interview withOffshore, Gabrielli describes the company's efforts to advance these plans, and how it is working to become one of the world's major oil exporting countries.

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Offshore: Your most recent investment plan calls for $224.7 billion to be spent through 2015. What is the forecasted production increase in Brazil by 2020 and how much will be in the presalt? How much do you expect your reserves to grow in this period?

Gabrielli: Petrobras' total production planned for 2020 is 6,418,000 boe/d, including fields located in countries where the company has operations. Of this total, 1,993,000 bbl will come from the presalt region, including areas acquired under the transfer of rights agreement.

At present, we do not know to what extent the presalt discoveries will increase our reserves, since this depends on the ongoing exploration activities. However, based only on what we already know, we can say that Brazil's reserves, currently standing at around 15 Bbbl, are expected to double.

Offshore: How much are you investing in your R&D center in Rio de Janeiro, and what are the main areas of research in this center? What is Petrobras doing to train and increase the availability of manpower in the industry?

Gabrielli: In addition to our Research and Development Center, Petrobras' technological management involves all of our operating bodies, universities and research institutions in Brazil, international research institutions, as well as global oil companies and suppliers. Our 2011-2015 Business Plan calls for approximately $1.3 billion in investments in technology per year. We have hundreds of research groups working in Brazil to address the key issues, not only in all oil, gas, biofuel and energy industry activities, but also in environmental preservation. There are 50 thematic networks involving 80 institutions and average annual investments of $270 billion. These networks have enabled the implementation of world class laboratories and the training of researchers.

One of the biggest challenges our industry faces is manpower qualification. Petrobras is the primary supporter of the National Professional Qualification Plan developed by the National Oil and Natural Gas Industry Mobilization Program (Prominp). This program is expected to qualify around 213,000 people to work in 185 categories of the industry's supply chain. Of this total, about 70% are at the primary and secondary levels, which comprise the supply chain's greatest needs.

We are increasing Petrobras' staff, which is expected to grow from the current 61,000 workers to 74,400 employees in 2015, not including subsidiaries. We have held selection processes each year, always with many more candidates than openings. For the selection process currently in progress, there are 174,000 registered candidates to fill 590 positions nationwide and to form a reserve reference file.

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Offshore: How much are you investing in offshore safety and health as well as environmental protection? What measures were taken to tackle these issues?

Gabrielli: Petrobras has a robust and rigorous policy for issues related to equipment and personnel training. All procedures are in full compliance with the requirements set forth by the regulators that oversee our maritime operations, including the navy, ANP, and IBAMA, among others.

Pursuant to the most advanced international standards, the company has installed nine EDCs (environmental defense centers) in Brazil, the goal of which is to ensure maximum protection for its operating units in the event of an emergency. The EDCs complement the existing local contingency plans in force at the terminals, refineries, and other company operating units. They are equipped with collector vessels, barges, chemical dispersants, bioremediation agents, and up to 20,000 linear meters of oil containment and absorption barriers, which can be moved quickly to address an emergency anywhere in the country.

All of the staff working on the platforms is accredited by the International Association of Drilling Contractors. Internal well safety training has been provided since 1971. A well closure drill, which measures both team and equipment response times, has also been addressed by an internal procedure. There are also emergency plans for oil spills in place for all Brazilian oil basins.

Offshore: Petrobras is increasing its production faster than any oil company in the world. What role will Brazil's regulatory model play in the development of the new presalt discoveries? Why was this model modified for the presalt? Do you believe that Petrobras should operate all presalt fields alone?

Gabrielli: Brazil has a privileged position. We have a huge consumer market; a diversified energy matrix; a solid and growing industry; leading oilfield technology, particularly with regard to offshore activity; and institutional, economic and legal stability. From what we already know about the presalt, we can say that the exploration risk is low and productivity is very high. Under the production sharing system adopted for the presalt reserves, contractors bear the exploration risks and will only be refunded if they make commercial discoveries. Payments will be made in oil. The remaining production will be divided between the government and the contractors. Petrobras is a leading deepwater operator, holding 22% of the areas this horizon worldwide; and we have the technology and technical teams with extensive experience in offshore exploration and production. All this places Petrobras in an excellent position to successfully operate in the presalt region, where it already produces 130,000 bbl/d.

Offshore: How do you compare what is happening in Brazil with other oil booms, such as North Sea during the '70s? What lessons did Brazil learn from the experience in other countries?

Gabrielli: One of our concerns is to avoid the phenomenon that became known as the "Dutch disease." [Editor's note: The "Dutch disease" refers to the deindustrialization of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The term originated in Holland after the discovery of North Sea gas.] Among other initiatives, we are making efforts to increase the local content in our hiring, driving the growth of the entire production chain, and motivating international companies to come to Brazil in association with Brazilian companies. And we have been quite successful in this. Brazil is already building production platforms equipped with 75% domestic content at terms and prices consistent with those practiced abroad.

Offshore: The presalt fields are rather distant from the coast (around 350 km/218 mi). What is Petrobras doing to maintain terminals onshore and overcome the logistical challenges in these operations? Where will the best opportunities for suppliers be? What were the largest operational difficulties found in the presalt and what is the break even cost for petroleum in the presalt?

Gabrielli: Much progress has been made in recent years, allowing not only for stable drilling through the layer of salt, but also reducing well drilling time and investments. It is all a matter of technology. For example, the first well Petrobras drilled in this presalt section took more than a year and cost $240 million to be completed. The most recent wells Petrobras drilled there took 60 days and cost, on average, $66 million.

This was possible for several reasons: learning that took place in well drilling in order to cut through the 2,000-m thick salt section; improvements in well lining specifications; advances in drilling fluid quality; enhanced well geometry design; better drill bit specifications; and progress achieved from chemical analysis performed at the research center and by Petrobras' well engineering group.

The lifting costs are also lower in the pre-salt region now due to the volume of production. The well that is connected to the Lula pilot produces 36,000 b/d. The presalt lifting cost is lower. All separation and injection units that are currently on the surface will be installed on the seabed. With fewer people on board, logistics will also be optimized.

Offshore: Could you give us more information about the $13.6 billion divestment plan? What shares are you selling in some of your assets? What interests do you forecast in these assets, mainly in Brazil? What E&P assets in Brazil are you planning to sell?

Gabrielli: Divestments are commonplace in many companies. Petrobras' divestments are relatively minor considering the size of the investment, and half of them are financial. Half are adjustments of receivables. A lot of this has been facilitated with the establishment of Progredir, a program that involves the six largest Brazilian commercial banks. It can offer Petrobras suppliers – and the suppliers' suppliers – money for less than the market can pay, because they are assured that Petrobras will pay. It is hoped that Progredir will replace the company in the payments of the intermediate phases, freeing resources. Another way is the series of cash collaterals. We can substitute this guarantee for insurance, bank guarantees, and free resources. All of this will add up to half of the $13 billion set out in our business plan. Asset sales, meanwhile, will account for the other half of the $13 billion.

Offshore: Are you worried about increasing costs caused by the requirements of local content in Brazil? How many ships, FPSOs, and drilling rigs you plan to build and how many will be built in Brazil? What are you doing to minimize your costs with distribution?

Gabrielli: We have already commissioned the construction of seven drilling rigs, of a total of 28 to be built in Brazil, in addition to 30 other ones that will come from abroad. In Brazil, we have also already ordered seven hulls for FPSOs that will operate in the pre-salt region. We are calling them "replicants." The reason for this is that they have the same design and will serve as the basis for the construction of the other systems that are needed to undertake all of the operations in the presalt area.

At a first stage, we are using a combination of existing technologies that we have already mastered and improved. At a second one, we will use new technologies, with emphasis on reducing equipment weight and size, increasing automation on the surface, and enhancing underwater production and fluid separation systems.

With respect to logistics, we currently have a fleet of 287 support vessels and expect to have 568 by 2020. We will use supply distribution hubs for fuel, drilling fluids, and other products and materials that are used on a large scale on platforms. They will be installed at strategic points between the coast and the presalt cluster. Unprecedented in the industry, these centers will reduce costs and minimize environmental risks. We are also developing similar solutions for passenger transportation to increase transport speed and safety, and to reduce costs.

Offshore: Can you tell us what Petrobras is doing to support its supply chain? How do you finance your suppliers with working capital, and what investments have you undertaken in the supply chain? How are you going to diversify your suppliers?

Gabrielli: Petrobras supports its network of suppliers in several ways. These include the provision of professional training; structuring funding mechanisms; improved supply chain management; facilitating partnerships between Brazilian and foreign technology base companies; and encouraging the insertion of small and midsize enterprises in the industry's production network. We also undertake actions that facilitate funding, especially the Progredir program, which enables the supply of credit at a volume and under competitive conditions to companies operating in the supply chain. The suppliers' cost of borrowing is expected to decrease by an average of 20%. The evolution of our goods and services supplier reference file, which currently adds up to more than 5,500 companies, also stands out in our internal procedures. The reference file also encourages companies to improve their management practices.

Offshore: How can Brazilian financial and capital markets be developed to make available new financial instruments and more insurance capacity in Brazil? What is Petrobras doing to help develop financial and services markets in Brazil?

Gabrielli: As mentioned, Progredir is an important program to develop the market, since it increases industrial competitiveness and provides more local content. Progredir aims to facilitate, in a quick, standardized manner, the supply of credit at a reduced cost to all companies in the Petrobras supply chain. More than 250,000 businesses are currently part of this chain, which enhances the potential of the initiative. In order to improve financial and risk conditions, Petrobras is the anchor of Progredir, contributing with the company's entire production chain by transferring to the participants its better credit perception in the market.

Offshore: Petrobras plays a fundamental role in Brazil's economy and has a great impact over inflation rates, trade balance, and the currency. As Petrobras president, how do you balance the interests of your main shareholder – the government – with the need to increase investments? What are the difficulties of aligning Petrobras interests, government, and minority shareholders?

Gabrielli: Despite the apparent ambiguity – being controlled by the government and having private shareholders – we have no difficulties making this alignment because the goals are convergent. We do not need government investments for our investment programs and have achieved highly positive financial results over the years. In 2010, for example, we posted record profit, and in the first half of 2011 we achieved a net income 37% up on 2010.

The author

Peter Howard Wertheim is Offshore's Contributing Editor based in Rio de Janeiro. He can be reached at: peterhw@frionline.com.br.

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Born in Salvador, capital of Bahia state, Petrobras president and CEO José Sergio Gabrielli de Azevedo graduated with bachelor's degree in economics from Universidade Federal da Bahia, where he also received a masters degree in fiscal incentives and regional development. He obtained a PhD in economics from Boston University with a dissertation on the financing of the Brazilian public sector companies from 1975 to 1979. From 2000 to 2001, he was a visiting research scholar at the London School of Economics and Political Science.

Gabrielli has been the chief executive officer of Petroleo Brasileiro (Petrobras) since July 22, 2005, and serves as its president and member of the executive board.

Prior to that, he served as the chief financial officer and investor relations officer of Petrobras from Jan. 31, 2003, to July 21, 2005, where he was responsible for the executive management of accounting, corporate finance and treasury, project finance, investor relations, tax administration and financial planning and risk management. He has published several articles and books on productive restructuring, the labor market, macroeconomics and regional development.

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