The huge and unabating Chinese demand for energy, relentless global economic growth, rising oil prices and a backdrop of raging conflict in the Middle East – the stakes in the strategic debate over energy security have been raised again. Petrobras, the Brazilian state-controlled company, sits on both sides of the fence, as the Latin American giant is both a producer and a large consumer of energy. Meanwhile, it has also cultivated its pioneering role in developing bio-fuels.
Just like many of its competitors, Petrobras has enjoyed the recent oil boom, with a succession of record profits. Nevertheless, its president, Jose Sergio Gabrielli de Azevedo, has been critical of a lack of global leadership to tackle strategic issues: “The G8 should be more active in encouraging demand substitution and energy conservation,” he tells Emerging Markets from his 23rd floor office overlooking the stunning Guanabara Bay in Rio de Janeiro.
“The current structure of consumption may be altered thanks to more active actions, incentive and intervention policies from G8 governments ... This has already started in a way. We now see some pieces of legislation that mention a required mix of ethanol with petrol fuel.
“There are also some incentives in favour of biodiesel in Europe, although I don’t think US policy in terms of ethanol [made from corn] is most appropriate, because it’s like a subsidy for a kind of ethanol that is more expensive than the Brazilian-made [sugar cane] alcohol.” He stresses that Brazil’s bio-fuels are competitive without subsidies.
Still, Gabrielli acknowledges that there are some “legitimate forms of protection” as producing countries are often more concerned with their own domestic interests than with the welfare of consumers. But he trusts there will be some long-term changes.
“There is a growing awareness that a guarantee of energy supply is a basic element for the future ... No wonder there is this current search for bio-fuels, as well as the strengthening of coal and of nuclear energy. There is a whole set of initiatives currently underway to address this whole question of energy security.”
Ahead of the pack
“We are well positioned at both ends of this issue,” says the Petrobras chief. “We are big in terms of deep water drilling and non-traditional forms of oil production (we now have plans to explore oil in ultra-deep waters below the salt layer), and we also have a long experience in the area of bio-fuels.
“Brazil is the only country in the world with a nationwide distribution network of ethanol at petrol stations. All cars in Brazil run on at least 20% of ethanol. We are positioning ourselves strongly to export ethanol. We have started to set up a similar logistic for biodiesel, which is now available in thousands of petrol stations across the country,” he says. The company currently purchases 100% of the domestic output of biodiesel and has plans to launch biodiesel production in its plants by 2008, Gabrielli points out.
Key to the bio-fuel push is new technology. “We have developed a new technology process that allows us to produce high quality diesel with a very low level of sulphur with the use of vegetable oil (the so-called H-Bio). We are going very well from this point of view,” he says.
Indeed, Petrobras has altered its strategic plan to assume the world leadership in bio-fuels, he argues. The company has increasingly diversified its traditional activities in oil and gas to become a comprehensive energy conglomerate. It has technically achieved self-sufficiency this year as output –1.85 million barrels per day (bpd) – has overtaken domestic consumption.
Foreign expansion
Petrobras has also expanded its foreign activities, including in Argentina and the US (where it has just bought a majority stake in a Texan refinery), and Gabrielli forecasts a rise in its worldwide output from 2.4 million bpd in 2006 to 4.5 million bpd in 2015. Its financial health means that only $400 million out of the $87.1 billion, five-year investment plan will have to be drawn from the capital markets.
Gabrielli, a former CFO of Petrobras until he was appointed to the presidency last year, says that the company’s leverage was cut from 55% in 2003 to 18% in 2006.
Recent discoveries of natural gas resources have encouraged Brazil to boost the use of gas, in spite of a lingering dispute with Bolivia. Gabrielli is also considering with interest the ambitious plan to set up an 8,000 km-long gas pipeline between Venezuela and Argentina, which would need investment of some $23 billion. The gas pipeline network in Europe is “a very adequate model”, he says. Potential partners with experience in long-distance pipelines, including Russia’s Gazprom and Germany’s Ruhrgas, have been identified.
“The European network links Siberian, Asian and North African output to the European market. This is what we intend to do in South America,” says Gabrielli, who admits there are a set of issues to be addressed, including regulatory and environmental ones (the gas pipeline would cut through the Amazon forest). “This is important for Latin American integration,” he insists, in a reference to strategic issues pushed forward by presidents Lula, Chavez and Kirchner of Brazil, Venezuela and Argentina.
Regarding Bolivia, where Petrobras has already had to hand over its network of petrol distribution, Gabrielli is more cautious. Although he has been known to adopt firmer positions than his own government on the issue of Bolivian president Evo Morales moving to renationalize hydrocarbons, he now avoids controversy. “I am not going to comment on the decisions of the Bolivian government. We [Petrobras] are in permanent talks, and we sit down almost every week with YPFB [the Bolivian equivalent of Petrobras], but we are not going to comment through the media.” Up until mid-August, oil production and refining remained under the operational control of Petrobras, according to Gabrielli.
But what about the risks of a Ukraine-like scenario, when Russia threatened to cut the gas supply at the beginning of the year? “Geopolitical considerations are inevitable, we have to deal with risky situations and instability. This is part of the business, and we have to live with it,” says Gabrielli. “Are there more unstable places than Iraq anyway? The oil business is to invest where there is oil and gas.”