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A Well-Oiled Machine

By running Petrobras as a business, not a cash till, Brazil has been rewarded with self-sufficiency in petroleum.

October 01, 2006|Marla Dickerson | Times Staff Writer

Rio de Janeiro — Not far from this sultry port city, shipyard workers are hustling to complete the latest in a flotilla of vessels for the government-controlled oil firm. Financial statements show the company on pace for a year of record sales and earnings. In the cubicles of the organization's towering headquarters here, office workers have hung decorations celebrating Brazil's self-sufficiency in petroleum.

State ownership is synonymous with underachievement for much of Latin America's energy sector. But for Petroleo Brasileiro, known as Petrobras, the only thing rising faster than crude output is confidence.

While government-owned oil companies in Venezuela and Ecuador struggle with falling production, Petrobras has nearly doubled its output since the late 1990s. Production is about 1.9 million barrels a day and is projected to jump to nearly 2.8 million by 2011. Proven reserves are climbing at a healthy pace, up by nearly 50% between 2000 and 2005.

By comparison, reserves of Mexico's government oil monopoly, Petroleos Mexicanos, or Pemex, have slipped badly over the same period. Pemex is still Latin America's biggest oil producer, with an average output of 3.3 million barrels a day last year. But with its largest oil field in decline, Pemex could be overtaken by Petrobras within a few years, according to Mexico City-based energy analyst David Shields.

"That was something unthinkable even five years ago," said Shields, author of two books on Pemex. "Brazil is a country which until recently ... had a very serious deficit in oil."

No longer. Brazil this year celebrated its "oil independence" -- the first time that domestic production exceeded demand.

When Petrobras was founded in 1953, its initial output of just a few thousand barrels a day amounted to little more than an oil leak. But Brazil got serious about reducing its dependence on foreign crude after the 1970s oil shocks jolted its economy.

Bedeviled by meager onshore deposits, Petrobras transformed itself into an accomplished deep-water driller. It also worked with farmers to promote widespread use of sugar-cane ethanol, which today accounts for 40% of the fuel that Brazilians burn in their cars.

The former pipsqueak of Latin American oil companies is now looming large. Growing world demand for "green" energy has Petrobras working to boost exports of ethanol. And it is betting heavily on another plant-based fuel, biodiesel.

At the same time, Petrobras' deep-water expertise has become the ticket for tapping the planet's dwindling oil reserves, most of which lie far beneath the ocean floor. While continuing to drill off the Atlantic coast of Brazil, which currently provides 80% of its oil, Petrobras is looking abroad. It has hit pay dirt in U.S. waters off the Louisiana coast. And it is searching as far away as Africa and Asia.

"We are not a typical state-run company," said Jose Sergio Gabrielli de Azevedo, a bearded, bespectacled economics professor who took a leave from the Federal University of Bahia to become Petrobras president and chief executive.

Unlike other nationalized firms, where budgets and revenue are in the hands of politicians, Petrobras must answer to Wall Street. Although the Brazilian state owns 37% of the company and controls 56% of the voting rights, much of the firm's equity consists of freely traded shares, including American depositary receipts listed on the New York Stock Exchange.

This structure has provided the organization with billions in capital to improve its operations. It has also forced Petrobras to open its books and adhere to the regulatory standards for public companies. And it has imposed discipline on the government, which collects taxes on Petrobras but can't pinch from the oil company's purse.

Petrobras last year posted revenue of $74 billion and net income of $10.3 billion, up 67% from 2004.

"They run their national patrimony as a business, not the state cash register," said Jorge Pinon, an energy researcher at the University of Miami and a former executive with oil company Amoco in Latin America.

To promote competition in the oil sector, Brazilian lawmakers in 1997 approved legislation breaking Petrobras' monopoly over production and refining. Although the state firm still dominates, it now must go head-to- head with outsiders when bidding on drilling leases in Brazilian waters. The company also faces competition in the retail sector, where it operates about 7,200 gas stations, about 20% of the nation's total.

The way Petrobras does business differs markedly from that of Pemex, which has a monopoly on Mexico's oil industry from the wellhead to the pump. Critics have long derided the firm as a tar pit of inefficiency and corruption. Thieves make off with an estimated $1 billion in fuel every year. A top executive resigned in late 2004 after revelations that he billed the company for his wife's liposuction.

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