Petrobras

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Petrobras is one of the top oil producer, refiner and associated industries company in the world, headquartered in Rio de Janeiro. They are currently 55% owned by the government (representing 1/3 of the total equity of the company) with the government owning a golden share (similar to Embraer and Vale) which allows the government the first right of refusal on various governance issues. Looking at massive capitalization, Petrobras is considering issuing more of their stock which is currently trading at a PE of 10.5x with an industry benchmark of 10x.

However, with Petrobras in the midst of heavy capitalization which begs the question of whether or not they plan to maintain this government owned model if they decide to continue to raise capital in the public markets. Currently, they command 14.17B boe and their major costs are their appraisal costs in exploration and their production costs split between lifting costs and government costs. The current extraction price of oil is an attractive $24.74 USD with a $9.51 lifting cost and a $15.23 government cost.

Petrobras is currently seeking to drill for oil in more extreme depths than it is currently operating at looking at their Presalt projects (projects similar in nature to Canada’s oil sands in that they are looking at unique locations with which to extract oil). When asked if this will increase their lifting costs, they remarked that they initially expected costs to rise as much as 20%, but have since revised that number to be equal to or less than current costs as a result of the economies of scale through automation.

However, it is not without challenges. The new oil sites will be 300 km out from the coast line where the traditional helicopters used do not have enough range, requiring them to purchase new types of equipment. They will also require hubs as jump points to the new rigs to store inventory, food and maintenance equipment. There are also implications for transport of product back to shore.

There are also new changes expected in the regulatory model they use. Currently, they are using a concession model, but may possibly switch to a production sharing agreement where companies bid and allocate a percentage of the oil profit to the government. The strategy for some of these companies (example those in China) may have a strategic benefit to bid higher (as a strategic buyer versus a financial buyer) in order to gain access to the oil reserves (the story I had come to investigate, the effect of a resource race on international business relationships) producing a sort of vertical integration which would technically remove a double bottom line (an idea thwarted by the financial theory we learned in Finance II but revisited in Managerial Accounting). The current rules for bidding are that at least 30% of the profit must return back to the government, and the government can refuse bids which are not economically viable (allocating too much of the profit to the government and overbidding for the resource) and Petrobras continues to dictate what technology is used in extraction.

Another interesting relationship they have with China is through the Chinese Development Bank where they have procured a $10B loan, $3B of which is executed through a barter system of trading oil for products. However, apparently China’s new policies with trade throughout the world are stepping on a few toes as they are generally changing their strategy such that they don’t want products from the rest of the world, but are continuing to export to partners. However, a company like Brazil (and Canada) wouldn’t be interested in just exporting commodities without developing their own industries which causes some friction in the business relationship.

When asked why they don’t just acquire refineries as part of their strategy, they mentioned that it is really expensive to do, that complex regulations make it difficult and that retrofitting or upgrading their a rig to increase capacity is generally not financially viable.

They prefer to make an entry via a joint venture with partners to explore new reserves in different geographies. Once a discovery is made they also prefer not to be an operator in these locations.
Also, in some countries like Argentina, where the regulations are about to dictate the price of oil, the financial viability of projects in the region become unattractive (a very subtle and modern form of expropriation) and companies in that region are generally looking to divest operations in those markets as capital continues to flee Argentina.

With Brazil having a leading role in the development of bio fuel (Ethanol), Petrobras explained how they could create bio fuel efficiently from sugar cane with an Energy Out / Energy In ratio of 8.3, beating wheat at 1.2, corn at 1.3 to 1.8 and sugar beet at 1.9. They use their Petrobras Research Center, the largest in Latin America, to focus on three development goals: Expand limits (exploration), Enhance Product Mix (new product techniques) and Sustainability (CO2 production, H2O management and energy efficiency). One example of a project they are working on is 2nd generation bio fuels, where they use a special enzyme from biomass byproducts to create more ethanol.