The extraordinary pace of semi-public Petróleo Brasileiro S.A’s growth is astounding. In just over ten-years it has shot from the 27th largest energy company by market capitalization to the 3rd. Massive pre-salt finds have encouraged the company to pursue an aggressive financing and development strategy aimed at boosting production. However, rising inflation, disagreements over royalty distribution or a retraction of foreign capital could hamstring growth. In today’s GR Energy and Climate Brief, Garten Rothkopf analyzes the political and economic realties of Petrobras’ pre-salt development program.

Massive new offshore discoveries in the last several years have prompted Petróleo Brasileiro S.A (Petrobras) to undertake an aggressive financing and development policy with the aim of ramping-up overall production.  Petrobras’ success in accessing money markets and its recent history of respecting private investment have highlighted the benefits of its ownership model.  The sheer scale of Petrobras’ new strategic development plan – including assets in 18 countries, stretching five continents and $224 billion in planned capital expenditures – however, remains a formidable lift for the hybrid public/private company.  Significant obstacles will need to be overcome for the company to move forward with development of the pre-salt, including: rising inflation, disagreements over royalty distribution, and a potential retraction in foreign capital, all of which threaten to sideline Petrobras’ push to become the world’s leading oil producer.  In today’s GR Energy and Climate Brief, Garten Rothkopf analyzes the political and economic realties of Petrobras’ pre-salt development program.

Big Finds Meet Big Ambitions

The scale and pace of Petrobras’ pre-salt exploration and development program has surprised even the most pessimistic analysts.  In 1999, two years after the Brazilian government ended the company's monopoly in Brazil, Petrobras was listed as the 27th largest energy company, with a market value of US$ 13.5 billion.  Over a decade later, Petrobras is listed as the 3rd largest energy company by market cap, buoyed by discoveries of recoverable pre-salt oil reserves.  Each year since the the 2007 Tupi Field discovery has seen reserve growth, with year-end proven reserves up 7.5% from 2009.

To fuel continued development of these expensive offshore finds, Petrobras CEO Jose Sergio Gabrielli has proposed an aggressive development and financing plan – $224 billion in capital expenditures by 2014 and a doubling of oil output by 2020.   Gabrelli, who has overseen the company since July 2005, sees pre-salt development linked to Brazil’s overall economic health.  Petrobras’ investments represent roughly “2% of Brazilian GDP and the supply chain as a whole should be somewhere around 7-8%” according to Gabrelli.  Pre-salt development is expected to require 28 new drilling ships, or a third of the present world fleet.146 supply ships and 72 large tankers. Some analysts are concerned that Petrobras may be overstretched.  According to Annette Hester, of the Center for Strategic and International Studies: “Petrobras has a lot on its plate; it has several other large drilling projects apart from the pre-salt finds. We need to see how it balances all of these competing demands – that will be the real test.”

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