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Interview

with Valdir Carreiro, President, IESA Óleo & Gás

01.04.2010 / Energyboardroom

IESA Óleo e Gás is a part of INEPAR Group. As an engineering concern was established more than 40 years ago, but IESA Óleo e Gás per se was created around 2004. How did you manage to establish your reputation in the oil and gas industry and not live in the shadow of the holding company? What would you say the company stands for today in the oil and gas industry?

Regarding the first question: how did we turn this company in a short time? Well, it has already been six years. Our company originated within the group as a division of the parent company. Today we are an independent operational structure, providing integrated solutions to the oil and gas industry. What we bring here is our expertise in engineering, procurement and construction. We transformed the company into one of the best in this segment, providing complete EPC solutions . Our success was thanks to having taken advantage of other group companies’ experience in the area of oil and gas and due to a very good track record with Petrobras, where we are considered one of the best companies. You may know that Petrobras ranks companies on three levels “A”, “B” and “C”. IESA Óleo e Gás has been graded as an “A” level in more than 70 items. This allows us to present bids as requested by Petrobras and regardless of the size and complexity of the bid we are invited to compete, which allows us to grow on a permanent basis.

We have always received very strong support from our parent company, although we work and take decisions independently. What differentiates us from the rest of the market is our capital-labor relations. We deploy a culture of participation of employees in all decision-making process, allowing an employee to think and contribute to decisions and understand and participate in the results; this makes everything easier and the company is able to grow naturally with less effort.

Working together with big companies with big projects also facilitates the growth process. We have partnered with top companies in Brazil: Queiroz Galvo, Camargo Correa and Odebrecht, amongst others; we have developed a synergic great approach with them, building up successful partnerships. This helps a lot our growth due to their capability to efficiently manage the businesses and contracts we entered into together.

Apparently this approach of coming at a project from the “E” side is paying off because you have grown over the past years – even between 2008 and 2009 you had growth of 19%. So what are your expectations in terms of revenue and profit for 2010 and what do your order books look like?

In 2010 we have expectations of around R$850 million, which represents an increase of another 20%, essentially repeating the same growth as in the 2008-2009 period.

We now have a backlog of approximately R$2.3 billion, this allows for growth since it depends directly upon the backlog you have. Last year we won a large tender with Queiroz Galvo – RNEST (North East Refinery) in the state of Pernambuco. This project represents just over R$ 1 billion.

We are also participating in the construction of two platforms; both structures have been contracted through a company in which we have a 15% share , called QUIP, and there are other platforms in the pipeline.

As an EPC company you work in three main segments: offshore, refineries and power plants. Where is your main focus and where is your growth coming from?

I think it’s difficult for us to establish a focus amongst these three: refinery, platforms and gas plants, because it depends heavily on the investments made by Petrobras. We have to be aware of the strategic plans of Petrobras to identify business opportunities that our company may have.

Talking about Petrobras, in order to be prepared for the demand of future contracts you will be installing a manufacturing plant in the Southern states of Brazil over the coming year. What is your roadmap to start manufacturing in this plant and how would it be integrated in your current activities?

We have evaluated the strategic plan of Petrobras and are tracking the pre-salt that is now becoming a reality. Petrobras has recently launched one of the largest share offerings in order to raise capital for funding this growth. Needless to say, even without the capitalization, Petrobras would have sufficient cash flow to enable the company to continue making investments.

There is a plan by Petrobras to build a large number of rigs. Exactly how many is yet to be defined, but it is expected to be around 20 new platforms over the next five years. Next year 8 production platforms are expected to be under construction. So, with this vision in mind, we decided it was better to anticipate future demand and create a base for our activities in the assembly of modules for platforms.

As modules are difficult to move around without the use of barges we searched the coast of Brazil for the best locations for our operations and identified several areas in Santa Catarina and Rio Grande do Sul states.. We are already beginning to take steps to ensure that this foundation is established for the production of modules in that region, given that 20 platforms means some 250 modules must be built. We want to be one of the major suppliers of modules in the coming years.

We’re betting a lot on platforms. Not only the modules, but also in the construction of the platforms themselves through QUIP or even through other companies that we might create in the future. This will complement the module production so that we are involved in the full cycle. We develop engineering, construction, supply of modules and decks.

This makes us a good alternative even for foreign companies that are coming to Brazil: a company specializing in the entire chain of a platform construction.

What do memoranda that you sign with particular states imply in terms of financing and taxation for IESA Óleo e Gás?

All states we looked into were offering similar incentives. Across Brazil – in Rio Grande do Sul, Rio de Janeiro, So Paulo, Santa Catarina and others – states seek to match the incentives of other states.

We do not choose one state over another only according to financial incentives, but also considering strategic reasons, such as how suitable an area is for production of modules, besides factors such as easy access to sea with an appropriate water depth for the barges operation. Also important is proximity to highways, in order to easily transport equipment , and also to a port, so that imported goods can easily enter and expedite the assembly. It is of course also important to obtain all necessary licenses quickly in order to begin production of the modules.

As every Brazilian company does, how do you assess your accessibility to financing in the country and what are you preferred means to raise capital for your growth?

We actually require little outside investment for our regular operations; we try to work in a neutral cash flow mode.. Therefore, contracts tend to be self-funding. We do have lines of credit in Brazil, but they are not cheap, with the exception of BNDES, so financing is difficult. Because of this we look more at the capitalization of resources from partners than actual lines of credit.

We are foreseeing tapping international funds as a leverage for our growth.. Also in our new business strategic plan we are considering structured projects where overseas funding would be welcomed.

Company investment would be used to create new businesses as well. As an example, this past week we opened up our facility at the city of So Vicente, So Paulo, to support Petrobras operations in the Santos Basin, for a 5-year contract.

We have talked a lot about Petrobras, your main client I believe. In the future what kind of client base are you looking at? Are you looking to mostly focus on Petrobras, or are you looking to attract new players here?

You are right; there is no doubt Petrobras is our main client. I am sure you have been following Petrobras’ investment plan: it is huge. We have not yet seen the investment plan for the pre-salt in light of the recent capitalisation, but we can project that over the next five years there will be good opportunities for business with Petrobras.

That said, we cannot ignore the entrance of foreign companies in the Brazilian market. That is why we have an area that takes care of foreign contacts. For all IOCs coming to Brazil we are also hosting company visits. Our intention is to diversify in order not to be concentrated on Petrobras alone. However, for the moment 99% of our revenues come from Petrobras and 1% from other companies. Petrobras has today an investment plan of US$ 50 billion per year which should increase to US$ 70 billion. So, if we can get a fraction of that, it would really be very good. We would love to work with other companies too and we believe t we are prepared to do so, but they are yet to arrive!

Now Brazilian companies, including Petrobras, are also looking to grow in the area of construction of thermopower plants. Brazil is growing and therefore the demand for energy is becoming much higher than the GDP, which means it will be a greater challenge to meet this demand. The fastest way to resolve such a discrepancy is by developing thermal energy. Therefore, we are following these developments and given our experience in the field we will be participating in this movement in the future. President Lula has had his share of luck so far because it has rained in the right places, but in the future it could become a problem. Then we are also following this trend and we shall also be a strong player in the construction of thermopower plants.

How are you positioning yourself today in order to take advantage of the enormous $224 billion investment that Petrobras is making over the coming 4 years?

We have a strong long-term relationship with Petrobras and since they know and trust IESA Óleo e Gás, they always invite us to participate in bidding processes. However, when it comes to seeking international partners we have to make a lot more effort to demonstrate our company’s competences. We have to leverage the expertise of our entire group.

Additionally we have a large production capacity with our factory in Araraquara, which is one of the largest facilities in Latin America. We have over 130,000 square meters of constructed area and a total area of 1,000,000 square meters. What makes things more difficult for us is the exchange rate, because we now have an over-valuation of the Real; so it is more competitive for foreign firms to import equipment. That said, there are requirements of national content that ends up helping Brazilian companies, which represents only 35% in the exploration phase for the pre-salt, and 65% in the construction phase of the platforms.

What would you say are your ambitions for the coming years, where would you like IESA Óleo e Gás to go?

We have a plan in the next five years to achieve a turnover of R$ 1.5 billion. But for IESA what is more important than revenue alone is the relation between revenue and profit. We also want a company that holds quality and safety standards in the highest regard and one which not only respects the environment but is also socially responsible. We are a certified company, holding all the necessary certifications such as ISO 9001, ISO 14001 and ISO 18000. We also have the SA 8000 which relates to social responsibility, which very few companies have at the moment. Our employees are satisfied and happy because we improve the quality of life of our society in general. We have several programs involving day care centers, hospitals, blood banks, schooling in poor areas – all initiatives to improve living conditions. For example, we recently participated in an important campaign to stop the sexual exploitation of children and adolescents.

So overall this is my goal… Once I have achieved this I can go fishing and let the staff here take over!

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