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with José Sergio Gabrielli de Azevedo, President & CEO, Petrobras

08.09.2010 / Energyboardroom

Oil and Gas Financial Journal (OGFJ): You have a very solid academic background in Brazil and abroad. What were the main differences in moving from academia to executive positions at Petrobras?

The main difference between academic and corporate work is in the speed of the decision-making process. At the university, you have more time to analyze the issues, while at the company decisions must be made quickly for the success of the business.

OGFJ: What is Petrobras’ market value?

Petrobras reached its highest market value, some $200 billion, in 2Q08. Due to the economic conjuncture, which has affected the global capital market, we closed 2008 at $115 billion. At the end of 1Q09 the value was $139 billion, a 27.3% surge in the period.

OGFJ: How has Petrobras’s stock performed since the economic downturn began? Do you feel it is undervalued? Please explain. We understand that after the announcement of the $174.4 billion business plan shares went up.

Petrobras’s business plan was announced on Jan. 26, 2009. On that date, the PN share closing market value was R$23.53. The day after the announcement, the closing value was R$24.74. A month later it was at R$26.22, while on March 26 it had risen to R$32.02. In late April, it was hovering on R$28.60. In the first quarter of 2009, Petrobras’s stock outperformed Bovespa (So Paulo Stock Exchange) and the Dow Jones. It also did better than the AmexOil index, which tracks the performance of the world’s biggest oil companies.

OGFJ:With about $15 billion in profits in 2007, Petrobras has grown to become the 8th largest oil company in the world and perhaps the 15th biggest company overall, according to stock valuation. What would be the single major issue that could curtail future growth – a long period of depressed oil and gas prices?

Our plan reflects a long-term strategic agenda, which is not dependent on short-term conjunctures. In addition to the highly volatile prices, other uncertainties also make decision-making more challenging. Among them are the increased service, material, and equipment costs, the supply and demand dynamics, and the development of biofuels. Geopolitical factors such as exacerbated nationalism, regional conflicts, environmental implications, among others, also increase uncertainties. This explains why we took longer to complete our business plan, which is ambitious but feasible because it is based on actual growth conditions. We have proved reserves in the development phase and discoveries under assessment that may become reserves that will suffice to ensure our growth. Additionally, we have a portfolio of 265 exploratory blocks in Brazilian sedimentary basins for exploration, and, moreover, we have a large domestic market to supply with our products.

OGFJ: The world is in a credit crunch and Petrobras needs billions to keep up with its $174 billion crisis-busting five-year investment plan. How much in dollars has Petrobras taken out in loans from Brazilian state-owned banks? How much must it take up to 2013? How much cash can Petrobras generate this year and next year from operations? Petrobras forecast it would to generate from $120 billion to $150 billion total during the next five years. How will you accomplish this?

For 2009, we secured a loan worth $12.5 billion from the National Development Bank (BNDES). In the first five months, we have already raised $30 billion in funds. With this and with our own cash generation, we already have the investments foreseen for the first year of the 2009-2013 business plans. The net cash flow projected for the plan’s five years is $148.6 billion, including dividends.

OGFJ: Petrobras is a huge entity in Brazil and contributes to the primary surplus of the federal government through taxes, etc. How does this work, and does this hurt the company’s ability to grow?

Firstly, it is important to say Petrobras is not dependent on the federal government, its controlling shareholder, to undertake its activities. Our financial results aren’t included in the government’s primary surplus either. The company’s investments are guaranteed by the revenues coming from industrial and trade operations. We reinvest 75% of our profit in new projects. Petrobras’ financial obligations with the government only concern the payment of dividends. Petrobras’ economic contribution to the country can be measured based on the payment of taxes, fees, and social contributions, which reached $6.3 billion in the first quarter of 2009 alone.

OGFJ: How are negotiations with suppliers to lower prices by at least 30%? Do you have any concrete results?

Our surveys show a subsea and surface equipment price reduction is already in progress because of lower steel prices. Furthermore, rig supply is up in the market. In addition to market dynamics, we are also pursuing project cost optimization measures by simplifying and standardizing equipment. In our bidding procedures, we are hiring smaller packages that aim to have medium-sized companies participating.

OGFJ:The press reported that Petrobras is negotiating with several other countries for further loans in exchange for oil. Could you give us more details about this? Which countries, what amounts of oil and loans? Will the oil be from the pre-salt layer?

Petrobras received $10 billion in loans from China as the company seeks financing to develop the largest crude discovery in the Americas in more than 30 years. In May the two nations signed 13 accords. The agreements included the loan that the China Development Bank will provide to Petrobras and another $800 million the bank will provide to Brazil’s development bank BNDES. We are in talks with other countries, but it is too soon to be specific.

OGFJ: What is Petrobras’s estimate for Tupi’s lifting costs and estimate about the long-term cost of producing and transporting Tupi’s 5 to 8 billion barrels of reportedly recoverable reserves?

Since we have not declared this discovery commercial yet, we cannot discuss reserves, rather recoverable volumes. Adding the areas that have already been tested in the pre-salt (Tupi, Iara, and Parque das Baleias), the figure is expected to range from 9 billion to 14 billion barrels. At this stage, it is premature to discuss production costs, since we are still in the assessment phase, not only aiming to determine reservoir behavior, something that is in progress with the extended well test in Tupi, but also regarding the types of equipment we will use for the definitive development of the pre-salt reserves. However, production is feasible with $45 oil.

OGFJ:Credit Suisse bank estimates that $600 billion will be necessary to develop and produce in the pre-salt in the next 20 to 30 years. What is Petrobras’s estimated figure?

We do not yet have this estimate. This depends on factors that are still being determined. In our business plan, we foresee investments of $111.4 billion, from 2009 to 2020, to develop production in the pre-salt layer. We expect production to reach 1,815,000 barrels per day in these areas alone, which is about what Petrobras produces in the whole of Brazil.

OGFJ:What are the main technical challenges to produce pre-salt oil?

With its extensive experience as a deepwater oil producer, Petrobras has the technology to develop production in the pre-salt layer. There is no technological barrier that will prevent pre-salt development. We have a specific team of highly qualified technicians in the areas this work involves – exploration, production, downstream, and gas and energy – studying all aspects concerned in the projects. We will work under greater pressures, at higher temperatures, with corrosive fluids, at great distances from the coast, and at huge water and well depths. Nonetheless, we have the know-how to deal with these challenges. We have to reduce the size and weight of the equipment and increase the levels of automation and remote control, among other matters. Also, we have to achieve more autonomy and adjust transportation and supply logistics. With extended well testing production, which we are carrying out at Tupi, we will have better knowledge of reservoir dynamics, and this will be fundamental for the production projects.

OGFJ: Can you provide details as to how Petrobras and its foreign partners plan to produce 5.7 million barrels of oil and gas per day by 2020 (more than half the output of Saudi Arabia), becoming one of the five largest integrated energy companies in the world?

Of the total volume of 5.729 million barrels of oil and gas per day foreseen in our strategic plan for 2020, some 5 million barrels will come from fields located in Brazil, while 632,000 barrels per day from exploration and production activities abroad. Of the total domestic production, 3.3 million b/d will come from reserves that have already been identified, above the salt layer, while 1.815 million b/d from the pre-salt areas. Since we will have the capacity to refine 3.2 million barrels in 2020, there will be nearly 2 million b/d available for exports. Additionally, two of the four refining units we will build will produce derivatives for export.

OGFJ:Petrobras is one of the world leaders in deepwater E&P. How much does the company currently spend on developing new technologies at R&D-Cenpes? Do you expect this spending to increase dramatically in the coming years?

The company’s commitment to technological development is reflected in the volume of resources allotted to R&D activities, which in 2008 added up to R$1.7 billion. The resources set aside for technological research have been increasing yearly and will continue keeping up with the growth of the company’s remaining activities. Petrobras generates more patents than any other Brazilian company. In 2008, 72 patents were applied for in the country, 17% more than a year earlier.

OGFJ: What are the investments per business area foreseen in the business plan? Which one is expected to grow more in the upcoming years?

Most of the investments will be made in the E&P segment, the area that is expected to grow the most in the upcoming years. In total, $104 billion will be invested in five years, 59% of the total Petrobras will invest through 2013. The second largest part will go to the downstream area, which involves refining, transportation, trade, petrochemicals, and fertilizers, and is set to get $43.4 billion (25% of the total). Gas and energy projects will receive $11.8 billion (7% of the total). Of the total of $174.4 billion, $158.5 billion will be invested in the company’s activities in Brazil, while $15.9 billion abroad. The E&P segment will also be the one to get the most investments abroad, $12.5 billion or 79% of the total.

OGFJ: You said Petrobras is building a new production model to make production of some 600 projects less expensive. What will this new model look like?

A group of specialists has been working hard on this, pursuing new ideas and new procedures. We have a few important premises that are guiding our studies. Since the pre-salt reservoirs are located more than 300 km off the coast, we will seek to improve equipment autonomy in order to reduce the number of helicopter flights and support boat trips. To achieve this, we are analyzing the possibility of implementing mid-way supply centers in order to reduce transportation. Automation and remote control are also fundamental. We also intend to reduce the number of wells, increase production per well and, thus, reduce costs, since each well costs $100 to $120 million.

OGFJ:Petrobras has been recognized by the United Nations for its social and environmental balance. Can you explain what the company is doing currently by way of investing in alternative types of energy, such as biofuels, ethanol, wind, and solar. What are the amounts foreseen in the strategic plan to invest in these activities?

In 2008, we created a subsidiary exclusively to carry out biofuel development projects, a segment to which we will allot $3.33 billion in the 2009-2013 period. Of this total, $1.941 billion will be used to produce ethanol, $480 million to produce biodiesel, $400 million will go to logistics for these fuels, and $530 million aimed to biofuel technological research & development. We are also working on developing wind and solar energy. Our operations are guided by our concern with safety, with the environment, and with health. In 2008, we prevented the emissions of 930,000 tons of carbon dioxide, while in 2009 we put the S-50 diesel in the market, with lower sulfur contents. It is because of our actions in this area that we have been listed, for the third year in a row, in the Dow Jones Sustainability Index.

OGFJ: What were Petrobras’s export volumes in 2008 and in the first quarter of 2009?

In 2008, we exported a record volume of 673,000 barrels of oil and derivatives per day: 439,000 barrels per day of oil and 234,000 barrels per day of derivatives to the American, Asian, European, and South American markets. In the first quarter of 2009, exports were also expressive: 666,000 barrels per day of oil and derivatives, a 16% increase over a year ago.

OGFJ:Could you list the biggest oil and/or gas discoveries made in the world in the 2000 to 2008 period?

The biggest discovery made in the past 10 years was Kashagan, in Kazakhstan, in 2000, with some 20 billion barrels of recoverable oil equivalent. The other discoveries were evaluated practically at the same levels or, in recoverable volumes, at levels inferior to the recent Iara and Tupi discoveries, in the Brazilian pre-salt. The biggest discoveries made in the world, also in 2000 were: the Tabnak (Iran); Severnyl (Russia) and Yadavaran (Iran). In 2002: Dhirubhai, in India; in 2004, Levoberozhnoye, in Moldavia; in 2006, Kish, in Iraq; in 2006, Longgang, China; in 2007, Tupi; and in 2008, Iara, both in Brazil. The other discoveries we made in the pre-salt have not been assessed in such a manner as to determine recoverable volumes yet.

This Interview was conducted by Peter Howard Wertheim and Dayse Abrantes for Oil & Gas Financial Journal, and was published in the July 2009 issue



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