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Petrobras: A Latin Model?

Can Brazil's state oil giant Petrobras serve as a model for Mexico and Venezuela? Three experts share their perspectives.

Inter-American Dialogue

Brazil’s Petrobras is now one of the top six most highly market-capitalized energy firms in the world, joining other national oil companies (NOCs) that are replacing familiar private-sector players, PFC Energy said in a report last month. Will the company's success endure? What do other Latin American NOCs need to do to join the ranks of the world's influential players?

Georges Landau, Head of Prismax Consultoria in Brazil: Petrobras' unquestionable success—financial, technical, and in huge hydrocarbons discoveries in Brazil and elsewhere—depends, for its sustainability, on the company being able to steer an independent course as a major global integrated energy enterprise, without succumbing to partisan Brazilian politics. This implies a very high investment rate, including R&D. Lula's government is trying its darndest to politicize the company's decision-making process by allocating purely technical management positions on a partisan basis; thus far, this perverse trend has been steadfastly resisted by the president's own chief of staff, Minister Dilma Rousseff (who chairs the Board of Petrobras), and the company's president, Jose Sergio Gabrielli, but it is a matter of speculation how long they can withstand the apparently insatiable appetite of political parties for well-paying, strategic jobs, allotted by the president as a reward for what is really very questionable political allegiance. Petrobras now faces unprecedented financial and technological challenges, in the form of E&P in the pre-salt layers (i.e., extracting oil and gas from deepwater depths in excess of 6,000 meters), and needs to be able to rely on a professional staff of the very highest quality and proficiency. The company has been fortunate to count on such a staff, and that accounts for its success, as Brazil's and Latin America's largest enterprise, and in particular as a NOC. The challenge for other NOCs in the region is to emulate this trajectory. They will not succeed if their governments treat them as mere cash cows to finance public-sector expenditures, but regrettably this is happening in quite a few countries.

Roger Tissot, independent energy consultant: If God is Brazilian as Lula claimed after the announcement of the Tupis oil discovery, Petrobras must be close to heaven ... Petrobras is a company everybody loves. From the left, it fits the criteria of state corporatism that was in vogue for many years in Latin America, showing that yes, national oil companies can indeed be profitable and highly efficient. From the right, it confirms that regulations forcing market competition is the way to go. After years of operating under a national monopoly, Petrobras 'rose' to the challenge of global competition when President Cardoso opened the oil industry. The truth lies somewhere in between. Petrobras enjoys a virtual monopoly in Brazil, but nobody can doubt its successes since the opening of Brazil's oil industry. Now other Latin American NOCs are looking at Petrobras as a model to follow; however, not all of them would be able to emulate the Brazilian company. For that to occur, a set of conditions would need to be met. First, the NOC should not be the main source of revenue for the economy in order to avoid opportunistic rent behavior from the political class. Second, the country must have a relatively large and well-trained labor pool. Third, the NOC must be entitled to a relative large level of operational, financial, and strategic independence. Fourth, the NOC must also face the constant threat of competition. Fifth, the company must have clear efficiency indicators—financial, operational, etc.—and a board of directors whose main priority is the success of the company and not the protection of vested interests. In Latin America, Ecopetrol from Colombia is perhaps the closest to Petrobras' model. Ecopetrol is forced to compete with IOCs, has secured a certain level of financial and strategic independence, and its management is accountable to performance indicators. ENAP from Chile is also a company that tends to rank high, but this is mostly due to the nature of Chile's geology. As a net oil importer, ENAP and its international branch, Sipetrol, couldn't afford the inefficiencies common to other NOCs, since eventually the market would have forced them out of business. All the other NOCs in Latin America are struggling in an ideological battle, which I would define as a pendulum between Pemex and the 'old PDVSA.' Pemex is the extreme case of a cash cow corporation with very little room for operational, financial, or strategic independence, while the old PDVSA was a very successful NOC but one perceived to be detached from the political realities of Venezuela at the time and more focused on behaving as a global IOC. The challenge for Petrobras moving forward is to keep being a successful corporation according to the measurements of any oil company while maintaining the balance between the needs of the local politicians, who tend to be risk averse, and the high risk nature of the oil business.

Mariano Gurfinkel, Associate Head of the Center for Energy Economics at the University of Texas at Austin: Brazil's growing hydrocarbon sector is the direct result of the implementation of commercial frameworks for oil production and the move to partially privatize Petrobras. The key to success has been the definition of for-profit activity within the upstream oil sector in Brazil. If in addition we add commercial objectives for Petrobras, a growing and vibrant sector is possible in which Petrobras is the principal participant. Our research on national oil companies has shown the importance of adequate commercial frameworks for the functioning of a national hydrocarbon sector and for increased performance of national oil companies. Moreover, we have identified a market premium for partially privatized national oil companies that function within such commercially favorable frameworks, Petrobras being a clear example. As long as commercial frameworks are kept in place, Brazil will continue to benefit from a dynamic hydrocarbon sector, and Petrobras will enjoy continued success. Though the lessons learned are many, they are not widely implemented. Some countries in our Hemisphere have moved forward and set up commercial frameworks that have attracted considerable investment. Like Brazil, now with the commercial frameworks in place, a limited few are in the process of, or are considering, partially privatizing their national oil (or gas) company. Mexico faces both these challenges today. The country could benefit from the implementation of adequate commercial frameworks that would allow for private investment and would define commercial and for-profit objectives for its national oil company. However, political and legal hurdles remain.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 



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