Abstract

Petrobras, the state-owned Brazilian multinational energy corporation, is among the largest companies in the oil industry. The company has enjoyed a monopoly over the oil reserves in Brazil since it was founded in the year 1953. The oil crisis of 1973 and 1979 hurt the revenues of Petrobras. The company invested heavily in research and development in the 1980s and successfully discovered oil in the deep waters of the Campos basin. Over the next few years, Petrobras focused on coming up with a technology that would help it specialize in drilling techniques to drill 1,200 meters below the sea level. Petrobras also invested heavily in developing floating production platforms. By the 1990s, Petrobras became the leader in deep and ultra deep off shore oil exploration techniques. Its monopoly was terminated in the year 1997 when oil production in Brazil was liberalized. The 1990s paved the way for Petrobras to move forward, both in terms of production capacity as well as technological expertise. In the 2000s, the company focused on increasing production levels as well as exploring international ventures. The next major revolution was the discovery of a pre-salt cluster off the coast of Brazil in 2007. It was believed that there were oil reserves under a thick layer of salt. Analysts predicted that Brazil would join the league of oil super powers with the discovery of new oil sources. After the discovery, Petrobras invested heavily in the exploration of the pre-salt cluster. Investors from all around the world who believed in the prospects pumped in funds. In 2008, Petrobras proudly announced its highest production level of 1.97 million barrels of petroleum per day and natural gas of 422,000 bbl per day, annual income of US$130 billion, and profits of US$19 billion. The 2008 financial crisis affected Brazil’s economy and the demand for commodities, which were Brazil’s main exports, around the world fell sharply. The Brazilian economy fought its way out of the recession within a short time of two years and by 2010, Petrobras announced production of 2.7 million barrels per day and an investment plan to reach a production level of 5 million barrels per day by 2020. However, after the announcement of the investment plan, production stagnated at Petrobras for three consecutive years. The gap between the huge investment and the production raised various questions about Petrobras’s capability of living up to its plan. A detailed study of events showed major defects in Petrobras’s big plan. The government’s constant intervention in petrol prices to curb inflation and its forcing Petrobras to sell at lower prices after importing at higher prices pushed the company into trouble. The government also forced Petrobras to buy raw materials from local companies to give a boost to the economy. Besides, it stopped the involvement of foreign companies in exploration of the pre-salt cluster, which restricted the availability of new technologies. The arrest of a powerful former Petrobras executive, Paulo Roberto Costa, in a money laundering case involving billions of dollars also showed clear signs of the corrupt activities in the state-owned company. The appointment of Gracas Foster as the new CEO raised the hopes of analysts and investors alike as Foster had good contacts with Brazilian President Dilma Rouseff and they expected the oil prices to rise, which would in turn benefit the company. However, Foster failed to convince the president about the necessity to raise the oil prices – a decision that was said to be politically crucial as the elections were due in October 2014. Gracas Foster has several challenges lined up ahead of her in order to restore the company to its former glory.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the business of Petrobras
• Examine the strategic decisions taken by the company
• Study the business environment of Brazil
• Analyze achievements and failures of the company
• Analyze the investment decisions of the company

Keywords

Petrobras, Brazil, Floating Production Platforms, Pre-salt cluster, Business and government, Strategy,Investment, Oil prices, Inflation