A Well-Oiled Machine

Not far from this sultry port city, shipyard workers are hustling to complete the latest in a flotilla of vessels for the government-controlled oil firm. Financial statements show the company on pace for a year of record sales and earnings. In the cubicles of the organization’s towering headquarters here, office workers have hung decorations celebrating Brazil’s self-sufficiency in petroleum.

State ownership is synonymous with underachievement for much of Latin America’s energy sector. But for Petroleo Brasileiro, known as Petrobras, the only thing rising faster than crude output is confidence.

While government-owned oil companies in Venezuela and Ecuador struggle with falling production, Petrobras has nearly doubled its output since the late 1990s. Production is about 1.9 million barrels a day and is projected to jump to nearly 2.8 million by 2011. Proven reserves are climbing at a healthy pace, up by nearly 50% between 2000 and 2005.

By comparison, reserves of Mexico’s government oil monopoly, Petroleos Mexicanos, or Pemex, have slipped badly over the same period. Pemex is still Latin America’s biggest oil producer, with an average output of 3.3 million barrels a day last year. But with its largest oil field in decline, Pemex could be overtaken by Petrobras within a few years, according to Mexico City-based energy analyst David Shields.

“That was something unthinkable even five years ago,” said Shields, author of two books on Pemex. “Brazil is a country which until recently ... had a very serious deficit in oil.”

No longer. Brazil this year celebrated its “oil independence” -- the first time that domestic production exceeded demand.

When Petrobras was founded in 1953, its initial output of just a few thousand barrels a day amounted to little more than an oil leak. But Brazil got serious about reducing its dependence on foreign crude after the 1970s oil shocks jolted its economy.

Bedeviled by meager onshore deposits, Petrobras transformed itself into an accomplished deep-water driller. It also worked with farmers to promote widespread use of sugar-cane ethanol, which today accounts for 40% of the fuel that Brazilians burn in their cars.

The former pipsqueak of Latin American oil companies is now looming large. Growing world demand for “green” energy has Petrobras working to boost exports of ethanol. And it is betting heavily on another plant-based fuel, biodiesel.

At the same time, Petrobras’ deep-water expertise has become the ticket for tapping the planet’s dwindling oil reserves, most of which lie far beneath the ocean floor. While continuing to drill off the Atlantic coast of Brazil, which currently provides 80% of its oil, Petrobras is looking abroad. It has hit pay dirt in U.S. waters off the Louisiana coast. And it is searching as far away as Africa and Asia.

“We are not a typical state-run company,” said Jose Sergio Gabrielli de Azevedo, a bearded, bespectacled economics professor who took a leave from the Federal University of Bahia to become Petrobras president and chief executive.

Unlike other nationalized firms, where budgets and revenue are in the hands of politicians, Petrobras must answer to Wall Street. Although the Brazilian state owns 37% of the company and controls 56% of the voting rights, much of the firm’s equity consists of freely traded shares, including American depositary receipts listed on the New York Stock Exchange.

This structure has provided the organization with billions in capital to improve its operations. It has also forced Petrobras to open its books and adhere to the regulatory standards for public companies. And it has imposed discipline on the government, which collects taxes on Petrobras but can’t pinch from the oil company’s purse.

Petrobras last year posted revenue of $74 billion and net income of $10.3 billion, up 67% from 2004.

“They run their national patrimony as a business, not the state cash register,” said Jorge Pinon, an energy researcher at the University of Miami and a former executive with oil company Amoco in Latin America.

To promote competition in the oil sector, Brazilian lawmakers in 1997 approved legislation breaking Petrobras’ monopoly over production and refining. Although the state firm still dominates, it now must go head-to- head with outsiders when bidding on drilling leases in Brazilian waters. The company also faces competition in the retail sector, where it operates about 7,200 gas stations, about 20% of the nation’s total.

The way Petrobras does business differs markedly from that of Pemex, which has a monopoly on Mexico’s oil industry from the wellhead to the pump. Critics have long derided the firm as a tar pit of inefficiency and corruption. Thieves make off with an estimated $1 billion in fuel every year. A top executive resigned in late 2004 after revelations that he billed the company for his wife’s liposuction.

But analysts say the federal government is committing the biggest offense. Mexico’s treasury last year siphoned $54 billion from Pemex -- more than 60% of the firm’s revenue -- to fund public spending. The firm lost $7.1 billion, the eighth straight year it had bled red ink. Its heavy tax burden has left it little to spend on drilling and exploration to replace Mexico’s aging Cantarell field, where production declined 12% in the first eight months of 2006.

In March, Pemex executives announced the discovery of what they say is a promising field called Noxal in the deep waters of the Gulf of Mexico. But the company lacks the capital and know-how to develop the field on its own. One solution would be to bring in an experienced partner in exchange for a share of the oil, a standard industry practice. But Mexico’s constitution allows Pemex to work with outsiders only on a fee basis.

Gabrielli said Pemex executives had talked with him about hiring Petrobras to help with deep-water projects. Gabrielli said he told them that he wanted a piece of the action, not a paycheck.

“We are not a service company,” Gabrielli said. “We’re a producer.”

To that end, the company is spending big to keep the oil flowing. Petrobras plans to invest $87.1 billion in its operations over the next five years, including $17.4 billion for projects such as refineries and vessels.

That spending is visible at the Maua-Jurong shipyard in the city of Niteroi in Rio de Janeiro state, where hundreds of workers are readying a Petrobras vessel known as an FPSO, or a floating production, storage and offloading system, to go to work in Brazilian waters next year. Petrobras and other offshore operators use such movable platforms to process and transport oil from remote wells.

The units are handy in areas where it is not cost-effective to lay underwater pipelines. Another advantage is that they can be disconnected from wells quickly and moved out of harm’s way in the event of hurricanes. Petrobras has asked U.S. authorities for permission to introduce the technology into the Gulf of Mexico, where it is ramping up operations.

The company’s U.S. subsidiary, Houston-based Petrobras America Inc., has secured 287 leases in the gulf and is planning to invest $1.5 billion in the region over the next five years, according to Renato Bertani, president of Petrobras America.

The company has made discoveries in two fields known as Cascade and Chinook, about 200 miles off the Louisiana coast in waters 7,000 to 9,000 feet deep. Petrobras is the operator and has a major stake in those fields, where the first wells are scheduled to come on line by 2009.

Other gulf holdings include an 80% participation in a gas field known as Cottonwood, which is slated for start-up in 2007. The company has a non- operating minority stake in an oil field dubbed St. Malo, whose lead operator is San Ramon, Calif.-based Chevron Corp. Last month Petrobras purchased a 50% interest in a Texas refinery.

Bertani declined to give an estimate of the size of the company’s Gulf of Mexico discoveries. But he recently told Dow Jones Newswires that potential reserves of the Cascade, Chinook and St. Malo fields could be as much as 1.5 billion barrels.

The gulf “is one of our priority areas outside of Brazil,” Bertani said. “We think there is sufficient potential to reward our investment.”

Going abroad has its risks. Bolivia’s nationalization of its hydrocarbon industry this year has strained relations with Brazil, its biggest customer for natural gas, and threatens investments made there by Petrobras. Bolivia wants to raise natural gas prices significantly and aims to assume control of two Petrobras refineries on its soil. The move has Petrobras scrambling to secure other sources of natural gas.

Petrobras likewise doesn’t produce enough diesel to meet Brazil’s needs. So it is looking to green alternatives. The company has patented a fuel known as H-Bio that uses vegetable oil in the refining of conventional diesel. The company said the process would save vast amounts of petroleum, turn out a cleaner-burning product and allow Petrobras to reduce its imports of diesel fuel substantially.

Petrobras is also betting heavily on the petroleum diesel substitute known as biodiesel, which can be made from animal fat or vegetable oil from crops such as soybeans, palm or castor beans. The company is building three production plants to try to meet a government mandate requiring every liter of diesel sold in Brazil to contain 2% biodiesel by 2008, rising to 5% by 2013.

It is already selling a blend containing 2% biodiesel in hundreds of its retail gas stations, and it has incorporated biofuels into its long-term planning.

“Petrobras decided not only to be an oil company but an energy company,” said Ildo Luis Sauer, its director of gas and energy. “It’s a strategy for our survival as a company.”

marla.dickerson@latimes.com