Petrobras' Safety Net Explained

Despite continual increases in the price of oil, Brazil's largest oil producer, Petrobrás (PBR Quote - Cramer on PBR - Stock Picks), appears to be more prepared than ever to face a world crisis on the scale of those in the 1970s and 1980s. A solid company, with international holdings and shares traded on the New York Stock Exchange, it has already achieved pioneer status this year with regard to the exploration of new sources of energy. What are the reasons for its success?

First of all, "PetroBrax" has remained loyal to its roots. The word refers to the Brazilian government's 2002 project to change the name of the company to make it better known internationally. The idea at the time was to transform Petrobrás into a transnational energy company. The name change followed the steps of British Petroleum which, in the same year, changed the meaning of BP (BP Quote - Cramer on BP - Stock Picks) to "Beyond Petroleum" in its push towards globalization.

As is well known, the name change did not occur. However, the objective behind it is close to being reached. Whereas in 2002, oil extraction was at 1,320 million barrels per day, in 2007 the company was extracting 1,918 million barrels per day. This increase of approximately 45% made a crucial contribution to the greatest achievement of the company and the country in terms of energy -- the long-sought goal of self sufficiency in oil. This was only made possible due to the large investments made in the sector, including the construction of the P-50 platform in the Campos Basin off Río de Janeiro.

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"I don't want to boast, but Brazil was successfully able to meet the challenges of investment and technological development. That is, Petrobrás is close to self-sufficiency for a reason," according to Eduardo Fernández Pestana Moreira, vice-director of the Faculty of Economics, Management, Accounting and Actuarial Science of the PUC (Pontifical Catholic University) of São Paulo. The company boasted on April 21, 2006, that self-sufficiency had been achieved, although this claim is based on an estimate, not firm data, and some would dispute the company's claim.

The characteristics of Brazilian oil -- which is heavy oil -- mean that light oil needs to be imported to help refining. Thus, Brazil produces more than it consumes -- a sign of self-sufficiency -- but exports part of the commodity and imports the same fraction of better quality oil. Walter de Vitto, petroleum and gas analyst of the consultancy firm Tendencias, notes that "if we think of petroleum as a derivative , we don't have the refinement capacity that the country needs."

To deal with this deficiency, the Ministry for Mining and Energy announced a project to construct a large refinery, which would cost around 8,000 million reales ($5 billion). However, the political dispute over which State the installation will be constructed paralyzed the process. One of the last large investment projects along these lines was the Henrique Lage (REVAP) refinery, inaugurated in 1980. At present, Brazil has 16 units operating at 1,965 million barrels a day.

In any case, the experts note that the country's position in the oil market has improved. The increase in production and the investment in new extraction techniques increased the country's bargaining power and, more importantly, its ability to deal with crises related to the instability of oil prices. The country's president, Luiz Inácio Lula da Silva, recently declared: "When Petrobrás was created, there was an almost total dependence on the exterior. We were producing 2,700 barrels per day when demand was at 172,000 barrels. Today, on the contrary, we are experiencing the best macroeconomic environment of the last 20 years and Petrobrás has been fundamental to this."

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