Document of the Fernand Braudel Institute of World Economics Associated with the Fundação Armando Alvares Penteado - N. 45 2011

Will offshore discoveries change the course of Brazil’s development? Oil in Deep Waters

Norman Gall Ricardo Stuckert/Presidência da República Stuckert/Presidência Ricardo

Celebration at the São Paulo Stock Exchange - September 2010

1. “A lottery prize”

After Petrobras, Brazil’s state-controlled oil London, nor in New York,” Lula proclaimed. “It company, found giant fields of oil and gas in the was in São Paulo, in our green and gold Bovespa, Santos Basin, at great ocean depths in the South that we consecrated the greatest capital-raising in Atlantic, President Luiz Inácio Lula da Silva called the history of world capitalism.” the discoveries a bilhete premiado, a winning lottery There have been cascading announcements of ticket. In September 2010, concluding a $70 discoveries since Petrobras and its private partners, billion stock promotion to finance a $225 billion British Gas (BG), Repsol of Spain and GALP of investment program announced by Petrobras, Lula Portugal, began reporting in 2006 that they found a and a clutch of high officials mounted the podium cluster of giant fields up to 300 km. offshore, some at São Paulo’s Bovespa stock exchange in a blizzard 7,000 meters beneath the ocean’s surface, trapped of confetti, wearing bright orange jackets and white safety helmets adorned with Petrobras insignia as Continued on page 2 they posed for photos in the style of a victorious Norman Gall is executive director of the Fernand Braudel Institute of football team. “It was not in Frankfurt, nor in World Economics and editor of Braudel Papers.

This issue of Braudel Papers is sponsored by Revenue Watch Institute. 2 BRAUDEL PAPERS

in the pores of limestone beneath salt market with government support beds more than 2,000 meters thick. and with privileged access to huge When the first supergiant discovery, reserves in deep waters of the originally called Tupi, was declared Campos and Santos basins. Brazil ready for commercial development is now the world’s biggest market at the end of 2010, the field was for equipment and services in the renamed Lula in homage to the offshore oil industry and Petrobras Fernand Braudel Institute president who was retiring after eight the biggest single buyer. Petrobras is of World Economics years in office with an 80% approval now a conglomerate, with interests Associated with Fundação Armando Alvares Penteado (FAAP) rating in opinion polls. in gas pipelines, supertankers, Rua Ceará, 2 – 01243-010 Seven of the 10 biggest oilfields petrochemicals, electricity São Paulo, SP – Brazil Tel.: 55 11 3824-9633 discovered in the world since generation, fertilizers, ethanol and e-mail: [email protected] 2001 are in the presalt beds biodiesel. Yet in deep waters it www.braudel.org.br of the Santos Basin, according still must overcome problems of Board of directors: to the oil consultancy Wood geology, technology, logistics, safety, Chairman: Antônio Carlos Pereira Mackenzie. “Brazil is the world’s finance, politics, human resources, Vice-chairman: Eduardo José Bernin largest exploratory opportunity,” corporate governance and strategies the investment bank Credit Suisse of economic development. Members: Antonio Carlos Barbosa de Oliveira, Beno Suchodolski, Bianca reported, adding that “the presalt’s This special issue of Braudel Papers Rinzler, Cesar Hirata, Charles B. Neilson, full resource volumes are likely to attempts to analyze the scope and Claudia Maria Costin, Fernão Carlos Botelho Bracher, Gilberto Natalini, Idel be much higher than the volumes depth of these challenges. Metzger, Janet Ortega, Joaquim Elói currently disclosed for licensed Cirne de Toledo, José Luiz Pereira da Costa Dias, Joseana Requejo do Amaral areas.” After partnering in 29 * * * Marcicano, Lourival Sant’Anna, Luiz wells drilled there, BG doubled its Alberto Machado, Mailson da Nóbrega, Maria Helena Guimarães de Castro, estimate of oil and gas reserves for its These great oil discoveries came Maridite Oliveira and Paulo Tenani. 27% share in five exploration blocks at a climax in what has been called to 6 billion barrels of oil equivalent the best phase of Brazil’s history. The Executive director: Norman Gall Coordinator: Nilson Vieira Oliveira (BOE), which would raise the total decades since the end of military Manager: Margarida Osório Guimarães for these projects to roughly 22 rule in 1985 have seen consolidation billion barrels, in only part of what of democracy, curbing decades of Sponsors: now is seen as a vast oil province. chronic inflation and major gains in Armínio Fraga Neto Petrobras is a state-controlled social justice. Democracy, stability BASF company whose shares are publicly with rising consumption gave BM&FBOVESPA traded in São Paulo and New York. Brazilians a benign view of their Bradesco Despite its huge discoveries, the prospects. The Global Attitudes Fundação Itaú Social Fundação Odebrecht stock of Petrobras has languished Survey of Washington’s Pew Research Futurebrand below the price at its $70 billion Center found Brazilians more Instituto Natura stock flotation and even below satisfied with economic conditions Instituto Unibanco levels prevailing before discovery in than the citizens of any of 22 Itaú 2006 of the first giant field in the countries except the Chinese. Some Klabin O Estado de S. Paulo Santos Basin. Brazilian and foreign 77% think Brazil will become, or Unilever investors voiced concern over what already is, a world power, although Worldfund they see as political interference that concept remains vague.

Braudel Papers is published by the that has distorted the company’s The past quarter-century in Brazil Fernand Braudel Institute of World priorities and limited its operational coincides with what may be a high Economics capacities as it pursues complex and point of human development that ISSN: 1981-6499 costly efforts to produce oil and gas accelerated during the six decades in the ultra-deep waters of the South after World War II. Prodigious Editor: Norman Gall Deputy editor: Nilson Oliveira Atlantic. advances occurred on a planetary With its offshore discoveries scale in longevity, nutrition, Designer: Givanilson L. Góes since the 1970s, Petrobras is now productivity, communications, among the world’s most highly logistics, science, public health, integrated major oil companies, scholarship and many other fields Copyright 2011 Fernand Braudel Institute of World Economics dominating its large national of endeavor. Middle-class patterns BRAUDEL PAPERS 3 of consumption have been through partnerships with state “our passport to the future” proliferating throughout the companies. The share of state but warned against “hasty world. The challenge today is to companies in world oil industry spending that leaves for future sustain these advances. Brazil has revenues rose from 22% to 33% generations only debts and much to gain or lose from these since 2002. desperation.” Nevertheless, contingencies. Second, the surge of the new production-sharing Brazil indeed may be a special speculative trading of oil on regime fortifies a politically- case. Visiting Brasília in 1976, financial markets since the protected state capitalism with Takeo Fukuda, soon to become early 1980s exaggerated price broad discretionary powers prime minister of Japan, told fluctuations. Prices doubled in and little transparency. A his hosts: “After the oil crisis, it the 12 months to May 2008 reinforced Petrobras monopoly has become clear that resources as traders held hundreds of would reduce chances for are limited. This is a big event thousands of contracts for 849 competition and for spreading in the history of mankind. Your million barrels, or 10 times daily risk among several companies. country is a power in the 21st world production, before prices The new laws oblige Petrobras Century, a resources power.” peaked at $147 a barrel a few to become the operator, with This kind of talk became woven months later. a 30% minimum stake, of all into protocol in other countries’ Third, the financial fragility exploration blocks in “strategic” diplomacy with Brazil. Yet the of global oil companies and deep-water areas embracing talk is coming true. Brazil’s contractors, coupled with the 149,000 km2, an obligation that cornucopia of resources has come growing expense and difficulty would strain Petrobras’s already to life as booming commodity of finding new reserves, led to stretched manpower, financial exports as a world leader in, for mega-mergers over the past two and technical capacities. All example, iron ore, soybeans, decades that created super-majors operating decisions, including beef, poultry, cellulose, sugar and like Exxon-Mobil, Chevron, contracting of personnel, oranges. Guided by Embrapa, Conoco-Phillips and BP-Amoco, suppliers and service providers, the government agricultural as well as super-service providers would be subject to veto by research institute, application of such as Transocean, Halliburton political appointees in a new new techniques transformed the and Schlumberger. state company, PetroSal Petróleo, rolling cerrado scrub forests of Fourth, these new discoveries supervising these ventures. Brazil’s Central Plateau, an area are driven by a revolution in The idea of Brazil as a the size of the Great Plains of geophysics, enabling exploration “resources power” was reinforced the United States, into one of the beneath the massive salt beds by a new frontier in petroleum world’s most productive farming of the Gulf of Mexico and the discovery, among the last of regions. South Atlantic. Some analysts such frontiers on this planet. The pre-salt euphoria bred in predict that the world’s deep While Brazil’s deep-water oil the political class the illusion water output should double discoveries are a major target in of limitless resources on the to 12 million barrels daily the worldwide search for new horizon. Proposing legislation (BD) between 2010 and 2017, reserves, Petrobras may have to to create a new institutional mainly in the new “Golden move more slowly and cautiously framework for these discoveries, Triangle” of Brazil, the Gulf of in overcoming limitations Lula’s cabinet ministers cited Mexico and West Africa, but in financial, technical and “extremely low exploration risks also in Australia and Indonesia. manpower capacity. and great profitability.” Exploration and production Lula’s popularity was based on The giant oil discoveries in in these difficult environments a huge consumption boom. The Brazilian waters come amid four demanded new technologies boom was fueled by big increases changes that restructured the provided by an oligopoly of in government employment and political economy of the world multinational providers of salaries as well as a tripling of oil industry. First, control of the services and equipment, now the transfer payments, including the world’s reserves by traditional most profitable sector of the oil Bolsa Familia program that pays oil majors such as Exxon, Shell industry. small monthly sums to mothers and BP fell in recent decades In her inaugural address, to keep their children in school. from a dominant share to only President Dilma Rousseff The transfer payments and a big 5%, with access to another 30% called the pre-salt discoveries increase in formal employment 4 BRAUDEL PAPERS

contributed to the lifting of Brazilians many times have Discoveries 6,000 meters deep some 29 million Brazilians out taken benign outcomes for also occurred in the Gulf of of poverty. Brazilians are enjoying granted. Hence this warning in Mexico, but there is nothing else the fast growth of consumer 2009 from the late Italian-born like ours. We are in one of the credit to buy domestic appliances, geologist Giusseppi Bacoccoli deepest oilfields ever found.... In computers, motorcycles, cars in his book O Dia do Dragão Brazil long years of patient ant- and new homes, with personal [The Day of the Dragon], a like work have gone into proving loans growing by 26% yearly reflection on his three decades of that we have a competent state since 2003, at interest rates exploration for Petrobras: oil company; that we developed exceeding 40% that now absorb competitive knowledge and as much as 40% of monthly Many have spoken of the low technology; that we have a good income of indebted families. exploration risk of the pre- regulatory regime; that we offer Lula’s big bet on consumption salt. Not so! Even in the cluster political stability with clear rules rather than investment deprived of fields in the Santos Basin without tearing up contracts. We Brazilians of a long-term strategy. where Tupi [Lula] was found, cannot risk losing all this when, It has weakened the fabric of it is necessary to operate in hearing the ephemeral song of a democracy by using easy credit to waters 2,000 meters deep and grasshopper, we precociously exult raise unrealistic expectations. drill through thick beds of salt. about winning a lottery prize.

2. The ascent of Petrobras

Petrobras is one of the world’s against Carlos Lacerda, a journalist answer to the foreign oil “trusts,” most successful state oil companies. who was his main political enemy. Petrobras grew rapidly both as Its creation in 1953, after intense In his suicide note, Vargas charged a conglomerate and a vertically- political debate, came as nationalism that “a subterranean campaign of integrated major oil company at surged among Latin America’s international groups joined with a time when that kind of private extractive industries. Brazil’s first national groups” had tried to block enterprise had been falling into state oil monopoly, the National creation of Petrobras four months eclipse. In Brazil, Petrobras today Petroleum Council (CNP), was earlier. While this “subterranean exercises far more political and created by decree of President campaign” was never explained economic power than that attributed Getúlio Vargas (1930-45; 1951- further, mistrust of foreigners and to John D. Rockefeller’s Standard oil 54) in April 1938, barely a month dependence on them remained trust at the time it was broken up in after the nationalization of private one of the themes underlying the 1911, in an anti-trust case decided oil companies in Mexico. The CNP many controversies surrounding the by the United States Supreme was modeled after Argentina’s YPF development of Petrobras. Court. Despite many controversies, (Yacimentos Petroliferos Fiscales), Petrobras thrived in the Petrobras won acceptance as a vital organized in 1922 as Latin America’s crosswinds of nationalism and national institution performing first state oil company. In July 1938, internationalism. By the early critical functions. In his Oil and Brazil’s Academy of Arts and Science 1980s, it became the largest Politics in Modern Brazil, the awarded a gold medal to YPF’s company in South America, with Canadian historian Peter Seaborn founder, General Enrique Mosconi, $18.3 billion in revenues and Smith observed: a prophet of Latin America’s oil ranking 18th among all companies, nationalism who became a guiding public and private, outside the Petrobras came to the fore as figure for the Brazilian military United States. By 2009 Petrobras apparently the only solution to the leaders who played a key role in and its 81 subsidiaries had formed a problem indicated by the myths: persuading Vargas to create first the sprawling conglomerate that earned how to develop Brazil’s reputedly CNP and then, in 1954, Petroleo R$230 billion (US$132 billion) in vast oilfields without having Brasileiro S.A. (Petrobras). revenues, equal to 7% of Brazil’s ‘the trusts’ seize control of them. In August 1954, President Vargas GDP, which would rank it the 18th Indeed, from an entirely realistic shot himself in the heart following largest company in the Fortune standpoint, Petrobras was the only disclosure that one of his aides was Global 500. viable solution, even if the problem involved in an assassination attempt Created six decades ago as Brazil’s were only to carry out a thorough BRAUDEL PAPERS 5

exploration of Brazil’s sedimentary by the CNP in 1951 that went produced some natural gas. Between basins. Foreign companies had not, beyond 2,700 meters in depth 1953 and 1967, Petrobras drilled with few exceptions, indicated any before penetrating a thin formation 156 wells in Amazonia, mostly in interest. containing light crude. the Middle Amazon region of the The hopes of many Brazilians Nova Olinda discovery. However, When Petrobras was founded, who believed that the heartland exploration was still confined largely its technological dependence on contained abundant oil seemed to the banks of big rivers. Surveys foreigners was dramatized by the vindicated. Some foreigners deeper into the jungle had to await hiring of Walter Link, former chief supported this view. The American development of large helicopters geologist of Standard Oil of New geologist F. B. Plummer surveyed during the Vietnam war, which later Jersey (now Exxon), to organize the north-east for the CNP in carried heavy drilling equipment the new Petrobras exploration 1947 and then wrote: “The Piauí- into more remote areas, as well department. Link’s then fabulous Maranhão basin will supply as development of lighter and salary of $100,000 per year aroused petroleum for all Brazil and for waterproof geophysical equipment such indignation in some political Mexico and the Midwest of the that enabled seismic crews to roam circles that the finance minister United States. The region contains more widely to seek structures that refused to provide the foreign thick sediments of schists and could bear oil or gas. The search for exchange to pay him, so the army Link family oil and gas in Amazônia continues, disbursed the money. In 1954 Brazil by Petrobras and by HRT, a new had no university courses in geology. private company staffed by former Standard Oil’s Venezuelan subsidiary Petrobras technicians. (Creole) and Davy McKee, one of Initially, little attention was its leading contractors, agreed to paid in Brazil when Link and train Petrobras technicians. the Colombian chief geologist of When I interviewed Link at this Petrobras, Luis Morales, presented home in Laporte, Indiana in 1975, papers at the Fifth World Petroleum he explained: “There were only Congress in 1959 that took a 64 geologists in Brazil when I got pessimistic view of the prospects of there in 1954. We immediately sent finding large quantities of oil on 26 Brazilians to universities in the the Brazilian mainland. However, United States for training. Petrobras Link voiced more optimism set up a geology department at the about oil prospects offshore on University of Bahia, near where oil the continental shelf, and even was first found in Brazil, and then expressed guarded hope for eventual Walter Link, 1954 other Brazilian universities followed discoveries in the Paraná basin in suit. We wanted to explore in the limestone, with great domes and southern Brazil, which is covered Amazon, where the big problem anticlines.” by a thick layer of basalt that was access. We even lacked boats The region surveyed by Plummer limits the quality of geophysical to move supplies along the jungle never produced significant amounts surveys. Major offshore discoveries rivers. So we bought 22 boats in of petroleum, even though nearby had to await development of New Orleans in order to begin areas of the Amazon delta and the more advanced technology for geophysical work.” continental shelf later were explored seismic surveys and more powerful by foreign companies under computers for processing the Discoveries in Amazônia “risk contracts” with Petrobras. geophysical data. Between 1954 and 1960, Moreover, after 4,000 barrels of The Oil and Gas Journal Petrobras spent US$300 million on oil flowed from the Nova Olinda published a shorter version of Link’s exploration, described at the time as well during tests, the discovery was paper that also went unnoticed in the largest single such investment declared non-commercial, though Brazil. In 1960, when Link resigned in the world. Great excitement somewhat more productive than and presented his final report to the spread through the country when, much more shallow wells drilled President of Petrobras, his views in November 1955, Petrobras by government crews along other were leaked to the Brazilian press, struck oil at Nova Olinda on the Amazon tributaries (at Itaituba provoking political controversy but Madeira river, one of the Amazon’s and Bom Jardim) in 1926-32 gradually winning acceptance. Brazil main tributaries, in a well started that brought forth oil shows and did not show promise of becoming 6 BRAUDEL PAPERS

a close working relationship with General Ernesto Geisel during the 15 years in which Geisel dominated Petrobras’ activities. “In 1969 we even managed to buy oil at 99 cents a barrel from Egypt at a time when the Nasser regime was having foreign exchange problems after its defeat in its 1967 war with Israel. Petrobras was a much-solicited customer in those years, both by the

Guilherme Kramer majors and by independents, which had emerged as big players in the world oil market during the crude glut of the 1950s and 1960s.” The military takeover of April 1964 was a turning point in the self-sufficient in oil until the early in 1965 before rising to US$274 development of Petrobras. Coming 1980s, when ethanol began making million in 1969. at the end of the state company’s deep cuts in petroleum product first decade, it ended the political consumption and when offshore A buyer’s world market struggles and rapid turnover of activity, begun in 1967, led to big Exploiting its monopoly company presidents that plagued production increases. purchasing power for Brazilian its operations. The military set the When Petrobras was founded in imports in a buyer’s world market, course for its professionalization 1954, Brazil’s oil production was Petrobras obtained discounts in and expansion over the next two only 2,721 BD, less than 2% of different ways. In 1960, Platt’s decades. By 1961, the unions had the country’s consumption, and Oilgram called Petrobras the “largest become strong enough to impose estimates of reserves hovered around outside buyer of crude oil today”. In their own candidate for company 100 million barrels. During its years 1965, Petroleum Intelligence Weekly president and by early 1964, after of infancy (1954-60), Petrobras reported that Petrobras “buys crude a series of strikes, had forced the increased production to 80,910 at prices as low as or lower than nationalization of the small refineries BD by developing the CNP’s 1939 virtually any other oil importer”, that remained in private hands. ,In Bahia discovery. But consumption after it unilaterally extended Oil and Politics in Latin America, rose at the same time from 150,000 payment terms from 120 to 180 George Philip of the London School BD to 264,000 BD. Production days and, in June 1964, the new of Economics wrote: ran a losing race with consumption military regime decreed that Brazil’s until consumption peaked at 1.1 suppliers would have to take at least The 1964 coup was technocratic million BD in 1980 and then began 20 per cent of the contract price in rather than economically liberal to decline. Brazilian exports rather than cash. at least in terms of its effect upon During the formative years of Sellers of crude to Brazil wound up Petrobras, ending the search by Petrobras, the cost of big annual giving cash discounts of up to 4%. Petrobras managers and workers increases in consumption was “We placed our most important for a base outside the organization cushioned by the glut in world orders in March or April, at the as a weapon in internal political oil markets. Although the volume end of the Northern Hemisphere conflicts, and the consequent of Brazil’s crude oil imports rose winter, the time of the year when substitution of political for from 112,000 BD to 282,000 BD world demand for oil is weakest”, organization criteria in internal between 1957 and 1969, total explained Shigeaki Ueki, former decision-making… There was a foreign exchange outlays for these president of Petrobras (1979-84), limited amount of purging and the imports remained flat in nominal in an interview. As commercial relatively stable and authoritarian terms and fell in real terms. director of Petrobras earlier in political climate discouraged According to the International his career (1969-74), Ueki was disgruntled Petrobras employees Monetary Fund (IMF), oil import responsible for all Brazil’s oil trading from pressing their grievances costs declined steadily from US$262 before becoming Minister of Energy through political action. However, million in 1957 to US$199 million and Mines (1974-79), developing the economic liberals, who had BRAUDEL PAPERS 7

been prominent in fomenting the then industrial director, then 1964 coup, made very little progress successively head of Petroquisa in changing the structure of the oil (petrochemicals subsidiary), industry. BR (domestic distribution) and Interbras (international trading) Petrobras continued to grow before serving as company president under both civilian and the military in 1988-89. Searching for oil in 2.000 metros rule. Its oil import monopoly was de água the Middle East, Petrobras in 1975 decreed in 1960. One of the last acts Coluna de discovered the supergiant field of President João Goulart before perfuração of Majnoon (12 billion barrels Leito do mar fleeing the country in 1964 was reserves) in the marshes near Basra to sign a decree nationalizing the in Iraq, at the disputed border with remaining private refineries, a move Jazidas pós-sal Iran, drilling 20 wells before being not rescinded by the new military forced to abandon Majnoon after regime. A new petrochemicals the outbreak of the Iraq-Iran war. subsidiary, Petroquisa, was formed “I went to the Middle East in 1967 to dominate this fast- pré-sal more than 500 times: Iraq, Saudi growing industry by monopolizing Arabia, Iran, Algeria, also Nigeria. production of basic feedstocks and Brazil had no credit and I had to entering into downstream joint buy large volumes of petroleum, TADO S 7.000 metros abaixo E ventures with private firms. In A 800,000 barrels a day,” Guedes da superfície do mar NCI GÊ

1971, another subsidiary, Petrobras /A recalled. In those years, he was able Distribuidora (BR), was set up to Jazidas pré-sal to barter Middle East crude oil for IGO FORTES IGO DR

compete with foreign oil companies RO Brazilian products such as military

that, between them, still had the E hardware, frozen chickens, canned lion’s share of retail sales. Between beef, soybean oil and sugar. Long

1970 and 1978, both net sales and MARIOTTO WILLIAM : before that, as a young chemical net income, expressed in current engineering graduate, he received a dollars, multiplied roughly tenfold, I NFOGR ÁFICO hint of the Brazilian oil industry’s rising to exceed US$1 billion, future in his first job analyzing even as Brazil had to borrow crude oil in the laboratory of the abroad to continue importing Landulfo Alves refinery in Bahia. increasing quantities of expensive returned to its old mission with “A supervisor gave me a sample of oil, contributing to the debt crisis added desperation and zeal as the crude oil to analyze for processing of the 1980s. But the surge of oil average price of imported crude rose in refineries and asked me where prices hugely expanded Petrobras’ from US$13 a barrel in March 1979 the oil came from. I tested the cash flow and profits, as it did to a peak of US$34 in October oil for a couple of days and sent for big oil companies all over the 1981. In those years, however, a report saying that the oil came world. As did the majors during Petrobras’ investments in offshore from the Carmópolis, Brazil’s first the 1970s, Petrobras appeared to exploration and development were giant field, discovered in 1963 in shift the focus of its business, as beginning to mature, giving new the neighboring state of Sergipe. well as the purpose of its monopoly strength to the old dream of self- ‘Wrong,’ said my supervisor. ‘This role, from the old mystique of sufficiency. oil comes from Cabinda in Angola. achieving self-sufficiency for Brazil If you join the maps of South in oil production toward expansion Bahia and Angola America and Africa, Carmópolis into downstream enterprises – The career of Armando Guedes and Cabinda would lie right next from refining and transport to Coelho embodied the ascent of to each other.’ That was before the petrochemicals, fertilizers, mining Petrobras in the world oil industry. separation of the two continents was and promotion and trading of Born in the interior of Goiás confirmed by geological research.” Brazilian exports – that made it look State, he joined the company in That also was four decades before like an energy-related conglomerate. 1964 as a refinery engineer in supergiant oilfields were discovered However, after the second oil shock, Bahia to become later head of below the massive salt beds of the which shook the world industry logistics, then commercial director Santos Basin, inspiring a new wave much more than the first, Petrobras during the oil crises of the 1970s, of hope. 8 BRAUDEL PAPERS

3. Below the salt

“When we drilled beneath the adding: “The vestiges of the rupture University of São Paulo showed that salt, we entered the realm of the reveal themselves, if someone brings these regions were once part of the unknown,” said Peter Szatmari, a forward a map of the world and same land mass. soft-spoken, erudite Hungarian-born considers carefully the coasts of the “The opening up of the oceans, geologist of poetic inspiration who three [continents].” the fruition of geophysics as a field works at Cenpes, the research center But it was not until 1912 that method, the advent of the airplane of Petrobras. “We were finding a coherent theory of continental as a field vehicle, and the wide something entirely new beneath drift was formulated by an intrepid availability of government support the ocean, as when Columbus was astronomer named Alfred Wegener, have combined to bring about this discovering a new continent.” the son of an evangelical pastor. new age of exploration,” Robert Szatmari is one of many foreigners Wegener published a paper in Phinney of Princeton University who, over the centuries, found a new a German journal of geography observed in 1968. These searches world in Brazil. Having studied salt rejecting the idea that the Mid- produced a mature theory of plate formations since his escape from Atlantic Ridge beneath the ocean, the tectonics, holding that the Earth’s Communist Hungary in the 1950s, longest mountain range in the world, outermost layer is fragmented into a at the universities of Edinburgh, was a relic of a land bridge between dozen or more large and small plates Princeton and Columbia, Szatmari South America and Africa. He that are moving relative to each other came to Rio de Janeiro in 1973 to argued that the great ridge “should as they ride atop hotter, more plastic teach salt tectonics to Petrobras be regarded as the zone in which rocks mobilized by heat surging geologists. “The ancient continent the floor of the Atlantic, as it keeps from the planet’s core. The process of Gondwana divided and made way spreading, is continuously tearing of separation of South America from for a primeval sea,” Szatmari told me. open and making space for fresh, Africa took nearly 40 million years. “The salt from that sea evaporated relatively fluid and hot [rock rising] to form beds which sealed the from depth.” Wegener survived “Ring of Fire” concentrations of microbiolate battle wounds in the arm and neck The breakup of Gondwana began fossils for millions of years.” Around after being drafted into the German 150 million years ago with a series the time that South America and army at the start of World War I, of cataclysmic events, perhaps larger Africa became separate continents, only to freeze to death in 1930 while than the great Asian earthquakes dinosaurs roamed the ancient Brazil exploring the Greenland icecap. But and tsunamis of 2004 and 2011 that Shield, billions of years old. The he left behind a path-breaking book, spread havoc along the “Ring of Fire” process of separation of Africa and The Origin of Continents and Oceans in the Pacific and Indian Oceans in South America continues today at (1915; 1928), on the separation of bursts of energy that temporarily the rate of a few centimeters every great land masses from the primeval altered the Earth’s rotation. The year. continent that he called Pangaea, breakup began as two giant plumes The discovery of supergiant oil from which the present continents of molten magma erupted from fields below massive salt beds under emerged. Continental drift explained the Earth’s mantle – the St. Helena the South Atlantic is fruit of a the jigsaw-puzzle match between the plume to the north and at Tristan long and tortuous accumulation of coasts of South America and Africa, da Cunha to the south – forming knowledge on a global scale, viewed with its closest fit near the Brazilian what is now the chain of submerged through a prism that focuses on the city of Fortaleza and Accra in Ghana, mountains and volcanoes known as very remote past. A century after correlated by fossil remains on the the mid-ocean ridge. The plumes Columbus sailed to what still is two continents. of magma emerged as heat from known as the New World, Abraham Wegener’s radical ideas were the interior of the planet caused a Ortelius, scion of an Antwerp rejected by many scientists until thinning, weakening and swelling merchant family and author of the proven by new radioactive dating of the continental crust in what first modern atlas, Theatrum Orbis techniques, applied widely in is now the southernmost part of Terrarum (Theater of the World), the 1950s and 1960s. Tests of South America, creating hot spots wrote in 1596 that the Americas radioactivity in rocks 2 billion years in the crust and a series of fractures. were “torn away from Europe and old in Northeast Brazil and West The fractures opened a breach that Africa… by earthquakes and floods,” Africa by geologists at MIT and the split in two the tectonic plate of BRAUDEL PAPERS 9 the supercontinent of Gondwana, 120,000 meters in countless cycles of cover 85% of the continental shelf. creating two plates: South America replenishment and evaporation. Being lighter, more plastic and and Africa. The breach widened Salt is a common substance, more buoyant than surrounding over millions of years as the magma basic to the metabolism of living sedimentary rocks, the salt is forced cooled to become denser continental cells. Although it long had been a upward by tectonic movements, formations that sagged to form commodity of trade and a prize of like toothpaste extruded from a basins that became lakes where warfare in preindustrial societies, tube, to form giant submerged microorganisms flourished, only to the evolution of modern drilling canopies. The resources hidden be buried under the beds of salt that techniques by the late 18th Century under extensive canopies of salt remained after the waters evaporated. showed that salt deposits lay beneath revealed their potential in 1996, Scientists still debate the origin of large swaths of the Earth’s surface, when Phillips Petroleum found oil water on our planet. But most now conspicuously at the edge of present from its Mahogany platform beneath agree that, as a team of Petrobras or primeval continents, as in the a salt sheet some 3,300 meters thick. geologists state in an encyclopedic Persian Gulf, Iran and the Caspian In the Gulf of Mexico, wells were work, Sal: Geologia e Tectônica: Sea of Central Asia, where larger drilled more recently in waters more Exemplos das Bacias Brasileiras: “With volumes of oil have been found. than 2,000 meters deep, at similar the cooling of the planet [billions of One salt belt spreads below much depths to the Petrobras discoveries in of central and northern Europe, capping the huge deposits of oil and gas found in sandstones beneath the North Sea in the 1950s and 1960s, as oil companies developed drilling techniques that could reach 10,000 Institut Wegener Alfred feet below the seabed. Another belt stretches across the entire Great Lakes region of North America, embracing a salt dome near the village of Titusville, Pennsylvania where “Colonel” Edwin Drake drilled 69 feet in 1859 to find “rock oil,” used for illumination and medicinal purposes, launching the first stampede of prospectors in Portrait of Abraham Ortelius by Rubens what became the modern petroleum Alfred Wegener industry. years ago], water in the atmosphere Salt domes and other subsurface the Santos Basin, and prospects have began to precipitate to form the sea bulges of salt, known as diapirs, been located beneath salt canopies during the initial phase of the Earth’s became a prime target of oil more than 6,000 meters thick. history and led to the subsequent exploration as impermeable traps for The penetration of oil exploration formation and transformation of petroleum embedded in the pores below the salt was made possible by evaporites, or salts deposited by of reservoir rocks below. Another a revolution in geophysics. Salt plays periodic evaporation of seas and visionary, a one-armed mechanic havoc with seismic sound waves, lakes.” The process moves slowly, named Patillo Higgins, became which can travel twice as fast through but on a colossal scale. A salt bed obsessed with the potential of a salt than through surrounding 100 meters thick needs evaporation salt dome in Texas near the Gulf of sediments, distorting images the way a from accumulations of water totaling Mexico, called Spindletop, that in pencil seems bent when placed inside 6,000 meters, depths not seen today 1901 produced a gusher spouting a glass of water, “like a blurry, snowy except in oceanic trenches where 75,000 barrels daily. Beneath the TV picture,” said one geophysicist. tectonic plates have submerged. In Gulf of Mexico, created some 60 The pioneering discovery of the other words, the salt beds, 2,000 million years ago by invasion of subsalt Mahogany field by Phillips meters thick, capping Brazil’s deep- waters from the Pacific Ocean as the was made possible by innovation in water oil and gas discoveries in the western portion of Pangaea divided processing by supercomputers of 3D South Atlantic, would need successive to separate the continents of North seismic surveys, developed by Texas- water accumulations totaling and South America, salt deposits based Anadarko, the only foreign 10 BRAUDEL PAPERS

World Map by Abraham Ortelius, 1570

independent company now exploring Basin, Petrobras found its first giant fast through the formation that we Brazil’s presalt formations. “We are at field at Carmópolis in 1963. In a were sure it was salt, raising hopes the dawn of the global subsalt play,” desperate search for self-sufficiency as that we were finding another Gulf of said Clint Moore, who pioneered oil consumption and imports surged, Mexico.” However, they found only Anadarko’s seismic processing in the Petrobras increased its exploration dry holes off the coast of Espirito 1990s. “Now that we have a new tool budget by 32% in 1967, leading to a Santo State before moving north to to see under and within the salt basins strategic decision: ordering a seismic the Sergipe-Alagoas Basin, where of the world, it will make a huge survey of all 17 sedimentary basins in 1968 they found the Guaricema difference in the amount of oil and along its coast, covering some 4 field below 30 meters of water off gas that can be discovered in these million square kilometers, using the the delta of the São Francisco River, complex geological basins.” Petrobras still-rudimentary 2D technology. Petrobras’s first offshore discovery. absorbed these new techniques in its Drilling crews were probing deep-water discoveries. beneath shallow waters of the Advances in seismic imagery Step by step, Brazil’s exploration continental shelf, into ancient river During the 1970s, extensive horizons widened to find new deltas buried millions of years ago, oceanic belts of salt were found by prospects over several decades, from where low-quality seismic surveys seismic surveys along the coasts of dry land to offshore, then from 93conducted under Walter Link’s South America and Africa. Before shallow to deep and ultradeep waters supervision in the 1950s suggested then, these beds were drilled on land before reaching the presalt discoveries the presence of salt domes. “We in 1959 and in Brazil’s first offshore of the Santos Basin. In the 1930s and debated among ourselves whether exploratory well in 1968. After 1940s, the National Department of the anomaly we detected was an drilling eight dry holes, the crews Mineral Production (DNPM) made upward thrust of magma or a salt found the Garoupa field in 1974 several minor discoveries in the dome,” said Wagner Freire, who under 120 meters of water, overlaying Recôncavo Basin of Bahia. Following was chief of geophysics at the time. the salt, leading the rigs to move into rift trends northward into the Sergipe “But the seismic waves traveled so ever greater ocean depths along the BRAUDEL PAPERS 11 continental slope as it descended toward the abyssal plain of the South Agência Petrobras Atlantic. In the Campos Basin, now Brazil’s main producing region, more than 1,100 wells were drilled and 50 fields discovered since then. The advances in imagery derived from seismic soundings led to offshore petroleum discoveries at ever-greater depths, in a process akin to medical tomography, enhanced over the past half-century by ever- more sensitive equipment and faster computers. Seismic surveys in two dimensions (2D) in search of petroleum began on land in 1915, by bouncing sound waves off subsoil formations for mapping their density. These early seismic surveys could identify larger profiles of formations without getting detailed information about the imaged rocks or the pore fluids inside them. With commercial development of 3D surveys in the as it towed 10 cables, each 6 km. in abrupt thermal gradients, from 1970s, along with more powerful long and connected to detectors on the extreme heat of the reservoirs computers, better sensors and the seabed, generating data to be to near-freezing temperatures at unmanned vehicles operating in processed in a large computer. Newer the subsea wellheads to the tropical deep waters, geophysicists were able seismic techniques, called borehole atmosphere on surface rigs. These to map more detailed cross-sections geophysics, have enabled surveys challenges led to innovations such as of extensive oceanic salt belts to monitor the progress of drilling expandable casing, heated flowlines, beneath the continental margins. thousands of meters into salt beds advanced chemistry and super-sized In 1975 Petrobras started sending and detect changes in the nature of drilling vessels. professionals to foreign universities to formations ahead of the drill bit. Petrobras processed 3D seismic earn advanced degrees in geophysics. New software and professional skills surveys covering an area of 25,000 Since 3D seismics were introduced had to be developed to interpret the km2 to analyze the enormous salt in Brazil in 1978, the “information data emerging from below the salt. beds in the Santos Basin, at some density” of these surveys (seismic Petrobras had been probing places 5,000 meters thick, that traces per square kilometer) surged shallow waters of the Santos Basin trapped huge volumes of oil and from less than 100,000 to one since 1969, making minor discoveries gas in pores of sedimentary rocks million. over the years. As exploration went below that were the target of the In 1994, 4D seismic surveys to ultra-deep waters over the past Tupi/Lula discovery. These salt began, which are reruns of 3D decade to reach below the massive salt beds were formed in a narrow gulf surveys of the same territory with beds that trapped fossilized microbes or lagoon some 1,800 kms. long enhanced equipment, enabling after the continents divided, new by evaporation of a series of floods geophysicists to reduce drilling risk technological obstacles had to be during a brief period of geologic by detecting movement of oil, gas overcome. Drilling rigs had to handle time, some 500,000 years, coinciding and water through a reservoir over the greater weight and volume with the crunching of the primeval time as extraction escalates. These of pipe, risers, drilling fluids and landscape by the surges of magma can be large-scale operations. In a cement to complete wells penetrating from the Earth’s core that separated 4D survey of 1,520 km2 of oceanic beneath 7,000 meters of water, salt the continents of South America and territory in the Campos Basin, and sedimentary rock, hundreds of Africa. Petrobras geologists said they Brazil’s main producing area, a kilometers offshore. Oil industry still cannot explain why these thick seismic vessel bounced sound waves chemists had to develop drilling and salt beds were deposited over an area off complex geological formations completion fluids that could perform of 50,000 km2 , arguing that “the real 12 BRAUDEL PAPERS

tectonic-sedimentary significance region of the São Paulo Plateau,” a Brazilian margin than along the of these salt deposits is the key to a submerged volcanic rise, Petrobras African margin. Using new strategies better understanding what drove the geologists told the Offshore in seven years of work in pursuing opening of the South Atlantic.” Technology Conference (OTC) in innovative procedures, adjusted to The dimensions of these geological Houston. “The final breakup between the geological challenges of the area, features are enormous. “In the Santos South America and Africa was not Petrobras obtained a tremendous Basin, the continental crust extends symmetrical –the zone of stretched exploratory success and a world-class offshore for 700 kilometers in the continental crust is wider along the petroleum province was found.” Agência Petrobras

FPSO Cidade de Angra dos Reis, deck crammed with processing machinery

4. Risks and promises

Developing deep-water discoveries drilling for deep-water oil, he later of kilometers between shipyards and in the Santos Basin is forcing admitted to substantial “development factories on different continents and Petrobras to wrestle with frontier risks” in bringing these resources into lay hundreds of kilometers of flexible challenges in technology and logistics production. pipe, tubing, risers and insulated on a scale without precedent in the The world of deep-water oil electrical wiring to connect drilling oil industry as it leaps into the future. is inhabited by arrays of colossal and production platforms with exotic Although Brazilian officials promised machines and installations, apparatus thousands of meters below “extremely low exploration risks engineered to such demanding on the seabed. and great profitability” in seeking to tolerances as to permit continuous Floating a huge component to increase the state company’s control of operation at varying temperatures the place of assembly can be more the giant oil fields found in the South and pressures of ocean depths for expensive than its fabrication, Atlantic, the risks are now appearing. decades at a time. Gigantic specialist with rentals of some deep-water While Petrobras President José Sérgio vessels, some carrying cranes with a construction ships costing $500,000 Gabrielli justified low exploration lifting capacity of 10,000 tons, move a day. A subsea Christmas tree (the risks by the high success rate in huge subassemblies over thousands system of valves and electronics used BRAUDEL PAPERS 13 to control the flow from wells) can and may soon decline, notably people each month to and from weigh 30 tons, a manifold 200 tons. Marlim Sul, which in 2010 the platforms 150 kilometers Suction anchors installed in arrays produced 253,000 BD, or 13% offshore by helicopter. But the on the seabed can weigh 160 tons of Petrobras output. To meet this pre-salt clusters in the Santos each and rise to the height of a small challenge, Petrobras has launched Basin can be 300 kilometers away, apartment building. Inspection and the Varredura (Search) program too far for large-scale helicopter repair of subsea equipment is done in the Campos and Espirito Santo transportation. So we first have by large robots housed in undersea basins, identifying 284 prospects to reduce the number of people garages. with recoverable volumes of 2.2 working on the platforms by Petrobras has set an ambitious billion BOE that could be tied to intensifying automation. We goal to produce 6.4 million barrels existing infrastructure from older have to build offshore platforms daily of oil equivalent (BDOE) by fields. midway between the coast and 2020 in Brazil and internationally Consultants say that Petrobras the pre-salt discoveries to serve (mainly offshore in the Gulf of may spend $1 trillion in coming as logistical hubs with sleeping Mexico and West Africa). This would years in capital and operating costs quarters, so that workers arriving be 132% more than in 2010. Brazil of deep-water projects, a sum equal aboard boats can be distributed would produce 4.9 million BDOE, to half of Brazil’s GDP for 2010, by helicopter to the operating rigs including 2 million BDOE from the in by far the biggest industrial and platforms after overnight stays Santos Basin. But private analysts undertaking in Brazil’s history. on the logistical hub. The second have been skeptical of these goals, Petrobras’s annual capital spending logistical problem is the delivery of since historically Petrobras has fallen for the current decade, at more supplies to offshore operations. You short of its announced goals by than $50 billion, is much more need transportation of chemicals, 13%. The investment bank Credit in constant dollars than NASA’s machines, electricity. We probably Suisse forecasts 2020 production at yearly budget in the 1960s, when will have specialized platforms 4.6 million BDOE, 28% below the the United States was preparing dedicated to generating electricity Petrobras target. to send a man to the moon. Few and others to mix chemicals for public agencies in the world can drilling fluids.” Depletion match the scale and scope of its One difficulty of creating these If Petrobras were to reach contracting activities. hubs is assuring enough stability these goals, it not only would In the Santos Basin, bases for in rough seas to permit efficient be doubling output but also be large fleets of helicopters and mooring, landing and departure of compensating for depletion of 2 support ships should change the ships and helicopters. “Everyone million barrels daily of current ecology of the seashore, with the thinks it’s easy, but it isn’t,” said capacity at the rate of 10% port city of Santos becoming a José Formigli, Petrobras’s manager yearly over the current decade. new managerial hub for offshore of pre-salt operations. “And what’s Production from the seven major development. Guilherme Estrella, the price? We even were offered the fields of the Campos Basin, with Petrobras’s director of exploration use of aircraft carriers as hubs. But 44% of the domestic output of and production, imagines 50 aircraft carriers have the bad habit Petrobras, has been falling steadily platforms harvesting the initial of swerving from side to side. They over the past two years, at annual discoveries, each consuming 100 have thin hulls that they need for rates of up to 20%, after more megawatts of electricity, totaling speed, so when they stop forward than two decades of operation. 5,000 megawatts of capacity motion they sway and helicopters Depletion was signaled by generated by 200 gas-fueled can’t land on them.” increasing amounts of water turbines, equal to the consumption At the OTC Conference in produced along with oil and of Greater São Paulo, with its Houston in 2009, Formigli gas from the wells. The most roughly 20 million inhabitants. explained why Petrobras must dramatic example is the giant “In the pre-salt discoveries, innovate to develop the pre- Marlim field, where production we have two kinds of logistical salt cluster, given the scale of fell from 645,000 BD of oil and problems,” Gabrielli explained in production and the “unique gas in 2002 to slightly more than an interview. “The first is about characteristics” of the area: 200,000 BD after declining by people, which is a problem of “ultradeep water, remote location, 30% in 2010. Meanwhile, other distance. In the Campos Basin, contaminants in producing fluids, Campos fields are reaching or currently our main producing area, high gas-oil ratio, etc.” The main already reached peak production we transport more than 60,000 contaminants are carbon dioxide 14 BRAUDEL PAPERS

and hydrogen sulfide. One major drills, gathers and separates oil and special chemicals are added obstacle, Formigli said, is the gas from some 35 wells spread over and the pipe is continuously lack of space on the decks of 80 square kilometers on the sea lubricated.” The instability of salt converted supertankers (FPSOs) floor, housing sensitive equipment beds impedes horizontal drilling used as production hubs, crowded in a pressurized shed the size of a to increase recovery from reservoirs with machinery because of the football field that is planted on the immediately below the salt. amount of specialized equipment seabed to protect against undersea Laying the pipe to send gas needed to separate and process the currents and avalanches. Data to the mainland is one of the natural gas contained in the crude from the operation of the Perdido complex engineering challenges oil, removing contaminants and complex, as well as from Shell’s that Petrobras faces in scaling up reinjecting large volumes of gas, BC-10 project in Brazil’s Campos production. Oil can be shipped carbon dioxide and water back Basin, is monitored and analyzed to market on shuttle tankers, but into the reservoir to maintain well at a remote control center in New gas needs pipelines. The presalt pressure. This is one reason why Orleans. In the deep-water Parque discoveries forced Petrobras to the world oil industry is seeking to das Conchas field in the Campos think of expanding the gas market place more production equipment Basin, Shell in 2009 installed the because of the huge volumes of on the seabed. first full-field development using gas in the flow of oil from these Scientists and engineers at subsea oil and gas separation and giant fields. Flaring of gas is now Cenpes, the research center of subsea pumping, even before this forbidden by law. Gas can be Petrobras in Rio de Janeiro, are technology was incorporated in pumped back into the wells to trying to find a way of placing the Perdido complex that began sustain reservoir pressures, but automated processing plants to operations in 2010. not in the volumes expected when separate oil, gas and water on the To produce oil from deep waters presalt production escalates. seabed, some 2,000 meters beneath 300 kilometers from the coast in So the Allseas Solitaire, the surface waters. The plants would the Santos Basin, Petrobras must world’s largest pipe-laying vessel, be powered by undersea electrical overcome technical and logistical plied the Santos Basin in 2010 to generators that also would pump problems more severe than those install 200 kilometers of 18-inch oil and gas through pipelines laid faced by companies in the Gulf of pipe on the seabed 2,200 meters along the bottom of the South Mexico, now the source of one- below to connect the Tupi/Lula Atlantic to gathering stations and fourth of U.S. oil production, discovery with the shallow-water terminals hundreds of kilometers where underwater salt deposits gas field of Mexilhão and a coastal away. Subsea pumping systems, cover 85% of the continental shelf. processing plant. gas/liquid and oil/water separation The salt beds in the Santos Basin Over the past decade, pipeline and raw water injection into wells are very thick, in some places companies followed petroleum are in the experimental prototype reaching 5,000 meters. They are exploration into greater ocean stage on the seabed of Brazil’s plastic, mobile and heterogeneous, depths, negotiating the irregular basins. containing different kinds of subsea terrain, stretching over salt, shifting position as drilling hills, valleys and trenches, to Perdido proceeds. “Drilling into the lay huge pipes over several The industry’s biggest conquest subsalt reservoir presents daunting hundred kilometers. The tubes so far in installing production challenges,” Petrobras engineers are engineered to resist corrosion, equipment on the seabed is Shell’s observed in Houston. “Of all these pressure, hurricanes, earthquakes, $3 billion Perdido platform in the challenges, salt creeping is the most mudslides, erosion and deep- Gulf of Mexico, mounted atop a common and difficult to manage.” sea pressures, for which careful moored floating steel cylinder at The salt beds are unstable and can geological surveys are needed roughly the same distance from collapse the casing that encloses to design the pipeline. The pipe the coast as the Tupi dicoveries. the drill pipe and engulf the drill sections are coated with heavy “Perdido opens up a whole bit. “Microcarbonate reservoirs concrete and epoxy, to protect new frontier in deep-water oil still are poorly known,” said one against floating as well as damage production,” said Tyler Priest, veteran reservoir engineer. “The by seabed fauna such as barnacles, an oil industry historian at the oil emerges from the reservoir and are welded on the ship before University of Houston. “It is the very hot into a cool environment lowering into the ocean. The most technologically advanced at only 40 centigrade, congealing Allseas Solitaire is 300 meters long, facility in the world.” Perdido as wax to clog the pipe unless roughly the length of the biggest BRAUDEL PAPERS 15 aircraft carriers, not counting a BP’s nearby Tiber field. Human waters lacked only a stray spark to 100-meter pipe-laying crane called and mechanical failures, including set off a disaster like Macondo. a stinger that releases the tubing neglect of maintenance protocols During 2009 in the U.S. Gulf under water. The ship, which can for complex equipment, overcame of Mexico there were 28 major oil carry 22,000 tons of pipes aboard, redundant safety systems installed spills, gas surges and episodes of is kept on location by dynamically- to prevent disaster. On the day workers losing control of wells, a positioned thrusters. At least 10 of the accident, Transocean and two-thirds increase over 2006. In other pipelines like this will be BP managers on the rig were the British North Sea there were needed for the Santos Basin as discussing a maintenance backlog 85 serious incidents over the past development accelerates. By 2020 from a BP safety audit listing 390 year, a 39% increase over 2009. Petrobras plans to drill a thousand items demanding 3,345 man- In Norway, there were 37 such wells, 40% for exploration and hours of work. cases in 2009, up 48% from 2008. 60% for production, at a total cost “Modern oil and gas drilling In Australia, there were 23 near of $100 billion. rigs and producing platforms are blowouts in the first half of 2010, enormous floating machines, with occurring at twice the rate of 2009. The devil is in the details powerful engines and responsible The accident records, supplied The laying of pipe is only for keeping within geologic by the governments of these four one of the hundreds of complex formations large volumes of countries, appeared in a survey by operations needed to bring highly combustible hydrocarbons The Wall Street Journal, to which Brazil’s deep-water discoveries at high temperatures and Brazilian authorities refused to into production. The demands of pressures,” according to a report contribute data. project management are testing on the accident commissioned The deep-water discoveries in Petrobras as few companies have by President Barack Obama. the Santos Basin are roughly 300 been tested in the history of the “Drilling rigs are dangerous kilometers from the coast, twice oil industry. In the management places to work, dense with heavy as far from shore as BP’s Macondo of these mammoth projects, with equipment, hazardous chemicals well in the Gulf of Mexico. many risks, the devil is in the and flammable oil and gas – Gabrielli warned: “The industry details. all surrounded by an open sea has developed neither technology The risks of exploration and environment far from shore, where nor equipment for a rapid and production in deep waters were weather and water conditions can adequate response to an accident dramatized in April 2010 by the change rapidly and dramatically.” of these proportions,” adding blowout in BP’s Macondo well in The commission added that the that “containment barriers do not the Gulf of Mexico, an accident causes of the Macondo accident function adequately, the drilling with many political, economic and “were rooted in systemic failures by of alternate relief wells takes too ecological ramifications, caused by industry management, extending much time and the oil gathering faulty maintenance and errors in beyond BP to contractors” that technologies are insufficient. We responding to a gas leak that fueled operate worldwide. must improve the mobilization an explosion. The $560 million capacity outside the company, Deepwater Horizon was a 33,000- Macondo of the armed forces, state and ton rig floating on pontoons and Disasters on the scale of municipal governments and civil dynamically positioned by huge Deepwater Horizon are rare, but defense.” thrusters, with a derrick rising near-misses are common. In the Petrobras is seeking to avoid 20 stories above its top deck. It months before the Macondo trouble of this kind after suffering was a workhorse of the fleet of accident, a blowout in Australian four major offshore accidents in Transocean, the world’s largest waters poured oil into the Timor recent decades, with scores of drilling contractor, which was Sea for weeks. In the Gulf of deaths and the loss in 2001 of the operating 11 rigs in the Gulf of Mexico on a rig owned by Noble, P36 platform in the Campos Basin. Mexico and another 11 offshore a drilling contractor with a Gabrielli argued that the Santos Brazil. A year before it exploded, worldwide fleet of 71 rigs, an out- Basin discoveries are so far from burned and sank while trying to seal of-control well dislodged a two-ton shore that a major spill may not the Macondo well, killing 11 crew piece of equipment on the deck, damage coastal ecology, although members, Deepwater Horizon set sending workers scurrying for this distance would frustrate rescue a world record by drilling 10,683 safety. A gas leak on a North Sea efforts by ships and helicopters to meters below surface waters in production platform in Norwegian preserve lives and equipment. 16 BRAUDEL PAPERS

5. The industrial challenge

José Sérgio Gabrielli de Azevedo, 61, five support ships.” Petrobras plans to “Strangulation and risk” may soon become the longest-serving add 810 vessels of different sizes and Brazil is now the world’s biggest CEO in the history of Petrobras. complexity, including tankers and market for goods and services in the Many of his 33 predecessors as support ships (tugs, anchor handling, offshore oil industry and Petrobras president over the past 57 years lasted fire fighters, etc.), to its fleet by 2020. the biggest single buyer. Yet the months rather than years. They have In August 2011, Gabrielli told scale, cost and complexity of these been army generals, politicians, labor investors in London that Brazil´s needs pose challenges to Brazilian leaders, lawyers, bankers, engineers presalt discoveries would be “at the industry in seeking a greater share of and geologists. An economist with same slope of production as in the business opportunities. “The great a doctorate from Boston University first 10 years of the North Sea,” strangulation and risk for pre-salt and a member of the governing which peaked at 6 million BD in development is the incapacity of Workers Party (PT), Gabrielli was 1999. As a matter of fact, it took not suppliers to deliver ships, equipment named by Lula to head Petrobras one but four decades for North Sea and machines on time and at in 2005 after serving for two years production to peak after discovery in reasonable cost,” Gabrielli warned. as director of finance and investor the Netherlands of the Groningen gas “When I speak of equipment I mean relations. A tireless international field in 1959. thousands of systems, some of them traveler who eloquently proclaims absolutely critical.” the achievements and prospects of Brazil and the North Sea According to a study by the Petrobras to investors and the press, But there is a critical difference consultancy Booz & Co., Petrobras Gabrielli also skillfully navigates the between deep-water oil in Brazil will buy or rent $400 billion in rough waters of Brazilian politics, and the North Sea. While offshore equipment and services during the where his future may lie. Meanwhile, Brazil is dominated by one company, current decade. For deep-water he tells audiences that the Petrobras Petrobras, as operator and buyer of exploration and development over the investment program is the biggest in equipment and services, development next few years, Petrobras is expected the world oil industry today, yet also of the North Sea, as well as the Gulf to order 330 turbine-generators, voices concern about “critical areas, of Mexico, was activated by scores 610,000 valves, 10,000 kilometers of strangulation” in the supply chain. of companies, sometimes competing subsea electrical cables (umbilicals), “One of them is drilling rigs,” he and sometimes cooperating, engaging 17,000 kilometers of flexible tubing said. “A rig takes three or four months thousands of the best minds in (risers), 4.8 million tons of steel, to drill a well through 2,000 meters of geology and engineering to evolve thousands of pieces of complex water. A converted supertanker known new technologies and work methods subsea equipment, demanding 68 as an FPSO (Floating Production for producing oil and gas in an million man-hours of engineering Storage Offshore) becomes the hub extremely harsh marine environment. and a billion hours of construction of a production system, using 15 or These companies included the majors and assembly labor. It remains to be 20 wells. So with one rig it takes four – Exxon, Shell, BP, Texaco, Gulf, seen whether Petrobras can mobilize years to create a production system. Mobil and Socal – as well as Norway’s sufficiently qualified technicians to Rigs are critical and Brazil doesn’t Statoil and Norske Hydro and dozens formulate and manage efficiently produce them yet. We also lack subsea of smaller independents like Phillips, orders of this size and complexity, systems, tubing to connect the ocean Occidental, Conoco, Sohio, Hess without breeding stories of corruption floor to the surface. We must advance and Ashland. These companies in and leaks of inside information. in the area of large turbo-compressors, turn created an intensely competitive As of 2009, orders from Petrobras which are floating gas-fired electricity market for hundreds of firms dominated the world market for generators. We are talking about offering oilfield supplies, services and deep-water floating production gigantic quantities of equipment. equipment, as clusters developed in systems, mainly FPSOs that receive, Each system produces from 100,000 the ancient fishing ports of Stavanger store and offload oil and gas from BD to 180,000 BD. So if we are (Norway) and Aberdeen (Scotland). the seabed, with 23 of the 49 FPSOs going to produce 4.5 million BD by By contrast, Brazil’s emerging offshore operating worldwide, along with 2020, we need 41 of these systems. supply industry is largely dependent 10 of the 17 semi-submersible Each system costs about $3 billion. To on orders from a single buyer and on production platforms used globally. operate, each one needs an average of government finance. By 2020, Petrobras operations would BRAUDEL PAPERS 17 absorb 58 more drilling rigs (costing Wellstream, a British company that balance sheet. Almir Barbassa, the more than $600 million each), 45 produces advanced tubing in Brazil. Petrobras finance director, said that more production platforms and 309 Caterpillar will build generators and “some $20 billion” will be needed for supertankers and support ships. motors for supply boats. these deals, of which 20%-30% would Ultra deep-water rigs are leased to oil As the world oil industry migrates be shareholder capital and the rest companies at roughly $500,000 daily into deeper waters, technological borrowed. Most industry participants to drill exploration wells costing $100 challenges drive Petrobras and its doubt the capacity of Brazilian million each, including geophysical main suppliers toward continuous shipyards to build the drillships at and logistical support services. innovation. The strongest a cost of $664 million each, the The scale and complexity of multinationals, such as Schlumberger, winning bid. These shipyard projects deep-water operations engages an GE, Baker Hughes and FMC,are are 100% funded by the government. industry populated by thousands establishing laboratories adjacent to The Atlântico Sul Shipyard forms of contractors, ranging from Cenpes, the Petrobras research center parts of the new industrial complex multinational giants offering oilfield in Rio de Janeiro. at the deep-water port of Suape in services, like Schlumberger and The Booz study found that Brazilian the old sugar-growing region of Halliburton, to small companies suppliers could be competitive in Pernambuco in the Northeast. There occupying technological niches. shipyards, electrical systems, basic digitalized machines automatically cut Others provide supply boats and still engineering, logistical support for and shape steel plates that are carried others housekeeping and food services offshore operations and construction/ by giant cranes, with hauling capacity for workers at sea for weeks at a time assembly of large systems and modules. of 1,500 tons, for assembly at the dry- on rigs and platforms. The the construction companies dock. EAS is a joint venture between Petrobras is urging ABIMAQ Camargo Correa and Queiroz Galvão the Brazilian construction companies (Associação Brasileira da Indústria de hve government conttacts to build Camargo Correa and Queiroz Galvão Máquinas e Equipamentos) to induce tankers and rigs at their Atlântico Sul with Samsung Heavy Industries of foreign manufacturers to establish Shipyard (EAS) at the port of Suape Korea. EAS has orders from Petrobras, operations in Brazil, mainly through in Pernambuco in partnership with worth several billion dollars, for 20 partnerships with local companies. Samsung Heavy Industries of Korea, a supertankers and seven deep-water This strategy differs from those world leader in producing deep-water drillships. World leader in producing adopted by Norway, Britain, Korea rigs. Costs at Brazilian shipyards are these drillships, Samsung designed and the United States to develop nearly double those in Korea, which the new shipyard and sent 26 of its industrial suppliers for offshore benefits from economies of scale technicians to Pernambuco to train activities. Weaknesses in basic and better organization and skills. EAS employees in different specialties. education and research, both public These Brazilian shipyards are lucky EAS sent 22 Brazilians to spend a and private, have left Brazil with a to have firm government contracts at total of 75 days to learn production shortage of skilled manpower that has high prices while tanker rental rates methods at Samsung’s shipyard in impeded adoption of the strategies of are collapsing in a slowing world Korea. Productivity still is low, with advanced nations. economy. 160 man-hours needed to produce The most technically advanced Petrobras sought bids from Brazilian a ton of fabricated steel, against 22 equipment and services are provided shipyards for 28 rigs to be delivered hours in Korea. Highly disciplined, by multinational oligopolies by 2017, but accepted only one offer with sophisticated methods of serial controlling 90% of their specialized for seven drill ships at a total cost of assembly, the Korean shipyard delivers markets. Most of them either created $4.65 billion from Atlántico Sul. It 60 tankers and drillships per year. local subsidiaries or bought or rejected the other bids as being more Still a beginner, its Brazilian offshoot partnered with Brazilian companies than 20% over international prices. only will deliver one tanker and one to comply with local content rules. Petrobras expects to take delivery in platform frame in 2011. EAS has been Rolls-Royce is investing $60 million 2011 of nine rented rigs, four of them financed since 2007 by government to build a factory to supply turbo- capable of drilling in water depths of loans totaling R$5.7 billion (roughly generators for offshore platforms, 3,000 meters. It also is taking a 10% US$ 3 billion). which will require key components stake in a new holding company, “We built the shipyard and the from Brazilian suppliers. General SETE Brasil, to buy rigs for leasing first ship simultaneously,” said a Electric is investing $120 million to Petrobras, with capital provided production manager. “We need to to grow its capacity to build by government pension funds and climb the learning curve. We won’t subsea Christmas trees and risers foreign institutional investors as a compete with the Koreans. We just after spending $1.3 billion to buy way of keeping the rigs off Petrobras’s will do the basic work. We are limited 18 BRAUDEL PAPERS

by the lack of experienced engineers. punishment, that was waiting for According to the Booz study, You may be able to train a welder repairs because workers rushed to Brazilian suppliers claim that their in a year, but an engineer becomes finish it in time for Lula to speak at competitiveness is undermined by really useful only after five years. its launch last year. At the ceremony, high taxes and interest rates, lack of When the big government projects Gabrielli announced that the João technicians, poor infrastructure and ended in the 1980s and 1990s, many Cândido was opening “a new cycle” scarcity of long-term credit. They do unemployed engineers wound up of the Brazilian shipbuilding industry. little product research, export little driving taxis. These guys don’t return Earlier this year several top managers and remain dependent on Petrobras. to the profession.” To meet quality of EAS were fired. Their factories generally work on one standards, EAS recruited Brazilian Little by little, EAS is training shift, leaving them excess capacity technicians of Japanese descent, welders, among them several women that could be exploited if they were known as dekasseguis, who had worked who before were dependent on the to become competitive. It will be hard on production jobs in Japan. government’s Bolsa Família program for them to compete soon in high- of financial aid to poor families. Ione tech activities such as seismic surveys, Progress is slow de Oliveira, 30, finished secondary drilling equipment and services, For now, progress is slow, with the school and worked as a kitchen helper manufacturing turbo-generators welder playing a critical role. “A ship at a tourist hotel, aided by Bolsa and automation measurement and is made of steel plates,” said Paulo Família, before becoming among the control. Overall, Brazil’s costs are Kempers, an engineer who went to 400 candidates selected from 5,000 55% higher than world market prices Korea to train. “Steel plates generate taking a test in 2007, then taking for comparable equipment, and most of the cost of a ship, with welds remedial courses in Portuguese and much higher in some cases, without accounting for 2.5% of its weight. math before studying the theory being able to offer critical high-tech Without good welding, the ship’s of welding. “At first, I made many supplies. With a desperate shortage structure is weakened, unable to mistakes and could not see the of qualified professionals, Brazilian withstand rough seas,.” Anchored at defects,” said Ione, who now works engineering firms use up to six times the pier is the yard’s first supertanker as a team leader. “It’s not enough for as many man-hours as foreign firms João Cândido, named for the hero of a weld to look good. It must be good for similar projects. Some types of a revolt in 1910 of black sailors in inside. So we test it with X-ray, ultra- valves cost four times more than the Brazilian navy against corporal sound and for magnetic particles.” imports.

6. Human resources

Since its creation six decades engineers abroad for advanced study, as it struggles, often heroically, to ago, Petrobras developed from generating the knowledge system manage so many large and complex rudimentary beginnings to become that led to the deep-water discoveries projects. “There is only so much a robust knowledge system. But of recent years. Meanwhile, basic a company can do with a finite Petrobras is not Brazil. While education for most Brazilians was amount of critical resources such Petrobras invested heavily in the allowed to languish in failure, as equipment, professionals and development of a world-class negligence, perverse incentives suppliers,” one industry economist technical staff, Brazil’s political class and political manipulation for observed. “Obviously there is refused and still refuses to engage the short-term benefit of mayors a point beyond which the risks in the effort needed to give most and governors. In an overheated outweigh the benefits.” One reason Brazilians the opportunity for a economy, now famous as a consumer given privately for creating a new decent public education. Many in market and as a cornucopia of natural “strategic reserve” for the presalt the industry believe that the lack resources, the urgent need to find discoveries was to contain the exodus of skilled manpower is the biggest skilled workers is driving creation of of senior Petrobras technicians to obstacle to the development of the ambitious government programs to join private oil companies at higher huge oil discoveries in the South build human capacity to overcome salaries. These include foreign Atlantic. the failures of basic education. firms operating in Brazil – Shell, Petrobras sent hundreds of its The Petrobras technical staff is Chevron, Statoil and BP – as well most promising geologists and said to be severely overstretched as new Brazilian companies – OGX, BRAUDEL PAPERS 19

Guilherme Kramer HRT and Queiroz Galvão E&P – that are heavily staffed by former Petrobras executives. Petrobras has no quarantine policy for departing executives with access to confidential information. While top Brazilian executives in the private sector command salaries higher than those prevailing in the United States or Europe, Petrobras recruits its career officers by competitive examination. They rise to manage resources and assets far out of proportion to their earnings. In the private sector Paulo Mendonça, former Petrobras executive manager for exploration, earned $12 million as president of OGX in 2010, about 17 times more than the president of Petrobras. Marcio Mello, a former Petrobras by 2013 for suppliers of Petrobras, doubted the results of training geologist, earned about $4.5 million including welders, mechanical offered by System S and ordered an as head of HRT, a new company engineers, operators of cranes, outside study of these programs. “The created in 2008. tractors and machine-tools, engineers surging demand for trained workers specialized in piping and in 3-D and far exceeds the training capacity The Petrobras University computer-aided design, in all more of Senai,” said one researcher. Petrobras urgently seeks to than 800 occupations. At the Atlântico Sul Shipyard in develop new skills. The Petrobras José Renato de Almeida, a Pernambuco, 3,000 ex-cane cutters University in Rio and Salvador Petrobras veteran who directs were trained as welders by Senai in trains and retrains 70,000 employees PROMINP, says: “It was hard to fill the nearby city of Cabo, but nearly yearly. PROMINP (Program for 78,000 places in the courses because all were rejected by the shipyard. Mobilization of National Industry) of the low level of schooling of the In the presalt boom, Petrobras is attempts to train workers for candidates. Most needed remedial building two new office towers in Petrobras’s suppliers. The government courses in Portuguese and arithmetic Rio de Janeiro, where its employees makes bombastic announcements so they could read printed manuals are spread among 12 different of new emergency programs: and make simple calculations before buildings, and another tower in the PRONATEC (National Program for beginning training for work. We lack port of Santos to house new staff Access to Technical Education and instructors and properly equipped and functions related to the new Jobs) aimed at offering eight million workshops. Many pupils quit the discoveries. places by 2014 in 800 technical course and their monthly stipend But there is a demographic breach schools and federal institutes; E-Tec of R$300. President Lula went to separating generations of Petrobras (Open Technical School) to provide Pernambuco to hand out diplomas, employees, common to the global oil distance instruction for 263,000 but the graduates still lacked the industry as older technicians retire. students by 2014; the Foreign Study skills to begin work. Businessmen According to Gabrielli, “40% of our Program for 100,000 scholarships refuse to invest in training our staff has been with us for less than at universities abroad by 2014, the graduates for fear that would quit nine years and another 60% is with year of the next presidential election. later, seduced by better pay offered us more than 19 years and approaches These announcements overlook by other employers.” retirement. The 10-year gap between the lack of qualified instructors With a budget of R$228 million these two generations of employees for existing technical education (US$142 million), PROMINP, was caused by the downsizing that programs, which has left 20,000 concentrates its efforts on the took place throughout the world students without classes in federal “System S” training centers operated oil industry because of the low institutes. by business associations: Senai, international prices of the 1980s and PROMINP, launched in 2003, Senac, Senap, etc. The National 1990s.” Many technicians retired attempts to train 247,000 people Confederation of Industry (CNI) early, some because they worked at 20 BRAUDEL PAPERS

high-risk jobs and others because involves disputes over local content interpretation) or are necessary for they took buyouts, many of them rules in supplying equipment managing risk (i.e. well design and only 45 or 50 years old. Said one ordered by Petrobras for exploration engineering) in house. If anything, it human resources director: “We and production in deep waters. looks like Petrobras outsources much retired our knowledge base and then less than other major companies.” we hired consultants.” Outsourcing of services Until Brazilians commit This change in the personnel On these practices, Professor Tyler themselves to a coherent and long- structure provokes bitter controversy Priest of the University of Houston, term effort to improve the quality over outsourcing. Petrobras says it an oil industry historian, observed: of public education, they will find uses 291,000 people not directly on “Outsourcing of services in the themselves with the lesser share its payroll, against 80,000 regular offshore industry is the standard of value added in the equipment employees, of whom 29,000 were way of doing business, and has been and services needed for developing hired since 2001. Petrobras says it since the beginning of the industry deep-water oil and other complex intends to hire 6,000 more employees in the 1940s and 1950s. Over industrial projects. For example, the by 2013. As widely practiced in time, operators outsourced more Norwegian company Subsea 7 won the private sector, outsourcing and more. For example, operators a $1 billion order from Petrobras enables Petrobras to gain flexibility initially ran their own seismic crews, to supply four 9,900-ton buoys to while limiting the generous fringe but eventually outsourced all seismic be installed 250 meters beneath the benefits obtained by its regular staff. acquisition. Beginning in the 1990s, ocean surface in the Lula and Guará Government attorneys complain operators began to outsource more fields, in addition to 27 catenary that Bureau Veritas, a foreign and more of their R&D, most of risers with a total length of 3.9 kms. company that does inspections and which had traditionally been done to connect the platforms with subsea certifications in 140 countries, hired in house. Just about everything these wells. The multinational FMC won a retired Petrobras engineer to select days is outsourced to specialized another contract for $130 million and train outsourced engineers to companies: seismic acquisition, to supply systems for separation of scrutinize operations on platforms drilling, fabrication, transportation, oil and gas on the seabed, operated and specialized vessels that, for installation, well services, subsea by robots. Although these systems example, lay pipe at sea and use engineering, catering, you name it. will be assembled in Brazil, owing robots to inspect subsea equipment. Operators keep things that give them to local content rules, most of their The controversy over outsourcing a competitive advantage (i.e. seismic value added will be created abroad.

7. The grandiose seduction

Petrobras’s $225 billion investment projects include four new refineries, Petrobras argues that, without the program for 2011-15, the world’s buying and leasing of deep-water new refineries, imports of liquid largest in the oil industry today, drilling and production installations, products would rise from 5% of was curtailed to curb overheating gas pipelines, supertankers, total demand in 2010 to 40% by of Brazil’s economy and to prevent petrochemicals, electricity generation 2020. The projected cost per barrel of these investments from overreaching and facilities for producing and capacity in these new refineries ranges the state-controlled oil company’s transporting ethanol and biodiesel. from $33,000 to $52,000, roughly financial and operational capacity. Gabrielli said that Petrobras wants to double the cost of new refineries Luciano Coutinho, president of the become Brazil´s biggest producer of elsewhere in the world. “The reality National Bank for Economic and sugar-based ethanol by 2015, while is that Petrobras is swamped by Social Development (BNDES) and building a new ethanol pipeline. projects,” said a company veteran who a member of the Petrobras board, While Petrobras has built no new oil played a key role in developing the said the company “should seek more refinery since 1980 and now imports giant offshore fields of the Campos realistic goals.” large volumes of refined products, the Basin. “The capacity of Petrobras to Gabrielli said Petrobras is engaged decision to build three new refineries manage all these projects has been in 688 projects costing more than in the Northeast, far from the main overwhelmed for some time now.” US$25 million each and 3,000 markets, has been criticized as a The scale and complexity of efforts projects costing less than that. These concession to Lula’s political backers. to finance Petrobras investments BRAUDEL PAPERS 21 have attracted new scrutiny. Of the in 2011, including a R$55 billion Furious Congressional debate on $70 billion raised on stock markets loan announced for this year. Since the new institutional regime focused last September, $45 billion was 2006 loans disbursed by BNDES almost entirely on distribution government money. Its sovereign have grown by 38% annually. of royalties among states and wealth fund and the BNDES bought The volume of its loans in 2010 municipalities, neglecting the $16 billion in Petrobras stock, to Brazilian firms was three times governance and technical issues increasing the government’s voting greater than all World Bank lending posed by deep-water exploration shares from 58% to 64%. As part of to more than 100 countries. BNDES and production. Distribution of this circular transaction, the finance claims now account for 23% of all revenues in one of the world’s most ministry borrowed R$30 billion corporate debt in Brazil as its lending decentralized federations has provoked [$18 billion] to lend to BNDES so capacity approaches saturation in a bitter controversy throughout Brazil’s BNDES could buy Petrobras stock. credit expansion that threatens to two centuries of independence, Petrobras returned the $45 billion revive chronic inflation. In August with the poorer states of Amazônia to the Treasury to pay for rights to 2011, plans were announced for and the Northeast wielding veto explore and produce up to 5 billion the BNDES to lend another R$500 power over new legislation. The new barrels of oil and gas from potential billion (US$320 billion) by 2014 to production-sharing regime fortifies a reserves ,in seven presalt fields of the support an accelerated development politically-protected state capitalism Santos Basin. The expected gains program, Brasil Maior (Greater with broad discretionary powers and from these rights were based only on Brazil). little transparency. The reinforced seismic surveys and on a single well Petrobras may have been given a Petrobras monopoly would reduce drilled in Franco, seen as the largest poisoned chalice by nationalists under chances for spreading costs and of these fields. its statutory obligation to become risk among several companies. The The R$74 billion ($45 billion) the operator, with a 30% minimum complex coalitions of several political payment by Petrobras to the Treasury stake, in the giant presalt prospects in parties prevailing since 1985 distorts’ formed part of complex maneuvers to the “strategic” areas of the Santos and investment decisions, as with the balance fiscal accounts, while critics Campos basins. The chief nationalist three refineries being built in the argued that Petrobras overpaid for was President Dilma Rousseff, who Northeast. these new deep-water prospects. Even chaired the Petrobras governing The renewed world financial so, the stock flotation gave Petrobras board until last year. Given the state turbulence adds to the uncertainties a net inflow of funds of roughly $25 company’s strained financial and faced by oil companies in developing billion, a historical record for world technical commitments, Petrobras complex projects in remote regions, capital markets. may find it difficult to develop some increasing the importance of large- The investment projects are so of the seven giant prospects ceded by scale management capabilities. There varied and ambitious that Petrobras the government, together estimated are now over 200 exploration and will have to raise more capital within officially to contain the equivalent production projects worldwide that a few years, including $36-$60 billion of 5 billion barrels of oil, for which have a budget in excess of $1 billion, in new borrowing and $14 billion it paid $45 billion to the federal of which Brazil’s presalt development from sales of assets. In the months treasury after last September’s circular is the biggest. Andrew Gould, former before the financial crisis of August stock floatation. Under the 2011-15 head of Schlumberger, warned before 2011, Petrobras was unable to profit plan, Petrobras is to expand presalt the crash that many of these projects from world price increases because investments by $20 billion to $53 “suffer significant cost overruns. domestic gasoline and diesel prices billion, of which $12 billion will Indeed, as a general rule 30% of such were frozen by the government in its be spent on the seven deep-water projects experience budget overruns efforts to control inflation, limiting prospects. While Petrobras predicts of 50%.” Cost inflation is common the free cash flow available for its that it will produce 150,000 BDOE in offshore oil services and supplies. investment program. in 2015 from Franco, the biggest of Many Petrobras contracts carry cost- Petrobras and its suppliers these prospects, independent analysts plus clauses, while the $225 billion continue to depend on loans from say a more realistic target would be investment program for 2011-15 does the BNDES at subsidized rates to 2019. not contain inflation projections. sustain their investment programs, Two years after Lula’s government Under the new production-sharing absorbing a large share of the huge proposed to Congress a new legal regime for the “strategic” presalt increase of Treasury lending to the regime for the “strategic” deep-water areas, the issue of costs is likely to BNDES, rising from R$8 billion areas not already leased, outstanding provoke intense controversy. Under outstanding in 2007 to R$296 billion issues remain in legislative gridlock. production-sharing, compensation 22 BRAUDEL PAPERS

Guilherme Kramer

for operators is divided between (ONIP), a public/private umbrella while neglecting basic needs. This “cost oil,” enabling companies to association, says that capital spending grandiose seduction is embodied in recover expenses for exploration, for oil and gas in 2009-12 will total fiscal parasitism and megaprojects of development and production, and $147 billion, or 60% of all Brazil’s doubtful value, badly conceived and “profit oil,” which producers share industrial investment, leading executed without serious calculations with the government as prescribed business groups to fear a crowding of cost, that will drain resources from in their contract. As costs escalate, out of capital spending in other areas the economy for decades to come. the government share shrinks. of manufacturing. The political class tends to forget how Controversies arise that are endemic hard it was to consolidate democracy in production-sharing contracts. Beyond euphoria and end chronic inflation and how The controversies usually are settled Does Brazil really need to invest easy it is to plant the seeds of future in favor of the government, which in pre-salt development at this speed instability. Brazil’s success will depend acts as both contracting party and and scale? Will these accelerated on its capacity to invest successfully in regulator. investments create distortions of their education and infrastructure to make The issue of costs undermines own? Are these investments in oil its people more productive. These the illusion of unlimited resources more important to the future of Brazil real achievements come not from inspired by the pre-salt discoveries. than more investment in education, winning lottery tickets but instead These myths hide other disturbing ports, airports, electricity generation from dedicated effort to overcome questions. Gabrielli says that and transmission, communications, need and limitation. The discovery of Petrobras’s US$225 billion basic sanitation and transport huge amounts of oil and gas beneath investment program absorbs annually infrastructure? Then what are the the deep waters of the South Atlantic one-tenth of Brazil’s gross fixed capital priorities? What is the safest and most bred dangerous illusions that basic formation in a nation with one of productive strategy? limitations have been removed. The the lowest rates of public investment The illusion of limitless resources discoveries have raised the stakes of in Latin America. The National on the horizon seduced Brazilian risk and reward for Petrobras and the Petroleum Industrial Organization leaders into a premature triumphalism Brazilian people.

“How Petrobras works”, on page 23. BRAUDEL PAPERS 23

How Petrobras works José Sérgio Gabrielli de Azevedo These are comments by the president of Petrobras on some issues raised at the conference on pre-salt development on August 16, 2011, organized by the newspaper O Estado de São Paulo and the Fernand Braudel Institute of World Economics

Agência Petrobras How does Petrobras function as a conglomerate, involved in so many businesses? Petrobras sells 380 products, including fertilizers, electricity, refinery products and natural gas. We export and sell to our own national distributor, BR, and other wholesalers. Petrobras has a fantastic team. We have 3,200 high-level managers and another 3,000 coordinators, plus some 2,000 senior consultants. Petrobras has a permanent staff of 77,000 that is expanding to reach 103,000 by 2015. We have a small governing board of six directors and the president. Our top-level team has more than 100 people. These are the ones who basically run Petrobras. We made two extremely important changes in the investment is gigantic. The second important company in recent years. We discarded the concept difference is in the plan’s structure. We will increase of business units, where we had stand-alone firms our investment in exploration and production (E&P) in different areas, important for defining knowing by $8.7 billion, totaling $117 billion. Of this, 65% each one’s responsibility, but you lose this when will be invested in development of the discoveries, the company is growing fast. Our basic organization 17% in infrastructure and 18% in exploration. Of the now is what we call operational units. We separate $23 billion for exploration, one-third will be in the the responsibility for operating today’s assets presalt fields and two-thirds in other areas. from those responsible for creating new assets. In all business areas we have management units Risks responsible for new projects. Petrobras suffers from One thing is exploration risk. Another is a phenomenon that is not unique in the industry development risk. Nobody says that the presalt but may be more serious: 52% of our workforce has discoveries carry no development risk, which spent less than nine years with the company, while involves the nature of the reservoir and porosity 46% has more than 20 years’ experience. There are and permeability of the rocks. Exploration risk is few in-between. So our big challenge now is to mix measured by the success rate of discovery wells. In these generations, so that the experience of our the presalt area, our exploration hás a success rate older employees is passed on to our new ones. of 87%, compared with a world average of 20% to 25% for the industry. Investments We had $224 billion for the 2010-14 plan and $ Refineries 224.7 billion for 2011-15. The difference is not just They keep saying they we are rushing too fast in $700 million. There are structural differences. The first investing in refineries, which is not true. The Brazilian change is how much this is worth in Reais. Because market is growing fast. Today we consume 2.2 our currency gained value, this means R$389 billion million barrels daily (BD), with a refining capacity of instead of R$419 billion, while in dollars it is nearly 1.8 million BD. So we are importing diesel, naptha, jet the same. Over the next five years, Petrobras will fuel kerosene, gasoline and alcohol. Last year Brazil’s be investing R$2,000 every second, 24 hours each GDP grew by 7% while gasoline demand grew by day, seven days every week, 365 days a year. The 19%. Looking toward 2020, we will consume more 24 BRAUDEL PAPERS

than 3 million BD in refinery products. Today 5% of in deep waters, which is more than the second, third Brazilian demand is imported. If we fail to invest in and fourth-ranking companies, taken together. refineries and the market demands 3.3 million BD, in So Petrobras is by far the world’s biggest operator 2020 we would be importing 40% of our needs. Do in deep waters. Petrobras is the company with the you think that a company with the market power of highest success rate in the world for deep-water Petrobras will do nothing? Will it lose its role in one drilling. It is the company with the best knowledge of the world’s biggest markets? Today there are only of Brazil’s presalt geology. What happens is that four countries with markets of at least 3 million BD: at first you discover large reservoirs. Development United States, China, India and Japan. With a market of production begins and it grows fast. Production of 3 million BD, why should Petrobras stand idle? We reaches a peak and then begins to decline. This will invest in this market. We will invest $4 billion in is inevitable. You very rarely can find more large refining, half in four new refineries and the other half reservoirs in these areas. So you must migrate to in upgrading existing refineries. We will reduce the another basin. We had the good fortune that, with sulfur in our diesel and gasoline, as the law requires. the Campos Basin maturing after producing since 1978, we found something even bigger in the North Sea Santos Basin along our coast. We have heard criticism that the presalt discoveries We can say that God is Brazilian, but God only should be developed with the participation of helps those who work hard and wake up early. God several companies, as in the North Sea, instead of helped Brazil and Petrobras, but the fact remains Petrobras acting as the sole operator. There is a basic that, when the Campos Basin was maturing, difference between what happened in the North we found a newer, bigger frontier with trained Sea and developments here. In the North Sea the technicians who knew the equipment and with the learning and production curve rose from 1959 to infrastructure in place, things that were not possible 1999, when commercial and technical knowledge in the first 10 years of the North Sea. So we can say about deep waters was very limited. No company that being sole operator for the presalt discoveries dominated deep waters. This is why there were many is challenging but not impossible. We will do this operators in the North Sea. So the ancient fishing better than having 10 operators fighting over access ports of Aberdeen in Scotland and Stavanger in to ports, vessels and equipment. Norway were transformed to build platforms. What is happening now? Now Petrobras is a company that Political interference grew by 10% annually over the past 30 years. Does anyone think that Exxon, BP, Total, Repsol, Petrobras migrated from drilling on land to Shell and Sinopec do not have to deal with political shallow waters, at a time when drilling in from 70 interference? Does anyone think that any big oil to 160 meters was the big challenge. In 1980 we company is impervious to political influence? Is had to import platforms for drilling in 100 meters. there not political interference in the hierarchies, Petrobras then migrated from shallow waters to strategies and big decisions? This is the nature of the deep waters. Today we operate 45 production units oil business.

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