PETRÓLEO BRASILEIRO S.A. History

Company History:

Petróleo Brasileiro (Petrobr´s) is the Southern Hemisphere's largest company. Petrobr´s was formed in 1953 to act as the state monopoly for the exploration, production, refining, and transportation of oil and its derivatives. Since then, it has developed into a complex group of companies. Oil exploration, production, and refining remain its main areas of operation, but its major subsidiaries--Braspetro, Petroquisa, Petrofertil, and Petrobr´s Distribuidora, whose interests extend beyond oil alone--make major contributions to the company's balance sheet. These subsidiaries have their own network of subsidiaries and affiliates. However, this structure will not survive long into the 1990s if the government of President Fernando Collor de Mello, which came to power in March 1990, succeeds in relieving Petrobr´s of its non-oil activities through closure and privatization.

Brazil's economic situation prior to the formation of Petrobr´s reflected long-standing inflation problems and need to earn foreign exchange. At the end of the 1940s, foreign exchange reserves were dwindling, inflation was creeping upwards, and the country was heading for a balance of payments crisis. Ambitious development plans necessitated large-scale imports of energy products. During the first half of the 1950s, Brazil's energy demands, especially for oil and its derivatives, doubled. However, the lack of foreign exchange reserves constrained energy imports and thus industrial expansion. The campaign to develop a domestic oil industry was partly founded on the desire to relieve Brazil of this development constraint.

Politics played a major part in the birth of Petrobr´s and have continued to exercise an unusually strong influence on the affairs of the company throughout most of its existence. The process leading to the creation of Petrobr´s took several years and excited a lively political debate. The central issue was whether foreign companies should be allowed to invest in Brazil's domestic oil industry.

Economic nationalists wanted the country's natural resources to be exploited by and for Brazilians. They were a powerful force and fought an effective o petrÓleo é nosso(the oil is ours) campaign. Consequently Law 2004 of October 3, 1953, which set up Petrobr&acute:s, created a monopoly over most areas of oil activity within Brazil with no scope for foreign participation.

Implicit in the efforts to set up Petrobr´s was the unproved assumption that Brazil had large-scale oil reserves. The first attempts to find oil in Brazil took place in the late 19th century on a very small scale; the first explorers tended to be maverick individuals, and foreign companies were not involved. In 1917, the Geographical and Mineralogical Service of Brazil, a state-owned organization, set up a department for oil exploration, but activity by domestic interests was limited in the 1920s. Foreign companies carried out sporadic drilling, mostly in the south.

In the 1930s, the influence of state control and corporatism grew. There were desultory attempts by private Brazilian companies to find oil, but these were unsuccessful. Rumors abounded about the duplicitous designs of international oil companies on Brazil's natural resources.

In 1938, the National Petroleum Council (CNP) was formed by the state. It was placed in overall control of the oil industry and charged with carrying out systematic exploration for oil. CNP remained the official oil policy-making body after the formation of Petrobr´s. It was CNP which in 1939 made the first proven oil discovery on Brazilian territory--at Lobato. By the end of 1941, CNP had discovered three more fields, all in Recôncavo in the Bahia state in the north of Brazil.

Difficulties in obtaining equipment from abroad during World War II held up further development of Brazil's oil industry. By the end of 1943, domestic oil production was only 300 barrels per day, or about 1% of total oil consumption. Immediately after the war, there was some relaxation of the strict corporatism of the Estado Nôvo, the non-socialist system under which all elements of economic life were directed by the state, and some recognition that domestic capital might be insufficient to develop the industry. However, international investment was not forthcoming: U.S. business was preoccupied with the reconstruction of Europe, and Brazil was a relatively small market with unattractive geology and a history of hostility to foreigners.

The hesitation of the U.S. companies was justified: Brazilian economic nationalism quickly reasserted itself and had strong attractions for many sections of the population. The o petróleo é nosso campaign started among students but quickly spread to intellectuals. The army favored tight control over natural resources for reasons of national security, and the xenophobia of the campaign exerted an emotive appeal for a large part of the general populace. By 1950, when domestic production had reached 950 barrels per day, the prospect of a private approach to the development of the oil industry was nil.

Petrobr´s was set up with a monopoly over most aspects of the oil business. Within a decade of its formation, further activities were brought within the scope of its monopoly. In January 1963, Petrobr´s was granted the monopoly over the distribution of petroleum derivatives to the public sector. This move intensified the company's financial problems, as the government was notoriously slow to pay its debts. In December 1963, Petrobr´s gained the monopoly over the imports of crude oil into Brazil: private refiners, Petrobr´s, and the distributors had previously arranged their own imports. In March 1964, a decree was passed for the nationalization of the private refineries.

Although Petrobr´s had many successes during its early years, politics came to play an increasingly important role in the management of the company. This politicization arose from Petrobr´s's failure to find enough oil to free itself from a continuing reliance on government revenue and from the continuing belief that Brazil had massive oil wealth. This belief gave rise to massive misplaced investment. There were frequent politically inspired changes in the top management-Petrobr´s had no fewer than five presidents in its first decade--and policy continuity was virtually nonexistent.

Stories of ineptitude and even corruption, both in the government and Petrobr´s, emerged in the early 1960s and Brazil experienced a military coup in early 1964. The removal of Petrobr´s from the political arena for some time was a direct result of the coup, and the company was able to concentrate on its commercial activities, in which it had some success. By 1966, only 13 years after its formation, Petrobr´s was listed by Fortune as the 88th-largest company in the world outside the United States.

From the beginning, the primary task of Petrobr´s was to locate and develop Brazil's oil wealth. In 1956, when Juscelino Kubitschek became president of Brazil, domestic oil production was 6,500 barrels per day. Kubitschek set a goal of 40,000 barrels per day for 1960--a target which was already exceeded by 1957. At this time, production was still confined to the Bahia Recôncavo region. Exploration activity was intensified. In the mid-1960s, activity was concentrated on Bahia, Sergipe, and Maranhao and by the end of 1966 production had reached 150,000 barrels per day. It peaked at 172,000 barrels per day in 1969 before falling to 166,000 barrels per day in 1970 as production from Recôncavo began to decline. In 1970, reserves were estimated at 857 million barrels and new discoveries were only just replacing production.

Petrobr´s began to explore in other countries through its subsidiary Braspetro, as part of a strategy to hold Brazil's oil resources in reserve. This policy continues as an important part of Petrobr´s activity. Since 1972, Petrobr´s has been involved in joint venture companies in 16 countries, and has had operational responsibilities within joint ventures in Iraq, Egypt, Algeria, Libya, Soutn Yemen, Colombia, and Ecuador. At the beginning of the 1990s, Braspetro was active to some degree in Angola, Argentina, Colombia, the Congo, Ecuador, the Gulf of Mexico, Libya, Ghana, and the Norwegian and British sectors of the North Sea.

Exploration activity continued in Brazil throughout the 1970s. A major breakthrough took place in 1974 with the first discovery of oil in the Campos Basin off the coast of the state of Rio de Janeiro. Subsequent discoveries were made in the next few years. The first commercial production took place in 1977. Ten years later, oil production from the basin was 370,000 barrels per day or about 60% of domestic production. The performance of the continental shelf quickly compensated for the depletion of the onshore fields. Offshore deposits account for about 75% of known reserves, and their location in deep waters has encouraged Petrobr´s to develop its expertise in deepsea technology.

The discovery of the Albacora and the Marlim fields in the Campos Basin, in November 1984 and February 1985 respectively, marked further milestones in the company's history. Massive investment is planned for these two fields, Brazil's first giant fields, with a view to output of 725,000 barrels per day by the end of the century.

Although exploration and production have been Petrobr´s's primary activities over the years, the company is active in all phases of the oil business. Refining has always been important to Petrobr´s. Initially, Brazilian refineries were ill-equipped to deal with the high paraffin content of the crude found in Bahia Recôncavo. At the end of the 1950s, only the Mataripe refinery was up to the task, and domestic crude was exported. The majority of the crude processed in Brazilian refineries during this period consisted of imports. By 1960, Petrobr´s refineries were processing 250,000 barrels per day of crude oil, equivalent to about 80% of Brazilian refined product demand, and domestic refineries were being upgraded to deal with domestic crudes. By 1970, only 2% of petroleum product requirements were imported, and Petrobr´s operated five refineries with a combined throughput capacity of 419,000 barrels per day. A 120,000 barrels per day refinery in Sao Paulo was built, and expansions were underway at two of the existing refineries.

Petrobr´s initiated an ongoing "bottom of the barrel campaign"--an attempt to yield higher-value products--to bring its product slate, or range of products yielded by the refining of crude oil, in line with final demand. The aim was to yield lower quantities of heavy fuel oil and greater quantities of diesel oil. Petrobr´s also experimented with heavy ends cracking--secondary refining of heavy fuel oil to produce lighter products--which enables the company to refine surplus fuel oil further into diesel oil and liquid petroleum gas (LPG). By 1989, Petrobr´s was operating ten refineries and one asphalt plant, which had a combined maximum processing capacity of 1.4 million barrels per day of oil. That year an average of 1.2 million barrels per day of crude oil was processed to yield LPG (8%), gasoline (16.1%), diesel oil (34.9%), fuel oils (17.9%), and other oil products (23.1%).

Petrobr´s's refining profile was influenced by the Proalcool campaign (National Alcohol Program), which began in 1975 as a reaction to the 1973 oil price hike. The plan was to substitute the use of gasoline in private cars with alcohol produced from sugar cane. Initially, this policy had some success. However, production problems and the massive subsidies needed to make alcohol competitive with gasoline during the mid-1980s plunged the program into chaos. This caused Petrobr´s to revise its gasoline production capacity upwards.

Despite Brazil's increasing oil production, a large proportion of the oil refined in Brazil comes from abroad. In order to save valuable foreign exchange, Petrobr´s has for many years maintained a major stake in the National Tanker Fleet (Fronape), which ended the 1980s with 68 ships and 21 vessels under construction. In 1989, Fronape transported 89 million tons of crude oil, refined products, alcohol, and related products. Petrobr´s-owned vessels were responsible for 57% of this total.

Petrobr´s is also engaged in distribution though its subsidiary, Petrobr´s Distribuidora. Distribution was not included in the company's monopoly, and international oil companies were allowed to continue to participate in this sector. Since Petrobr´s opened its first service station in 1961, the number of its retail outlets has grown rapidly. Petrobr´s was already the third largest distribution company in Brazil in 1966 and owned 174 service stations, accounting for 13% of sales. By 1970, Petrobr´s was still in third place but its market share had risen to 20% and it owned 527 service stations. By 1989, its distribution arm was firmly established as the nation's leading oil and hydrated alcohol product retailer with a 37.3% share of the domestic market and sales amounting to the equivalent of US&dollar4.3 billion.

Diversification into petrochemicals was another obvious option for Petrobr´s which, even when it was not directly involved in the production of chemicals, was the major supplier of raw materials, mainly naphtha and natural gas, to the private sector in Brazil. During the 1950s Petrobr´s constructed a unit for ammonia and nitrogenous fertilizers in Sao Paulo and a styrene butadiene rubber unit at Duque de Caxias in the state of Rio de Janeiro.

During the 1960s, the Brazilian petrochemical industry expanded rapidly, and Petrobr´s established its first subsidiary, Petrobr´s Quimica (Petroquisa), in which it has a 51% interest, to oversee its role in this development. The Petroquisa system has grown to include Petroquisa itself and 35 other companies in which it has a direct share. The product range includes the major plastics, aromatics, synthetic rubbers, methanol, caprolactam, caustic soda, detergents, ethylene oxide, and monoethylene glycol.

As part of its economic liberalization campaign, the Collor government plans to break up the Petroquisa system through a series of privatizations and shutdowns--a fate which awaits other Petrobr´s subsidiaries. Petrobr´s Fertilizantes (Petrofértil), which is composed of five subsidiaries and two affiliated companies, and which supplies 84% of the nitrogenous and 45% of the phosphate fertilizers consumed in Brazil, is to be sold off.

Interbr´s and Petrobr´s Minera&ccedilao (Petromisa)--two subsidiaries--were to be closed down. Interbr´s, the company's international trading arm, was founded in 1976, and handles exports of coffee, cocoa, soybeans, sugar, processed foods, petroleum products and alcohol, vehicles, heavy machinery and equipment, chemicals and petrochemicals, steel and metal products, minerals, and fertilizers. Petromisa was originally set up to produce potassium fertilizers but has subsequently diversified into other mineral products.

In this way, Petrobr´s will be trimmed of its non-core activities. It will, however, remain an industrial giant by retaining oil exploration, production, refining, and marketing operations in its own hands. Petrobr´s itself will remain predominantly a state company for the time being at least.

During the 1980s, Petrobras was used as a macroeconomic instrument in an attempt to pull the country out of its severe debt and inflation problems. There were signs of a resurgence of economic nationalism with the decision of the constitutional assembly to ban the risk contracts that were introduced for foreign companies in 1975. Petrobras was opposed to the ban. The tenure of office of Petrobras presidents grew shorter again as the incumbents clashed with politicians over their interference with the running of the company. When Carlos Sant'-Anna took office in 1989, he was the third president to be appointed in a year, and the fifth in four years. His term of office and that of his successor were no longer than those of their predecessors.

Collor's administration advocates a free market economy. Consequently, the restrictions on the distribution of fuel and petroleum derivatives, which limited participation in this activity to 13 firms, were lifted in October 1990. The removal is expected of a number of subsidies that have had a damaging effect on the financial well-being and long-term performance of Petrobr´s. Petrobr´s had, for example, borne the cost of the subsidies in the Proalcool program and shielded the economy from the worst effects of the Persian Gulf crisis by buying oil on the world spot market and selling it in the domestic market for half the world price. In addition, the prices of refined petroleum products have not reflected true market conditions for a long time. The upshot of these subsidies is that Petrobr´s is in debt for several billion dollars and at the end of 1990 was losing almost US&dollar14 million a day.

Such financial constraints cast doubts on whether Petrobr´s will be able to make the necessary investments to achieve its longterm objectives of increasing oil production from an average of 726,000 barrels per day in 1990 to more than 1 million barrels per day by the mid-to-late 1990s, and of greater exploitation of the country's under-utilized gas reserves. The Marlim and Albacora fields are very promising but their exploitation requires massive inputs of capital. The financial crisis has already affected drilling: in 1986, 923 appraisal and development wells were drilled; by 1990 the number had fallen to 356. The introduction of market prices would help Petrobr´s fund this investment. It remains to be seen whether the Collor administration will reverse longstanding practice and open Petrobr´s to foreign capital.

Principal Subsidiaries: Petrobr´s Internacional S.A. (Braspetro); Petrobr´s Distribuidora S.A. (BR); Petrobr´s Quimica S.A. (Petroquisa); Petrobr´s Fertilizantes S.A. (Petrofertil); Renave; National Tanker Fleet (Fronape).

Further Reading:

• Smith, Peter Dearborn, Oil and Politics in Modern Brazil, Toronto, Macmillan, 1976.
• Wirth, John D., Latin American oil companies and the politics of energy, Lincoln, University of Nebraska Press, 1985.
  Quarterly and Annual Reports on Brazil, Economist Intelligence Unit.

Source: International Directory of Company Histories, Vol. 4. St. James Press, 1991.

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