If you were the head of a major oil exploration and development player and crude oil prices have fallen hard from a high of $147 a barrel to the current level of about $41, what would you do?
It’s a no-brainer: cut oil exploration spending which is deemed too risky, right?
Both oil majors like ExxonMobil and ConocoPhillips as well as minors and wildcatters like Marathon Oil and Husky Energy have already announced hefty exploration spending cuts for 2009.
Apparently, CEO Jose Sergio Gabrielli of Brazilian oil giant Petroleo Brasileiro S.A., (SAO.PETR4, NYSE: PBR) better known as Petrobras, begs to disagree.
This was his message in yesterday’s no holds barred grilling by Stephen Sackur of the program Hardtalk in BBC News Channel. There will be no let-up in exploration spending which news wires said that the amount needed is $174.4 billion over the next four years, which is higher than the original $112.4 billion Petrobras had planned for 2008-2012.
More striking is Gabrielli’s revelation that the spending is based not on the recovery of oil prices, but on a crude oil price of $37 a barrel for 2009; $41 in 2010; and only $45 from 2011 onwards. Petrobras therefore sees the current world economic slowdown would linger for many years to come which caps the increase in demand for energy.
However, Gabrielli says people will not stop using their cars, businessmen and tourists (not to mention migrant workers whom we have a-plenty) will still travel by air and goods will have to be transported—and these required old-fashioned fossil fuels. Gabrielli sees the investment plans as “very important for Petrobras’ continuity in growth.
One should take a leaf from Gabrielli’s notebook: One cannot afford to relax one’s investment and development in a very basic necessity such as energy. In fact, the best time to invest in energy infrastructure is when there is an apparent lull in demand.
Gabrielli can afford to be patient. After all, producing an oil field could take several years and even decades since the commencement of exploration.
Also, Petrobras has much oil reserves waiting to be developed, like its deepwater Tupi field, considered the largest oil discovery in the Americas for a very long time, since the discovery of Mexico’s Cantarell field in 1976.
Would it be too expensive to develop such a field? Sackur tried to outbalance Gabrielli. Yes, the latter replied, but over the years Petrobras has developed home-grown talent and accumulated years of experience doing such development—another lesson for energy companies who see technical talent as easily replaceable as a broken rig.
Is Petrobras trying to supplant its neighbor Venezuela, which is a partner in some projects, as the dominant Latin American crude oil producer? Not really, Gabrielli clarified. Petrobras is aiming to be a dominant petroleum refiner where the products generated have more value added, rather than just be a crude oil exporter.
With its strategy, Petrobras may be the “best-positioned” major oil company in the world to benefit during an oil price rebound, according to a Goldman Sachs Group Inc. report.
It is amusing to watch how Gabrielli deftly parries all of Sackur’s underhanded thrusts--from accusations that Petrobras is beholden to the government and politicians, to child labor in its sugar cane suppliers’ farms, and to its pipeline across the Amazon jungle.
One may not agree with Petrobras’ or Gabrielli’s plans and actions, but at least he should be given credit for clearly articulating his company’s mission and vision.
He belongs to a rare breed of bold and talented CEOs who are steering large and influential conglomerates in these perilous times.
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Note added, Feburary 6, 2009:
Shortly after this item was posted, Bloomberg reported February 5 that Petrobras will take delivery of 33 new oil rigs by 2012, with 11 of them to be delivered this year. The company’s program targets production of 3.66 million barrels a day by 2013, up from 2.4 million barrels a day last year. Many of these wells will be drilled in waters more than 2,000 meters deep, and require deep water floating platforms. The program includes developing the Tupi field.
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