AS/COA Online: Brazil plans to follow a Norwegian model for auctioning concessions in its offshore pre-salt oil fields, including creation of a 100 percent state-owned company. Can you talk about this and Petrobras’ involvement?
Gabrielli: A regulatory framework was created when Brazil had very small access to the international capital market at the end of 1990s. At that time, the price of oil was very low and Petrobras was at the beginning of its expansion program. The legislation in Brazil was created to reward the companies that took the exploratory risk. As such, the system would allow the companies that would be willing to take that risk to get the best rewards if they had success and they discovered oil.
Right now we have a completely different situation. Now we have a country that has more than $220 billion in foreign reserves and Petrobras has increased its market value to more than $180 billion. In 2003, our market capital was $15 billion. Now it’s more than 10 times bigger. Petrobras has discovered very large areas in terms of new exploratory frontiers where the exploratory risk is very low.
As such, the government is thinking of changing the regulatory framework towards greater participation and greater share of the government’s income flow from oil. For Petrobras, considering its strategic plan, the current regulatory framework is not going to be changed in relation to the areas that are already under concession. It will be only for areas that are not under concession right now. We think that the change will be in the direction of greater participation of the government in the income flow from the industry. We also think that Petrobras is well positioned because we are the operator in most of the area, and we think we have the best technology and best expertise to develop these new areas as fast as possible. Also, we have the financial conditions to do that. Not only technological, not only in terms of management, but also financial conditions.
AS/COA Online: Petrobras has a $174.4 billion, five-year business plan. You’ve said Petrobras will not seek additional financing until after 2013.
Gabrielli: When we announced our strategic plan, we presented the market with two price curves. One price curve involved oil prices of $37 per barrel in 2009, $40 in 2010, and $45 from 2011 in perpetuity. If the prices were at these levels, we would need $30 billion to finance two years of our $174.4 billion strategic plan for the next five years. This means that we announced that we would be financed by $30 billion on top of our cash flow from operations to finance our investment for 2009 and 2010.
But we also said that if the price of oil would be, on average, above $65 per barrel, with the same $30 billion we would finance five years of our plan. We would be fully financed if we get $30 billion in 2009 and 2010. We said that on January 23, 2009. From January to May, we raised $31 billion—$12.5 billion from the Brazilian Development Bank, $10 billion from the Chinese Development Bank, $6.5 billion from syndicated banks of different international banks, and $2 billion from the U.S. Ex-Im Bank. That means we are fully financed for the $174.4 billion right now if the price stays around $65 per barrel.
AS/COA Online: In keeping with that question, last month Brazil and China inked a deal in which Beijing will invest $10 billion in Petrobras. I was wondering what would China get in return? And what areas of partnership do you see for China and Brazil in the field of energy?
Gabrielli: We’ve signed three different contracts with China. One with the Chinese Development Bank [CDB], which is a clear financial agreement in which the CDB will lend us $10 billion that we would pay back in ten years. The amortization will be with interest rates based on international markets below our cost curve for bonds in the secondary market.
The second contract was an agreement with SINOPEC [China Petroleum & Chemical Corporation] through which we would we would offer SINOPEC up to 200,000 barrels of crude oil per day that they will pay for according to the international market price. They will pay us through an account that we will open at the Chinese Development Bank. We are required to keep in the Chinese Development Bank a minimum account balance equivalent to the interest rate that we have to pay in the next six months. That’s is the only requirement we have.
The third agreement was also signed with SINOPEC and it involves the possibility of joint ventures and evaluation of different opportunities in exploration in blocks in the northern part of Brazil; blocks outside of Brazil; and with possibilities in petrochemicals, refining, and logistics. That means that we have a memorandum of understanding for assessment of possible opportunities in the future.
AS/COA Online: Given Brazil’s growing relationship with China as demonstrated by these deals, do you think that Brazil and China should move away from trading in the dollar?
Gabrielli: We have begun discussions with the Chinese banks. For sure, both countries have a very bright future because both Brazil and China can surpass the current crisis in a better position than they were in before. We have very strong domestic markets, we have very strong domestic currencies, and as of right now the trade relationship between Brazil and China is our largest. Today we have bigger trade relations with China than with the United States. We may have good conditions to develop trade in our own domestic currencies, but we should consider these operations in the overall multilateral agreements that we have and trade relations. For Petrobras itself, we trade in U.S. dollars because the oil market is dollar-denominated.
AS/COA Online: With the BRIC leaders meeting recently in Russia, how does Brazil’s position on emissions reduction targets compare with that of Russia, India, and China?
Gabrielli: I cannot talk about Brazil as a whole but I am going to give you some information. If you take the sources of primary energies in Brazil, we have by far the most renewable primary sources of energy compared to any other country. More than 46 percent of our energy comes from hydroelectric power and renewables.
In the transportation sector, for example, ethanol today represents more than 50 percent of the total volume of fuel that our cars run on. Almost 90 percent of new cars produced by the Brazilian manufacturing industry—around three million cars per year—are flex-fuel cars that can run on any type of combination or blending of gasoline and ethanol. In Brazil you cannot use pure ethanol. You get at least 25 percent ethanol blended with gasoline, which means that we are far and ahead of almost all countries in the world in the use of renewable sources of energy right now. We think that other countries can follow us on several things that we are already doing.
On the other hand, we have problems with deforestation. We have to increase our control of the deforestation process and Brazil is doing that.
AS/COA Online: At the ethanol summit in São Paulo in early June, you discussed Petrobras’ role in expanding the ethanol market within Brazil. Can you talk about new initiatives Petrobras is undertaking to partner with other countries and expand the global ethanol market?
Gabrielli: We are not only expanding our position in the ethanol market within Brazil. We want to be a big player in the international ethanol market. Right now we have a joint venture in Japan with a Japanese company that involves developing a business model to increase the ethanol market there. We own 87 percent of a refinery in Okinawa and we already sell gasoline blended with ethanol in Japan. We plan to use our facilities in Japan to be an important hub in the ethanol business of that nation.
In Brazil, we have two big ethanol pipelines that we are going to use to bring new production from the new frontiers of ethanol production in the countryside to the coast. This is to minimize and reduce the system costs and increase the competitiveness of Brazilian ethanol to the international market.
Right now, we don’t have any concrete business defined in the United States, but we think that the tariff barrier to protect corn production and to protect corn-based ethanol in the United States is unsustainable in the long run because the competitive advantage of ethanol is by far surpassing any type of costs of the ethanol produced in the United States. I think if the U.S. releases part of the barrier, for sure our production is going to be an important source for the U.S. market.
AS/COA Online: Now that the Obama administration is in office, what ways do you see Brazil, and Petrobras in particular, partnering with Washington in the fields of energy security and climate cooperation?
Gabrielli: I think that Brazil has a very big opportunity to become an important exporter of oil and oil products in the future. With our big discoveries in the pre-salt area we are going to be one of the main producers worldwide by 2020. And Brazil is a possible substitute for other sources that today provide oil to the United States.
As I mentioned, Petrobras is also preparing itself to be a big player in the international logistics and trade of ethanol and could also be an important contributor to the United States in relation to ethanol supply. In the biodiesel area and in new technologies that are being developed, we have already advanced several patents in new types of second-generation biofuels but we also can cooperate with the United States. On the other hand, the U.S. government does not really have an institutional architecture that can allow a sole point for negotiation and for contact between a company like Petrobras and the U.S. government. We have to deal with several different agents and bodies and this, sometimes, creates slows movement in the system.