The perils of Petrobras

The Economist, 11/17/2012

BRAZIL’S discovery of oodles of offshore oil in 2007 felt like a transformative moment. For Petrobras, the state-controlled oil company, it raised the prospect of pumping 5m barrels a day by 2020, up from around 2m—meaning a windfall for the government and juicy returns for minority investors. Under Graça Foster (pictured), Petrobras’s boss since February, the find may yet prove a boon to both. But they and she face a white-knuckle ride first.

Recent history is less than encouraging. Investors who bought in during Petrobras’s share issue in 2010 have lost more than a quarter of their money at current prices. In August the firm posted its first quarterly loss in 13 years; the most recent quarterly results were limp. Meanwhile Colombia’s Ecopetrol has knocked the company into second place in South America by market capitalisation.

What went wrong? Back in 2007 Petrobras’s main worry seemed to be finding a way to pump the new oil, known as pré-sal (“beneath the salt”), which is buried under rock and salt in ultra-deep waters. But its engineers quickly cracked that problem: Petrobras produced 71,000 barrels a day of pré-sal last year. The world’s biggest corporate-investment programme is taking the oil from the sea bed to market. Instead of know-how, the glitches have included poor management and ballooning costs.

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