Economy & Energy
Ano XII-No 68
June -July
ISSN 1518-2932


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Petroleum and Gas: The Role of The State

What is Sustainable Development?

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Veja também nosso suplemento literário


O Crepúsculo do Petróleo
Mauro F. P. Porto


Petroleum and Gas:

The Role of the State

José Fantine*

Carlos Feu Alvim**


In the last issue of the e&e periodical we have started to analyze the pre-salt subject. The discoveries have changed the Brazilian oil sector. If the present perspectives are confirmed, we will have additional reserves of 50 billion barrels which, at 120 US$/barrel[2], represent 6 trillion dollars. It is an amount corresponding to 37 years of Brazilian exports, at the 2007 level, or five times all Brazilian exports in the last sixty years (corrected values) and about four times the annual American exports in 2007.

Since the oil monopoly belongs to the Federal Government, the State has the main part regarding the question of the movement of such huge amount of foreign exchange. Should no monopoly exist, still this subject would require the action of the State.

With the perspective of oil prices to remain in the range above 50 US$ per barrel, all world energy policy is under revision.

There is in Brazil a long tradition of energy planning, notably the electrical one. The long maturation period and the need of integrating the projects demand it. In the oil sector, due to the State monopoly carried out by Petrobras, this planning was executed by the company itself.

It was the 1979 oil crisis and its heavy consequences for the country that led to strengthen energy planning as a whole which was carried out by the National Energy Commission[3] in the President Figueiredo Administration. Liberalism in the nineties has practically deactivated the energy planning mechanisms, including the electric one. Together with institutional uncertainties concerning privatization and the lack of investments, the distrust concerning planning led to the 2001 electrical supply crisis.

In the present administration long-term planning activities have been resumed, organized around the Energy Research Enterprise (Empresa de Pesquisas Energéticas – EPE) and the more intense activity of the National Council on Energy Policy (Conselho Nacional de Política Energética – CNPE) has made easier the necessary adaptations. The Regulatory Agencies as well, established in the previous Administration, have contributed to this adaptation.

The electrical energy generation sector was structured to manage the competition among the different sources: hydro-electrical, natural gas, fuel oil, biomass, solar and wind. The close relationship of the private and public capital has found an equilibrium point. The use of biomass as fuel is under development using the previous experience of the alcohol program and the conservation programs are structured. Therefore no discontinuity or impact changes on models are expected and apparently problems concerning private national and international (up to now unimportant) and government capitals are evened up. However, concerning the expansion of oil and natural gas in Brazil there is much to be discussed and understood.

While the world discusses the possibility of the end of the oil era in the present century, Brazil is changing from an oil scarcity model to an abundant one in the next decades if the pre-salt reserves are confirmed as hoped. The panorama of the sector has changed in 1996 when Petrobras’ monopoly was changed to a model of open concessions. Petrobras has well adapted to the changes introduced in the system, it has reinforced its participation in the world market and presently it has US$ 250 billion assets that may go up to US$ 500 billion in the next decade, becoming one of the biggest enterprises in the world.

In the present report we address some issues related to the development of the petroleum and gas sectors in the world. This will help to understand the Brazilian case and also the development of Petrobras on the national panorama. One of the highlights on this report is the participation of the State in the Oil and Gas Industry in Brazil and abroad.

The world panorama regarding the petroleum and gas geopolitics from the seventies on.

The participation of petroleum in the world energy matrix (Figure 1) only became relevant at the beginning of the twentieth century and had a strategic importance from the First World War[4] on. Initially it was a strategic input from the military point of view but with increasing participation in global energy consumption and its uneven geographical distribution it has become, from the thirties on of last century, an economically strategic input (it can exceeding 10% of the world consumption). The division of the world that resulted from the First World War ensured the petroleum access to the leading world nations.


Primary energy sources participation in the world


Figure 1 - Projections of C. Marchetti (1984) compared to the actual evolution of the energy sources participation (in color) (IEA)

From the consolidation of the petroleum industry as a business and an industry, at the end of the nineteenth century in the U.S. until the 70s of last century, the oil activities in third world countries followed a similar model to the other technology and capital intensive business - a typical colonial era exploitation model. 

According to this model, the countries holding the reserves of raw material ceded their areas for exploitation to a few foreign companies belonging to leading countries (namely: USA, England/Netherlands, and France). These companies had all the rights and accrued "attractive" 50% of the profits from this activity for the host countries. However, as they dominated the entire cycle, from the wells to gas stations, they have chosen refining and distribution as the main profitable activity, thereby devaluating the oil prices, which then cost US$ 2 a barrel. Apart from the costs, almost no profits were left to the host countries, setting up the colonial exploitation model.

The Second World War re-divided the world extending the area covered by the so-called communist countries. The Soviet Union and afterwards China became leaders of a major part of the world, but without significant pressure on the world oil trade, since the Soviets had oil surpluses, exporting to their influence area and the Chinese were self-sufficient or an exporting country until the beginning of the nineties.

The situation of the oil industry in the world changed dramatically in the 70s because of several reasons. This was due to the evident losses of exporting countries, to the rising of leaders uncompromised with the existing status quo and the Cold War that limited military interventions. Progressive actions occurred since the 50's, when Iran nationalized oil, which was subsequently denationalized with the deposition of the leader Mossadegh and the creation of OPEP[5] in 1960, bringing together major oil exporters and giving them a political channel to demand for better oil prices.

Also, the actions of the Italian company ENI, founded in 1953 by the Italian government aiming at the development of a national energy strategy, in order to ensure their oil supply, helped to destabilize the dominant cartel[6] at that time, offering greater benefits to the producer countries.

As a consequence of the Yom Kippur war in 1973, Arab countries, followed by all developing countries with large oil reserves, decided to use oil as a pressure weapon. This caused the increase in oil prices (from 9.7 US$/b in 1974 to 49 US$/b in 2007) and a whole nationalization process during the decade. In 1979, new facts in the Middle East power struggle, the strength arising from the countries possessing the reserves that were earlier simple exploitation licensors, as well as the efforts of OPEP, rose the annual average oil price (1980) up to U.S.$ 96 (2007) a barrel, ten times greater than that in 1970. The evolution of the barrel price is shown in Figure 2 in current dollars of 2007, while average prices in 2008 (U$ 1.10 /b until June) have already exceeded the 1980 annual record. 

Spot Oil Prices (nominal and in US$ 2007)


Figure 2 - Spot prices of oil in current U.S. dollars and that of 2007. 
Source: Platts in
BP Statistical Review of World Energy June 2008 in consultado em 15/07/2008

Since the 80s, it was established the primacy of the great state owned companies of Arab, African, Latin American and Asian countries, substituting the great multinational oil corporations that had dominated the production of oil [i]all over the world (except in Brazil, Mexico, Argentina, USSR and China, that had nationalized their businesses in this area, between 1917 and 1953, and in a few other countries where the oil / gas business was not relevant).

There is no example in world history for such broad nationalization of natural resources as in the 70s. For the first time, poor countries without military power but holders of strategic raw material have taken over, without war or any significant retaliation, the role of the foreign concessionaire companies (all from rich countries needing this raw material). Earlier, the foreign multinational enterprises, at the time not more than 10 companies, dominated 80% of the world oil reserves. In less than a decade they kept only a share of less than 20% and this has not changed until now.

The world changed from that extreme rigorous nationalization processes period to another, in the nineties, of liberalization waves including privatization in many countries, including Brazil.

Nevertheless, from the end of that decade on, State actions strongly arose again. As examples, the strengthening of Russian state control over the sector, the new positioning of countries like Bolivia, Venezuela, Argentina and Ecuador, the non total liberalization, as previously foreseen, of Italy, France and Norway and the non total break of monopolies, which was also foreseen to happen, in Mexico, Venezuela and in Arabian and African countries.

Adding to that, other aspects that contributed to the decrease of expectations and positioning were: 1. the low income to the State in some cases of privatization; 2. the U.S. military invasion in the East showing the fragility of "not strategic commodity" theory concerning petroleum; 3. the recovery of oil and gas prices encouraging government leaders trying to become again the holders of wealth and power resulting from these prices; 4. the general revision of the liberalizing waves which was considered the cause of the crises in dozens of economies.

Oil and gas are the main energy sources to move the world economy, representing 60% of the total commercial energy consumed in the world. Coal represents 28% and nuclear and hydropower represent 12% of the total commercial energy consumed. The evolution of this participation over time is shown in Figure 3 in equivalent energy, in which the nuclear and hydro energy are valued considering the generation efficiency in the conversion to electricity. This type of equivalence increases the value of hydropower. Other types of energy (sun, wind, wood and waste) were responsible, in 2004 (, for an electric generation that represented 12% of the hydro or 0.7 % of the total, but not yet significant in terms of participation in the energy matrix.

Figure 3 - Participation of the primary sources of energy, said commercial, in the world.

 Data Source: BP

As can be observed, oil and gas are far from being replaced by old or new competitors, either by lack of supply, competitive prices, appropriate infrastructure for production and distribution, or technology for widespread use. Regarding the projections shown in Figure 1 (C. Marchetti 1984) what can be seen is that the expected transition to gas and nuclear energy has not happened as expected. The participation of oil has been falling only due to the price shocks. The most immediate response has always been the use of coal, which contributes to increasing the greenhouse effect.

As for the State's participation in the oil issues, it can be said that it never ceased to be relevant. In peripheral countries it occurs mainly in the economic area. In central countries, where the interests of national production system is strongly linked to the State, its action takes place often through the ability of these countries in setting up their power through diplomatic, economic or military channels. The U.S. government, considered as the prototype of a market economy, intervenes directly in the permission of oil exploitation in its territorial waters, in the preservation of shareholder control of its companies of the sector, and also, intervening by all means available in the petroleum geopolitics.

After the more intense privatization and nationalization waves, new ways of facing the oil and gas industry were consolidated in order to maintain the interest of the State as decisive but participating in a model containing various actors.

What essentially has changed was the feeling, now apparently a major one, that oil and gas are in reality important factors of power, income, and development; that the world accepts different ways of conducting such business without a Manichaean vision that only see the good or evil, as the predominant point of view that considers only the total reserves for the State or the private sector.

The oil and gas issue has become even more critical in the Middle East since 1990, due to the Iraq-Kuwait-U.S. wars, and after 2000 due to the tensions between Iran and the U.S. that again was involved in a war with Iraq, the owner of one of the largest oil reserves in the world – conflict that in some people’s opinion occurred precisely because of that wealth.

The oil reserves evolution by region (Figure 4) shows that the strong dependence on Middle Eastern oil, as in 1980 (54%), increased in 2007 (61%). The confirmed oil reserves in the Middle East reached in 2007, 755 billion barrels and in other places, 483 billion, amounting to 1,238 billion barrels in the world.

The reserves outside OPEC are 303 billion barrels; of which 175 belong to countries that were part of the former Soviet Union, and where Russia has a great influence. This means that outside of OPEC and the former Soviet Union there are 128 billion barrels. The possibility of an increase of 50 billion or more in the Brazilian reserves (13 billion barrels in 2007) is a relevant fact in the petroleum geopolitics. Taking into account that the Central and South America have increased their participation in the reserves from 4% to 9%, it is clear that the region has grown in importance in the world panorama.

In the Middle East, the oil and gas business is under the OPEC influence and suffers heavy opposition from nationalist movements relative to the possibility of agreements with the richer countries that are major oil and gas importers. Iraq, despite the opening of its reserves in the current military occupation by the U.S., and Iran, (owners of 20% of world oil reserves), are far from being ideal oil suppliers to these countries.

In some African countries guerrilla or nationalist movements have not stopped fighting against either the oil concessions or established governments. In South America, Venezuela, Bolivia and Ecuador have changed their liberal plans and imposed a new order in the sector. Russia, the largest exporter of oil and gas, decided again to increase the state-owned companies and government actions. This was achieved by means of re-nationalizing certain companies and taking control of this industry, which suffered a process of privatization and granting conventional concessions during the previous Boris Yeltsin administration.


Figure 4 - World oil reserves distribution with an indication, in the right, of the total by region in the year 2007. Data source: BP

According to the above mentioned, the continued increase in demand and the depletion of export gap[7], the oil price has reached the range of US$ 130 - US$145 a barrel, in July 2008. Thus the world is facing a complex change in the oil and gas sector by matching three independent variables (supply without gap, demand with no chance of decline in the short term and tensions in critical production areas)[8] and about what a little can be done. In order to improve the current situation it would be necessary an announcement of a major discovery outside the Middle East region or a reduction of the tensions in this region on a permanent basis, which does not seem possible in the short term.

In the medium and long terms, high prices will lead to a demand restraint and to the offer of other types of energy. During the seventies’ crisis there was a possibility of returning to coal[9] as a fuel. However, today the restrictions regarding the greenhouse effect, due to gases emissions, pose an additional pressure on prices of all fossil fuels. This fact limits the return to the use of coal. On the other hand, high oil prices enable the input of oil from new borders as well as the development of technologies to capture carbon gases and/or no emission of such gases with the high profit and taxes generated in the oil and gas value chain. One should not forget, however, that this is a slow process and that collides in the long term, with the limitations of global reserves of oil.

For the time being, the international community wonders what can be done to face the energy high price. France, Spain (Europe in general) and other countries are starting to be worried about the high prices. In the U.S., the oil dependency and high prices rules the political and military scene. China, India and South Korea spread their business around the world in order to fund and make arrangements for oil and gas huge supply needs in the future. These countries are following the U.S. and Europe companies’ economic models that, for decades, are exploiting oil and gas all over the world.

At the time of such serious strategic issues involving the oil and gas industry, when it is clear that the limited availability of oil in the world and, on the other hand, that the effects of carbon gases emissions to the atmosphere are under discussion, Brazil presents itself to the world as a potential holder of great oil reserves and, at the same time, as a potential leader in the production of bio-fuels and holder of the nuclear fuel cycle technology.

This set of problems and the respective potential solutions cannot be treated in a simplistic way. Since Brazil's role can be highlighted in a way never thought before, the nation cannot assume the risk of being "naive" or "presumptuous” regarding the world geopolitical scene. This may be the turn for Brazil, but it will be necessary more perception and firmness of purpose.

Prominent situations in the oil and gas business in Brazil

Petrobras and the oil business in Brazil had a historical overlapping development between the years 1953 and 1997. It is necessary to understand that development in order to have a good basis for making important strategic decisions in this new era. During the above mentioned period, oil and gas businesses demanded firm governmental actions. In the following analysis, even though Petrobras is the focus, only the aspects regarding State actions will be highlighted. It will be left aside Petrobras’ entrepreneurial achievements as this is not the object of this work.

Brazil is currently strongly defending the matter of the national sovereignty of the Amazon region, and its plans for bio-fuel. The country’s importance has grown in the international scenario and the pre-salt issue adds to it. The President, the Home Office Minister and the Mines and Energy Minister are constantly highlighting the importance of the pre-salt on national and international levels. Therefore, what should be done? We think that it is important that leaders, politicians, entrepreneurs and the society in general should have a deep knowledge of the oil and gas industry in Brazil on a first stage. On a subsequent stage, debates on this subject should be encouraged. Finally, independent decisions should be made and independent standpoints should be establishment in this matter that is of vital importance for their interest and that of the country.

Antecedent to the creation of Petrobras

The State's intervention in the Oil Sector has become evident in Brazil during the Second World War supplying crisis, which led to severe rationing measures. In 1938, the year preceding the outbreak of the conflict, it was created the National Petroleum Council - NPC – having as first president General Horta Nogueira who had previously warned the government about the risks of shortage.

The text content of Decree-Law № 395 and the structure of the NPC make clear the economic and military strategic nature of the petroleum.

The Decree-Law also made clear that the government’s major concern referred to the refining sector. This sector was nationalized and could be operated only by companies having Brazilian capital. The directors and managers also had to be Brazilians.

It was also determined that a share of the employees, to be fixed by law, had to be of Brazilian nationality. Regarding the production of crude oil the law only states that this production is of public interest. The Mines Code* already stated that in the case of no official registration, the existing deposits should be considered as a Nation’s patrimony.

The Decree Law 538 of 1938, that structured the NPC, stated that this council was responsible for judging the convenience of granting a licensing for oil and gas deposits research and extraction (later NCP became responsible for deciding on this issue)[10].

However, the same decree-law (Article 13) assigned to NCP, through a technical body to be created, "the official task of searching petroleum deposits as well as, when it deems appropriate, carry out extraction and industrialization of these products”. NPC, in practice, retained the oil exploitation in the country and had a nationalistic feature under General Horta Barbosa leadership.

The state owned companies in the Estado Novo period were already important instruments of President Vargas economic policy. His administration created the National Steel Company (Companhia Siderúrgica Nacional – CSN), the National Mining Company (Compania Vale do Rio Doce), the Alkalis National Company (Companhia Nacional de Álcalis) and the San Francisco Hydroelectric Company (Companhia Hidrelétrica do São Francisco – CHESF).

The decision of creating a state owned Oil Company was a natural path regarding the national policy aiming at giving dynamism to the State actions in the sector. When it was established under the coordination of NPC oil production had already started (2,000 barrels / day). Regarding the refining area, the NPC installed a refinery in Bahia producing 3700 barrels / day, which together with the private refining company in Rio Grande do Sul (Ipiranga Group); producing 5,000 barrels / day represented the Brazilian refining capacity.

When Petrobras was created it was already granted concessions to other refineries, approved in 1946, after the resignation of General Horta Nogueira (in 1943) who had a favorable opinion regarding state-owned companies.

The refineries, named: Union Refinery (Capuava) in São Paulo (20,000 b / d 1954), Manguinhos in Rio de Janeiro (10,000 b / d in 1954) and Manaus (5,000 barrels in 1956) started operating only in the fifties. It was under construction NCP Cubatão refinery (45,000 b / d) that started operating in 1954[11].

The present article mainly focuses on the performance of Petrobras. As it will be seen below, the appointment of Petrobras to implement the petroleum state monopoly (1953) brought to the oil sector a new dynamic. Even though Petrobras has been administratively subordinated to the Government, due to its institutional characteristics and its staff performance, this company had a role of its own in the Brazilian energy context. At the same time that Petrobras always suffered the influence of the Government (that appoints its directors), it also had, during its history, a considerable influence on the State, which leads to the necessity of examining its actions as an entity with own policy and will.

The state-owned company has an internal latent conflict namely the necessity of being a profitable company and at the same time of carrying out its agent mission of the State. This State x Company dichotomy will be clear in the following analysis. In addition, the Company developed an important corporate culture with positive and negative aspects. The negative one was extensively used in the campaign for privatization. Nevertheless, frequently the Petrobras’ staff strong will either avoid some inappropriate uses of its structure or inappropriate actions to satisfy government spurious interests, which could threaten the company’s survival. It is also true, as it will be shown, that government decisions that provoked Petrobras’ staff opposition, made possible for the Company’s directors to obtain the Government support in the implementation of major strategic actions. This would not be possible or unlikely to occur only from the entrepreneurial point of view. 

The 50s – the Brazilian fight to be no longer an onlooker at the cartelized oil context

The Country experienced moments of great political and economic relevance, including one of the most important popular and civic movements - the campaign "The Petroleum is our", in the 50s of last century. The crowning of this movement was the oil state monopoly decree, in 1953 and the legal establishment of Petrobras in 1954 to carry out this monopoly.

The Getúlio Vargas administration proposed the creation of a joint-venture company under the State control (December 1952). The state monopoly was established after extensive discussion in the Congress and a major public campaign, which mobilized the working classes, students, academics, militaries, members of public and private companies[12]. The proposal that was sent to the Congress considered the oil and gas business control by the State as an essential factor of national sovereignty and development as well as a way to guarantee profits to stimulate the required investment to increase the oil refining, prospecting and production.

The campaign "The Petroleum is our" had profound repercussions in the Brazilian political history and consolidated the State participation in productive activities. The Law 2004, enacted in October 3, 1953, establishing a monopoly and creating Petrobras changed a national feeling into law and later into a very specific and clear constitutional article[13].

As Brazil was considered an area without interest regarding oil market and potential reserves, it would certainly not call the attention of the existing oil cartel. President Vargas stated during the government proposal presentation, that “Brazil wanted the cooperation of foreign capital for its development, but prefers rather to set apart the oil reserves for the national companies exploitation since, as the international experience proved, there is no doubt  that the national control of petroleum is essential” [14].

At that time (from 1900 up to middle-70s) the oil exploitation, production, transportation, refining and distribution were cartelized all over the world (only Shell, Exxon, Texaco were important in these five sectors). The oil ruling companies naturally picked the most geologically promising areas to invest in exploitation and production and regarding the refining, picked those countries with the necessary infrastructure to supply its also cartelize market[15].

Thus, if the sector had adopted in Brazil a policy without the State control, the multinational companies would hardly have the intention of building refineries in the country[16].

In case such intention existed, this would mean to bring 100% of technology from abroad, adjust the facility to become integrated into its production system abroad and put the sector in line with internal and external cartels.

It was taken into account, at the time, the future establishment of Petrobras as an essential factor to reach a modern business organization, but under the State interest, which should be set free from any attachment to the current private cartel and from the direct State administration. According to the famous Brazilian writer and entrepreneur Monteiro Lobato, the State administration did not exploit the oil and also did not let others do it.

The purpose of establishing a state-owned company in the oil sector was already an earlier conception in France (that created Elf and Total), England (that created the BP and BG) and contemporary in Italy (that created ENI, almost at same time as Petrobras).

These countries created their own state-owned companies, as a response to the same cartelizing action, in order to search, produce and refine oil all over the world guarantying the national supply and not using entirely the great private multinational oil companies for this purpose, even thought having their headquarter placed in one of these countries (for example: Shell in England).

The United States were one of the major oil consumers at that time and had nothing to worry about.

They had enough oil and gas reserves in the country, had installed in the country the major oil companies’ headquarters operating all over the world, and ruled great quantities of the world’ stocks.

Moreover, due to the fact of being pioneers in the oil industry, the U.S. developed technology throughout the sector’s value chain, which led to national development and to ensure its world supremacy in the oil business (certainly not making this technology available to others countries).

Once granted the monopoly in 1953 and lined up with world events regarding nationalist movements, Brazil continued planning actions that since 1938 had assigned to the State the responsibility for the oil exploitation and production business leaving the refining activity to domestic companies.

Based on the establishment of the monopoly, it was supposed that the refining activity would generate enough income to follow the demand growth and stimulate the exploitation and production activities[17].

This movement was closely similar to what had happened in Mexico (nationalization in 1938) and Argentina (nationalization in 1923) that became international paradigms in dealing with the oil ownership and exploitation business by the state.

As a matter of fact, these countries, which had no industrial experience in the sector, showed the world that it was possible to succeed in this business even in adverse conditions, being sufficient the implementation of one process in the oil sector. One can suppose that they helped to strengthen the nationalizing movements around the world in the 70s.

According to Figure 5, it is possible to note that the refining processes capacity already implemented by NCP allowed the supply of almost half of oil products demand during the first years of Petrobras operation. After the creation of Petrobras there was a fast increase of investments in large refineries, terminals and distribution bases. This fact allowed satisfying almost all the domestic demand in the beginning of the sixties.

The in-land oil exploitation and production also started to present good results, as shown in Figure 6. The national income production statement through refining and wholesale distribution became true. For oil extraction, however, the whole internal demand supply was not possible to achieve with the in-land production and would depend on extraction at the Brazilian continental shelf, which would only be developed in the following decades.

Figure 5 - Production, exports, imports and apparent consumption of oil products in Brazil in the fifties and sixties.

Figure 6 - Satisfaction of domestic oil extraction and refining demand showing that the refining needs were largely met in the early sixties, while production was limited to 40% in the two decades.

At a certain point there was the risk that Petrobras would never start operating. In 1954, the year of its very creation, President Getúlio Vargas, one of those responsible for the new oil policy, could not resist a strong campaign against his government and committed suicide. The strong approval achieved during the Petrobras creation campaign was important to ensure its implementation and performance and it continued to be important for its preservation during the next decades.

Nowadays it is admitted that the basis of the campaign against the President was the fact that he frustrated interests when proposed his nationalistic policy, including the oil policy, and his vision of Brazil as an independent power among the nations. But his suicide strengthened the groups that supported him. A little later, a military movement under the leadership of General Lott aborted an attempt of coup d’état. This fact made possible President Juscelino Kubitschek to take-office. He was democratically elected and was extremely concerned about a national development project.

For a few more years, it was possible to continue the State monopoly and Petrobras experiment based on strong support from the Armed Forces and on the implementation of the Law 2004 (which established the state monopoly and created Petrobras) to run these projects. The Brazilian industrialization development during the years of the President Juscelino Kubitschek administration enlarged the technical basis that allowed the oil industry to continue its development. Emphasis should be given to the manufacturing of special steel, including the state-owned Usiminas steel company creation based on Japanese technology.

Therefore at that time, it was possible to note the main factors for the success of the campaign that created Petrobras and also its further actions towards the state policy and monopoly as follows:

  1. The government support;
  2. The military support, including management of the unities;
  3. The CNP’s, technological, installations and personnel resources (although small);
  4.  The monopoly protection against the world competition, then cartelized;
  5.  The initial resources from the compulsory loans from gasoline purchase;
  6.  The innovative management and organization model that actually allowed the company to act within the national scope;
  7.  The hiring of enough qualified personnel that was properly educated and trained in order to enable the company growth and to replace foreign staff then prevailing in many areas of the company;
  8. Start the organization of technical teams able to change the foreign plants design;
  9. The refining incomes enhanced by the large-scale production of the Cubatão refinery;
  10.  The staff motivation resulting from overcoming the huge challenge of thriving a big national company acting in such a complex sector ( there was less than ten American, British, French and Italian large multinational at that time);
  11. The essential industries installed in Brazil, specially the steel (Belgo-Mineira, CSN, Acesita), chemical and mechanical industries.

From a management and organization point of view, the industrial plants were independently established all over the country. However, its Executive Board was directly linked to the Federal Government. For this reason, the Executive Board had power and agility to develop these plants and overcome the challenges. It was possible to manage the overall coordination of a small number of unities. However, each unity reached considerable projection in their specific area, what could cause a major management problem. 

The 60s - the strong presence in the national context

The first administration of the sixties, that of President Jânio Quadros, of short duration, followed by the Parliamentary model experience and back again to the Presidential regime (President João Goulart), allowed the state monopoly and Petrobras to have an important role in the economy. The state monopoly was enlarged during President Goulart administration. The private refineries could not import oil anymore. This fact also predicted a possible nationalization of these plants (at that time there was four private refineries with high percentage in the national refining activity).

After the victory of the military movement in 1964, nationalistic tendencies prevailed against expectations of a possible elimination of the state monopoly and Petrobras (there was strong military participation in the “The Petroleum is our” campaign), which guarantied the permanence and deepening of the current model. The oil issue was considered strategic for the envisaged progress.

During that period, Petrobras accomplished its supplying mission by acquiring self-sufficiency in key products (gasoline and diesel) and their respective distributions. Petrobras implemented a large refinery in Duque de Caxias (Rio de Janeiro) and two others: one in Minas Gerais and the other in Rio Grande do Sul. Petrobras firmly sought onshore oil fields exploitation and production that unfortunately consisted of small potential reserves (geological causes). The exception was the important field of Carmópolis in the Northeast region of Brazil (productive up to now). Thousands of engineers and technicians have worked, studied or graduated aiming at achieving the desired industrial development.

During that decade, the offshore oil extraction was low (and even so, only in shallow water). The global oil industry considered offshore exploitation practically impossible due to high production costs, when compared with the low oil prices (U.S. $ 2 a barrel) of the international market and the lack of technology that should be used to exploit oil in increasing water depths that is, below 100 meters.

Petrobras was a pioneer in the offshore exploitation since 1964 (because it was awere of the low potential of inshore oil fields) and discovered the first oil field in the Brazilian northeast coast in 1968, which started the great discoveries of oil in the Campos Basin, in Rio de Janeiro. The first field was discovered in 1974, before the 1979 Second Oil Crisis and just during the 1973 First Crisis. That is to say, long before the first oil crisis and at a time when no one could imagine the extent of the oil crisis, Petrobras was already searching oil offshore, in spite of the high costs and challenges regarding exploitation and production.

Petrobras knew the difficulties regarding self-sufficiency by exploiting oil only in the inshore sedimentary areas. As it was a state-owned company (holding monopoly on behalf of the State) its behavior was different from that of the big companies, and so it continued looking for oil wherever it could exist.  Its managers and technicians believed that they could solve the problem of how to produce oil in deeper waters (as it indeed succeeded, being ahead of all other companies from 1979 oil crisis on, although several companies had already been exploiting oil in the North Sea and the Gulf of Mexico regions since the 60s but in shallow waters).

During the 60s, Petrobras made a major organizational change that may have been one of the main factors promoting its development: the “departmentalization”. The company created central bodies for refining, exploitation and production, transportation, marketing, human resources, finance, planning and others and therefore avoiding the proliferation of "independent companies" that could operate in local situations and not nationally. This would lead to the loss of optimization, technology and model security[18]. The departmentalization model proved to be effective for corporation control; all operational unities were under a specialized central command.

Should another model be adopted, certainly it would not have reached self-sufficiency in oil by-products or the progress in-shore and off-shore exploitation and production, by the same reasons already analyzed regarding the previous decades. That is, the state action was decisive in order to meet national interests. This centralization allowed the integration of the state and the company in the decision-making process in order to protect the global national interest.

Petrobras became financially independent due to its refining profits and, as a consequence, free from the State resources from then on. This situation also allowed the subsequent administrations to transfer to Petrobrás additional tasks, such as installing in Brazil a Petrochemical[19] plant with international capacity, which actually began with the Petroquisa Company proceeding with the actions already taken in the sector, but to a lesser extent, in petrochemical plants in Cubatão and Duque de Caxias (synthetic rubber plant). The company ensured the supply of products from its refineries to public institutions and state-owned companies as, due to public resources lack, the private distributors refused supplying these products necessary to governmental sectors and state-owned companies.

Another important point regarding Petrobras mission on behalf of the State was the beginning of distribution unities installed in the whole national territory, since the private distributors were acting only in coastal areas which offered a large and profitable market, not supplying to the countryside and the unoccupied areas. These private companies could reach these areas but charging high prices burdening the local economy and raising the prices of all goods, or simply not arriving there, therefore paralyzing the local economy[20].

The 70s - consolidation and growth

In the 70s, the two oil prices crises together with large national imports have caused considerable foreign currency draining and called the attention of the groups opposing the State solution.

As a result of the crisis, the Brazilian authorities permitted the private and foreign companies to exploit oil, authorizing and guiding Petrobras to establish risk contracts with worldwide companies.

In ten years more than 240 inshore and offshore risk contracts[21] were established by which, due to the new arrangement, more than 80% of the Brazilian sedimentary basins were offered to multinational and national companies, excluding the Campos Basin.

Petrobras, that earlier has found oil at the Garoupa field, decided to develop the technology and experimental production in deep water leading the administration of President Geisel[22] to encourage this experiment. From this time on it was started the national breakthrough regarding deep water prospecting that resulted in absolute success. Petrobras search for a limit in depth, and this would be 300 meters, as deep as possible for human diving.

Companies under risk contracts scanned the Brazilian territory during 10 years but didn’t find important oil fields. Their contribution was: 1- finding one oil field that has produced 2 million m3 of gas per day, in the Santos Basin (not connected with the pre-salt layer); 2- concluding that in fact it was very difficult to find oil in the country, mainly in-shore; 3- Petrobras encouragement to become more efficient.

It should be pointed out that, and it is very important, Petrobras discovered oil and gas later in almost all regions that have been prospected by foreign companies under risk contracts.

After that period, Petrobras ranked first in deep waters oil production technology worldwide and designed / started the progression of oil and gas discoveries and production in the Campos Basin. Also started two other important phases in Brazil, namely: 1- a stronger association of Petrobras with Brazilian universities in order to develop the necessary technology and; 2- the development of national key industries as well as that for the construction and assembling of offshore platforms and for large petrochemical and refining enterprises.

Three large refineries were built (Paulinia, São José dos Campos and Paraná) and two large petrochemicals plants were put into service (São Paulo and Bahia). It was also created the fertilizers company - Petrofertil, the mining company - Petromisa and the trading company Interbras. Thus, the country has grown as a result of Petrobras acting on behalf of the State. The company acting in petrochemicals, fertilizers and international trade of goods and domestic products covered the gaps in these sectors because there was no entrepreneurship and capital available to support the growing demand for petroleum products in the chemical, petrochemical and fertilizer sectors.

Petrobras took over the petroleum products distribution with subsequent high profits not only because of better prices control and cost transparency but also because it developed an optimized distribution network all over the country, even in underdeveloped regions.

During the 70s Petrobras developed extensive engineering capability and its Research Center was ready to design refineries and other plants. This was crucial for the Company performance and the national engineering in the subsequent phases. Large industrial conglomerates could be entirely designed in Brazil for the first time.

In these three decades the oil industry did not restrain the development of the country regarding oil supply (before 1953 this was the big problem) but on the contrary, it contributed decisively to rise national business and technology, helping to create an industrial park like those of the developed countries. During this period the company never offered products with higher prices than the usual prices practiced in the world market.

The State acting through Petrobras, initially through the refining and downstream activities, resulted in: 1- setting up an exceptional technological model opening the technological black box, for the first time in Brazil, and thereby stimulating other segments to develop their own technology; 2- producing income for the progress of other activities that initially were onerous or unprofitable; 3- preparing the national industry for investments growth that would become essential, from the oil crisis in 1979 on, for the off-shore activities. This State role facilitated from the 50s to the 70s organizing the huge oil exploitation and production in deeper waters.

The 80s - coming out of the major internal crises and the change of paradigm

During the 80s, due to the 1979 oil crisis two difficult situations came about in the country. Brazilian model proved to be appropriate and decisive: 1- during the first year there was the national and worldwide refining crisis, therefore changing the profile of domestic demand for oil products and of the oil supply to be processed. This has jeopardize the domestic supply due to the lack of market as well as storage of fuel and gas surplus; 2- during the first five years, the foreign currency spent on oil import crisis has contributed, together with other causes, to bring the country to a default situation regarding its creditors. Petrobras helped overcome the crises adjusting the refining and performing substantial progress concerning the production of oil in deep waters, as will be seen below.

It would be impossible to solve the new demand for diesel, worsened by the need to process heavy oil from domestic (still showing high levels of acidity) and imported (the only one available in the market) origins, if the country would not have installed a modern and integrated refining process before the oil crisis.

At the beginning of the decade the country introduced a vigorous oil products replacement and gasoline price rising program, trying to save foreign currency and thus quickly changing the national demand profile, which allowed Petrobras to rapidly improve its refining activity in order to reach this goal[23].

Petrobras set six Priority Refining Programs, known as “Bottom of the Barrel Program” and thus optimized its refining process to deal with the then produced type of oil in order to fully comply with the national demand and, even more, adding more than US$ 1 billion per year to the national product[24].

As a consequence of the oil price decrease in 1986, the pressure on oil price vanished but the raising of interests as well as the general decrease of commodities prices started to put pressure on the balance of payments. Petrobras’ challenges remained: 1- the gradual adjustment of the national heavy oils refining process, whose production has increased and; 2- the offer of more diesel to a market that had vertiginous drop regarding fuel oil and gasoline demand.

There was no example regarding refining process by private companies as it happened in Brazil. Naturally, if there were big private refiners installed in Brazil they would not adjust their refining process, which could encourage the installation in the country of alternatives to their products. To the refineries owners, the solution for this problem, in all peripheral countries, has always been integrating the local refining to their own refineries installed in the U.S. and in other strategic places, optimizing the oil processing in their headquarters. The refineries of both oil exporting countries (Venezuela) or non exporting countries (almost all other Latin American countries except Brazil, Mexico and Argentina) became permanent importers of diesel or gasoline (the products that  depreciate the oil) even if the profile of their domestic markets could be fully satisfied by the traditional ways of refining[25].

During the 80s, Petrobras’ better known achievement regarding oil exploitation and production in general were: the accomplishment of the oil production goal of 500,000 bpd in 1985, the sequence of important findings in deep water in the Campos Basin, namely Marlim, Marlim Sul, Marlim Leste, Barracuda, Caratinga, Roncador (in water layers deeper than 300m), the production rise in water layers depth ranging from 300 to 400 meters, the preparation for production in water depths of 1,000 meters.

The General Figueiredo Administration made an important decision in 1980 regarding the definition of a new energy matrix based on the absolute lack of dollars to import oil and other goods. He was assisted by the NEC, which would reach in 1985 the national oil production of 500,000 bpd (starting with 180,000 bpd, in 1980); 500,000 bpd of imported oil (starting with 800,000 bpd in 1980), 500,000 bpd (equivalent) of alternative energies and still some energy saving. The Government by itself then decided to trust in Petrobras' capability to find and produce oil in the Campos Basin, without even reaching a consensus with the state-owned company board of directors on this goal. It was a matter of state, not business. There was inside criticism at the company regarding that "arbitrary" decision, but looking backwards this was one of the wisest and complex decisions ever taken regarding the national industry, considering its economic and operational risks, the lack of appropriate technologies, the lack of any parameter in the world on the subject and, on the other hand, the expected benefits to the country.

Due to Petrobras engineering and technological programs the Campos Basin strongly increased the oil production reaching 550,000 bpd in 1985 (with 337,000 bpd in Campos) withdrawing the critical dependence on oil imports.

This governmental target, under the commercial and economic conditions at the time, would be impossible to carry out by an oil exploitation and production private system except with strong incentives. Worldwide prospecting in deep waters was not the target of large multinational companies and the respective technology was not available.

These companies were convinced that the cost of oil produced under these new conditions would be very high and therefore investments would not be provided for commercial production. While the cost of oil production and exploitation in shallow water or inshore was less than US$ 10 a barrel (funding and capital) the assumed costs for the then called profound waters would be around US $ 15 a barrel or more. Therefore, only a company supported by the state could conduct great exploitation in such depths, believing that at least it could solve the problem of foreign currency and supply. The technological and operational progresses as well as the production scale, due to the national competence, have made the activity in deep waters to become a profitable business, rather than a heavy burden as it was considered worldwide. It is important to emphasize that this occurred in a scenario where the oil prices were in the range of US$ 15-25, between 1986 and 2000.

After the implementation of the first Training Program in Deep Waters - PROCAP, formally established in 1986[26], after reaching 300-meter water layer (already a technological victory) Petrobras arrived quickly to 1000 meters, which placed the company in a position ahead of all companies in the world.

Brazil only produced oil in sea waters because of Petrobras competence. The large foreign multinational companies only decided to produce oil in deep sea after Petrobras succeeded in the Campos Basin and considering the possibility of oil prices rising in the 90s.

These companies still had enough oil deposits inshore and in shallow waters in the Gulf of Mexico and the North Sea. At the end of the decade the great multinational companies believed in the implementation of liberalism in the Caspian Sea region due to the collapse of the socialist nations as well as in dozens of countries pushed by multilateral agencies to liberalize their oil sector. 

Thus, they didn’t focus on potential and economical production in deep waters (there were no developed technology available). They were not wrong; they just have adapted themselves to their challenges.

Brazil’s bad luck regarding lack of enough oil for exploitation and production at low costs became an advantage. This situation led Petrobras to develop technology and to risk searching oil in deep waters, which brought valuable gains, from the end of the 80s, influencing the country development trough great academic and business activities.   

The strong energy program adopted in Brazil, where Petrobras performance was very important, avoided great difficulties regarding foreign exchange between 1980 and 1990.

It was in this context of success that the 1986 Constituent Assembly ratified the oil state monopoly and inserted it in the 1988 Constitution (earlier defined by Law 2004) canceling the risk contracts in the country due to the new legal order and because they were ineffective regarding the search of oil and gas.

In addition to the initial high loss of currency due to the sharp rise in the imported oil prices (initially 80% of demand) in that decade, the country faced three other crises of equal size: 1) the foreign debt interests crisis (very high), around 20% a year; 2) global devaluation of the export commodities prices; 3) overvaluation of imported manufactured goods and higher technological content.

Two questions are relevant: 1) why the national production system was not self-sufficient in many agricultural products even wheat (which could ease the crisis)? Or; 2) why Brazil was a typical exporter of commodities rather than high technology products or even semi-manufactured products?[27]

As a conclusion, the maturity of the model where the state had a strong role permitted to solve part of the oil crisis. If the country would have adopted another model there would be neither higher oil production nor refining that could quickly overcome the possible supply crisis and it would not be possible for Brazil to plunge into a program of alternative energy[28]. Brazil became the world leader in technology for offshore production and redirected its refining process to a new demand profile, which was not adopted by any other nation having such size of refining park; therefore this Brazilian model can also be considered as a pioneer one.


The 90s - time of changes in the legal framework


During the 90s, the focus of attention was a different one. The model adopted by Brazil was severely criticized by those who considered it as an obsolete solution and contrary to world liberalizing trends and opening of markets.

It was considered necessary to break the monopoly. Some people went further into considering the privatization of Petrobras. They claimed that Petrobras figures were poor and its costs high, despite the success demonstrated in deepwater and refining.

Half-victorious or half-defeated campaign, according to different opinions: the monopoly was made “flexible", but continued in the Constitution as not “flexible"; Petrobras continued to be a state-owned company, but great part of its shares (held by the government), devaluated at that time, was sold in the open market. Furthermore, a model of disintegration by means of the privatization of parts of the company had begun to be implemented. The foreign companies could access all the sedimentary areas, including the Campos Basin, according to a model that gave them the ownership of the found oil.

The Brazilian market reached an important dimension and at the same time when Petrobras identified extensive reserves in several sedimentary basins, foreshadowing an exploitation potential of around 15 to 20 billion barrels, which means an excellent patrimony. Self-sufficiency in oil appeared to be achieved depending only on the Federal Budget release limits  so that Petrobras could invest the necessary funds to achieve that milestone (it should be pointed out that this was only an accounting issue because, since the 50's, there were more inflow of government financial resources into Petrobras).

The excellent technical and operational performance of Petrobras, mainly regarding oil production, combined with the strong reaction of its staff against criticism extensively published in the media, helped the Senate to get a formal commitment from President Fernando Henrique, that is: its administration would neither privatize the company nor divide it into independent segments. This agreement led to the parliamentary approval of the government proposal making flexible the state monopoly of oil without modification (if there were any modification the constitutional amendment draft-law would return to the parliament and could not be approved). This amendment would allow the ingress of private and state owned companies, either national or not, in all segments of the oil industry in Brazil

During that decade, the strategies adopted by the state were again essential for the present situation. Oil prices had fallen after 1986 and high costs of exploitation and production in sea waters, especially in deep water, led all foreign multinational companies to reduce their investments in the search for oil all over the country, focusing only on areas already well known and in shallow water.

The oil was offered again in the market at low prices, in the period 1986 to 2000, and private companies didn’t want to spend their financial resources intensively in that sector. Petrobras, on the contrary, independently of the possible profits (that in theory would be lower or even nonexistent) had as its mission to provide the country with oil production as much as possible, so generating the necessary dollars to solve the country permanent currency crisis.

The company continued to search for more oil in even deeper waters and also began a new Plan, in 1992, to reach capacity to produce at depths of 2,000 meters after the 1,000 meters plan accomplishment. This vision was unique among companies in the world and gave Brazil self-sufficiency in oil when prices increased rapidly in the first decade of this century.

This achievement put Petrobras in a position of global prominence, preparing its way to act abroad as a successful company in all segments; its technology places Petrobras in an advantageous situation comparing with other companies.

Profits from refining and organizational and management model regarding supply and research, up to the 70s, were the main features that allowed to build and consolidate the Company. However, during the following decades, the benefits from increased oil and gas production, its internationally recognized organization quality as well as its exploitation, production and research performance established the basis to carry on its activities after the oil prices decrease, in the post-monopoly phase, and to its consolidation as one of the largest and most profitable companies worldwide.

In this decade, impacting decisions regarding national development were taken with large consequences.

The petrochemical companies were privatized which led to the breaking up of this sector, which was reconstructed only in the following decade.

The shutdown of the trading company Interbras eliminated a powerful channel for Brazilian exports that has not been replaced.

The state-owned fertilizers companies were privatized and acquired by groups of distributors, ceasing investment in this sector and leading the country again to become one of the largest importers of these products with repercussions in agricultural performance.

On the other hand, even in the uncertain institutional environment as the monopoly decline followed by privatization, Petrobras conducted an agreement negotiation with Bolivia that led to the current imports of 30 million m3 of gas per day and the building of a modern network of gas pipeline linking Bolivia to São Paulo and Rio Grande do Sul to Minas Gerais through Rio de Janeiro.

This state decision avoided severe gas shortage which could have contributed to a recession affecting the country from 2000 on.

It is important to point out that Petrobras, to meet this goal, had to show that the pipeline network as negotiated, served national interest and not that of private enterprise that wanted to bring gas only to São Paulo. Furthermore, this agreement would be dependent on the local and federal administrations ensuring gas purchase, during 20 years, for thermal energy production in a plant that would be built in Brazil.

That is to say that there would be no gas for the South and Southeast regions. National interest would not be served but the economic interest of a local private company.

Another enterprise model regards structuring the Chemical Gas Pole in Rio de Janeiro bringing back to Petrobras the petrochemical activities. This was considered the only way to make feasible this great undertaking of national and Rio de Janeiro administration interests[29].

The first decade of the century - a new paradigm

The production chain involving oil and gas has become capable of responding to major challenges and Petrobras substantially increased the production of oil and gas, remodeled and expanded the refinery in order to process much of the increased domestic oil production, expanded its business abroad as never before and started earning enough to invest more than R$ 50 billion in 2008.

Petrobras once again returned to the practice of giving preference to the domestic industry that the very limitations of state investments concerning state-owned companies had damaged (leasing was used to circumvent the restrictions, mainly regarding large foreign companies), placing orders especially for shipbuilding and other capital goods.

This is an important data that is often politically and economically neglected since the domestic industry would have certainly much to lose from a lower participation in Petrobras oil activities or from an inadequate production rate. Indeed, a higher production rate to serve only the interests of companies or their countries headquarters inhibits the participation of domestic industry as a matter of capacity. This is a crucial issue to be considered in exploiting oil in pre-salt layers.

Brazil has become self- sufficient as regards technology, management and business and Petrobras is becoming one of the largest integrated oil and gas companies in the world. The power of the company is such that many countries ask its support to develop their state-owned model and, at the same time, Petrobras business plans include working in dozens of countries in all oil and gas industry sectors.

Petrobras’ investments and plans, inserted in the PROMINP (Program for Mobilization of Petroleum and Gas National Industry), PACs (Growth Acceleration Program) and now in the Productive Development Policy, reveals: 1- the power of the company’s actions to leverage the national economy, 2- the possibility of using the oil sector in national efforts to guaranty the country a strong place worldwide and; 3- the catalytic power of the innovation process of Petrobras[30].

Oil and gas, shipbuilding industry, petrochemical, fertilizer, engineering, construction and assembly and technological advances are impacting and strategic, not because of political wish but because indeed they are everywhere.

The company officially announced in November 2007, besides its success in the first years of the decade, the discovery of a huge field of oil and gas, named Tupi, a clear result of more than three or four years of research. Afterwards, Petrobras announced the success of some petroleum wells drilling, named Carioca, Bem-te-vi, Caramba and Parati as well as the beginning of wells drilling in Yara, Guará and Jupiter (Figure 7). Nevertheless, only Tupi field, where tests were made on two production wells, is inserted into the proved reserves.

Petrobras broke down again complex technological barriers combining its expertise in deep waters with the competence now tested and approved in the sea ground layers deeper than 5,000 m.

It is the experts’ opinion that the Tupi field area covers from Espírito Santo to Santa Catarina corresponding to an area of 160,000 km2, unique event in the world, and so it is possible the existence of many other similar fields (Figure 6). They add more information saying that 15 wells have been drilled in many regions and oil was found in six areas but full evaluation tests were not performed

Particularly, these experts presume that the country has 50 billion barrels of reserves or even more since there are other target areas. If confirmed these reserves would put the country among the oil and gas geopolitical important countries. If the Tupi field embodies the surrounding area, perhaps a mega field is about to be announced.


Figure 7 - Wells drilled and under drilling by Petrobras in the province of pre-salt

Source: Petrobras; in the Speech of the President of Petrobras Jose Sergio Gabrielli de Azevedo at ABDIB, on Sep 11, 2008.

Figure 8 - Map showing the province of the pre-salt.

Source: Petrobras - Speech of the President of Petrobras Jose Sergio Gabrielli de Azevedo at ABDIB on Sep. 11, 2008

The Petrobras technology and performance showed again the way to reach national wealth. The government[31] is responsible for grasping the opportunity, for the first time in its history, to take advantage of a "huge gold mine" in order to reach better results.

An important integrated action state-Petrobras, not well understood, refers to electricity generation. Petrobras, driven by the government, has continued its plan to participate in the electricity generation. The Petrobras Gas and Energy sector conducts courageous plan to increase the gas pipelines network in the country[32] as well as increase liquefied gas imports providing large gas supplying capacity and electricity thus reducing the probability of energy supply deficit in coming years.

The reentry of Petrobras in petrochemical sector, complying with the state guidelines and its strategic plan, started with the structure of the chemical gas pole in Rio de Janeiro. Due to these actions, this Petrobras sector, which was eliminated during privatizations, was restructured and now again there are the necessary conditions for Brazil to become an important participant in the petrochemical sector worldwide.

The construction of a petrochemical refinery in Rio de Janeiro, in Pernambuco and those foreseen in Maranhão and Ceará characterizes a typical action of national interest, since certainly no private company would invest in refining in the country. This activity has only received large funds from state-owned companies to invest in new plants or in a few demanding markets[33].

In the U.S., for example, no refineries have been constructed in the last 30 years although the American market is a large importer of oil products. The U.S. government puts pressure on the petroleum companies in order to build new units in the country. But this omission has not motivated these companies since they can get more business profits under the present situation. Furthermore, they need large sums to invest in the search for oil reserves.

Our conclusion on this historical issue

Oil and gas have been and still are one of the world more important concerns (presently greater), which bring uncertainties and disputes. Also it is a Brazilian important concern but in this case bringing abundance hopes, sovereignty and wealth[34].  

The new discovery of oil and gas in pre-salt layers first fields changed the parameters and possible direction for such important issue. The issue petroleum cannot be treated any more under the point of view of scarcity and struggle, sometimes desperate, to achieve and maintain self-sufficiency, or the perspective of foreign interests. Moreover, it is not possible to maintain the theory of exploitation risk in order to continue making concessions to oil and gas exploitation in a broad way. In the case of pre-salt fields there are big chances of finding exploitable oil and gas fields (with negligible risk).

Thus, some essential grounds of the existing law that regulates the sector are no longer valid.

The pre-salt "mine" will develop a business whose final product, in today’s values and expected oil and gas reserves, may reach a cash flow exceeding US$ 200 billion per year at some stage in the coming exploitation cycle. Under the present regulatory framework and national planning it is impossible to efficiently conduct the new cycle of national wealth. Brazil wasted the brazilwood, sugar, coffee and rubber cycles and entered the 50s without an anchor to support progress. One of the governmental plans in the 50s that never ceased to move on was that or the petroleum.  During the period of great difficulties, the country emerged victorious due to the following combination: extensive technology, good business management and state commitment.

The authors’ intention in this article was to show that in the case of Petrobras there was a positive intervention of the Brazilian state in the oil and gas sector. In the present analysis, were included examples of other countries state-owned companies whose results were not so positive.

One should recognize, however, that in the oil market it is impossible to escape from the dilemma of choosing between the major international cartel and the state action. Among the state-owned companies in Brazil, Petrobras and some other companies have maintained a professional attitude regarding their business conduction and relationship with the government. This made possible the essential state role in directing Petrobras activities without compromising its medium and long term economic results since, as a company, it must also account for the majority and the minority shareholders.

The history of Petrobras led the company to establish with the Brazilian people, from the campaign of “The Petroleum is our” on a special commitment to the country development that is interesting to keep. Until the advent of pre-salt issue, the reformulation of the oil and gas system, although not ideal, would ensure the way to reach self-sufficiency. The maintenance of the current model for the non-pre-salt oil fields shall be considered. The new dimension of Brazil as an oil-exporting country makes again necessary to strengthen the role of the state as it happens in different ways in all countries where oil is crucial to the economy.

The decision on the oil exploitation policy in the pre-salt is vital for the future of the country. This issue cannot be seen as a purely technical problem that only matters to experts or merely related to fees to be paid. It should be clearly explained to the opinion formers; and popular involvement being inevitable along time. This should happen now in order to build up a large national consensus to facilitate, as happened in the past, a smooth conduction of oil and gas policy.

Presently a great mobilization should be to transform, with redoubled force, oil and gas in definitive and safe vectors toward national sustainable development. Brazil has no lack of energy or foreign currency; and it has the said "mine" of oil and gas, technology, knowledge, experience, industrial capability and a history of achievements. The country just need the legal tools to exploit this "mine" focusing solely the national interests, without fear, unhesitatingly and with no big international pressure, to proceed forward. If nothing will be done the nation will be judged by history.


(*) Engineer José Fantine, is COPPE consultant, Petrobrás Ex-director, Petrobras ex-Planning Superintendent, presently Member of the National Academy of Engineering.


(**) Carlos Feu Alvim, is PHD in Physics, editor of the Economy and Energy Magazine - e&e and COPPE consultant.


Author’s Note

It is our point of view that the federal government concessions suspension of the pre-salt areas in 2007 came in good time and that it is appropriate to review the model that governs the matter in Brazil.

After concluding pre-analysis of this matter the government determined the creation of a Inter-ministerial Commission to present, within  60 days, its conclusions on how (and indeed why) to direct this window of opportunity (perhaps the final one) so that Brazil shall become a member of the developed countries group.

The government will establish also an inter-ministerial commission to examine possible changes in the regulatory framework for future oil exploration in the huge oil fields of the called pre-salt layer.

It is our expectation that we can contribute to this discussion, bringing it into the heart of society, thus helping to put on the national agenda the economic question of how to match the potential of the pre-salt with the national progress and how to stabilize it in the real history of the oil sector in Brazil and the world.

We have given our first contribution warning on the risks of the indiscriminate entry of foreign currency in Brazil and on the underdevelopment situation, we may say poverty, of the majority of oil exporting countries (Economy and Energy Periodical number 67 ( We also have shown that the nation needs, besides a good petroleum regulation, a perfect planning to make good use of this wealth. Now we bring to the public our second contribution regarding the importance of integrating state and oil and gas sector in Brazil.

A version "under discussion" of a third text of the authors, containing suggestions for the model to be adopted, is available as a supplement copy of the present article, and can be requested to the editors of the “e & e” periodical. We intend to review it, as often as necessary, with the help of suggestions and criticism that might be appropriate.

[1] NOTE BY THE EDITOR: Most of the information, from 1980 on, are based on the direct experience of the co-author of this article, José Fantine, who was the head of the refining department of Petrobras, was assistent to the Director, Director Superintendent of Planning and Assistent to Petrobras’ President. In case of lack of explicit information source, one may consider them as his direct witness.


[2] This is the total financial flow that these reserves will permit, at average 2008 values, therefore giving enormous power to whom will be at the production end position since he will have the power to work such amount and the right of strategically directing the oil wherever He wants. Its commercial movement will be above US$ 200 billion annually and its gross results, above US$ 100 billion annually, if the present conditions and the desired production autonomy are maintained suggested by those who defend the status quo of the national oil sector. The certitude regarding exceptional results of those that exploit these reserves and of their country of origin (supply assurance) contrast with the uncertainties of Brazil in case it does not have the actual and legal control of the exploitation and production pace, of the oil destination and the internalization and otimization of revenues, taxes and foreign exchange in the country favoring society and the exporting national industry and supplier of goods to the internal market. Regarding this subject, see article “Commodity, Pre-Salt and Development”.

[3] CNE was directly subordinated to the Presidency of the Republic that has delegated its direction to the Vice-President Aureliano Chaves who was kept in this function as Minister of Mines and Energy in the Sarney Administration. In the Collor Administration, CNE was dissolved like several other energy planning instruments or organisms that were dissolved or disregarded.

[4] In 1911, when W. Churchill took over as First Lord of Admiralty Royal Navy, the predominant fuel in ships was the British coal; fuel oil was only used on submarines and destroyers. The use of coal immobilized one fourth fleet in the complex operation of refueling. By making the replacement of fuel, the British accepted the risk of dependence on external supply, as was coal, but not oil. The supply of oil became a strategic issue in the military sense of the word. With the increasing share of oil in the world energy matrix, oil, for economic reasons, has become a strategic input for all countries. (Source: Dahl, Erik J. Naval innovation: from coal to oil - Cover Story
Joint Force Quarterly, 2000 in;col1, consulted on Sep.07, 2008


[5] Organization of Petroleum Exporting Countries was founded by Saudi Arabia, Iran, Iraq, Kuwait, Venezuela. The present members are, besides the founders: Angola, Algeria, Libya, Nigeria, Ecuador, UAE, Qatar.

[6] The companies were Standard Oil of New Jersey (Esso), later, Exxon, and today, ExxonMobil, Royal Dutch Shell, now called simply, Shell, Anglo-Persian Oil Company (Apoc), later, British Petroleum, then BP Amoco, now known by the initials BP, Standard Oil of New York (Socony), later, Mobil, which merged with Exxon, forming ExxonMobil, Texaco, merged with Chevron, creating ChevronTexaco and then named Chevron, Standard Oil of California (Socal), now  Chevron, Gulf Oil, absorbed by various companies (wikipedia).


[7] Gap is the difference between production capacity and predicted demand

[8] Any event that indicates possibility of a situation aggravation does raise prices, and a favorable combination of factors brings them to lower thresholds. Thus, their permanence for long periods above U$ 140 a barrel is not expected, as well as the return to ranges very favorable to consumers would be nothing more than chimerical.

[9] Partially verified in heat and electricity generation, but not in the liquid fuels for transport.


* Translator note: The Mines Code rules the mining activity in Brazil

[10] The decision was entitled to the National Department of Mineral Production, in April of the next year that the assignment was transferred to NCP.


[12] The original proposal considered the participation of foreign capital in Petrobras up to 1 / 10 of the capital. consulted in sep.16, 2008. The National Democratic Union party - UDN supporter in principle of liberal doctrine took over, paradoxically, the defense of the state monopoly and its president, Mr. Bilac Pinto, presented a Substitutive to the law creating the National Petroleum Company (ENEPE) instead of Petrobras as proposed by President Vargas. Negotiating with the Congress, the government accepted the theory of monopoly, which was approved. The Senate House presented dozens of amendments, after approval by the Congress, to maintain the existing refineries and allow foreign companies participating in the oil distribution. In some people’s opinion the Government strategy aimed at provoking a Congress reaction. Others believe that the UDN position was in fact to prevent the law approval in order to radicalize the situation. But the remaining feeling was of a perfect exercise of sovereignty and unity of the Nation representative agents. The large majority in Congress and its various political parties were in favor of the project despite strong pressure from a few Brazilian groups and foreign lobby against it.

[13] Indeed, the campaign meant that oil that could exist in the country underground should be "Our" once found. The popular movement was so strong that its spirit prevailed for 53 years, until the 1996 Constitution, which maintained the reserves possession under the state control. But the Law 9478 art 26, of 1997, which regulates Article 177 of the Constitution, clearly offered the possession of the oil and gas businesses to the discoverer companies. The State as an owner of the reserves became rhetoric because it was only valid while the oil does not “exist”, for when discovered it does not belong to the Nation anymore.

[14] Quoted in an article of  Senator Jarbas Passarinho in "Correio Braziliense" dated 04/25/2006.

[15] Few other strong companies, like Total, Elf and British Petroleum were interested in exploiting and producing oil and gas outside their countries. Also, a few American companies were interested in exploiting and producing oil and gas abroad, such as Arco, Chevron, Occidental, and Mobil. All these companies, without exception, were interested only in areas of great probability of oil reserves as the Middle East, Asia, Africa and Venezuela. They were only interested in achieving production costs less than US $ 2 a barrel.

[16] Some people argue that private companies would be interested in domestic refining, also demonstrated by the initiatives of the Ipiranga Group in the 30s and groups that have installed small refineries in the 50s. It must, however, be understand that: 1- the initial action of Ipiranga was trying to use a closed market away from supply routes and also a well defined and near oil supply; 2-the other private refineries in fact only started to act precisely because of the imminent closure of the market to imports, which would lead, as happened, to a captive market until 1997 and free of the dominating cartels.

The Ipiranga group found very difficult to stay until 1953, precisely because of the presence of the cartel in the oil distribution and supply, after losing the sources placed near the supply.

In the underdeveloped world no refineries have been built, or where this occurred it was the result of strong local government action. But without exception, there was no example, in these countries, of optimized private refinery plants, except one or two of them placed on routes of interest  to the cartel (itself owner of the refining plant).


[17] The monopoly indeed established three essential points to move ahead as follows: 1) attribute to the sate the import of oil products and its entire sale to distributors, thus ensuring market for the products to be refined in the country; 2) eliminate the possibility of building refineries by third parties thereby avoiding competition of existing cartels; 3) grant agility and resources to the state oil exploitation and production that was already under its responsibility, since 1938, through the creation of Petrobras.


[18] Almost all state owned companies followed a model with a high degree of formal or informal decentralization (regionalization) (becoming areas under influence of local government).

[19] This was a national mission since under Petrobras’ own point of view the company, like all large multi-national ones, would turn (their corporate desire) its refineries into petrochemical poles. But the federal government wanted to create large national petrochemical industry involving Brazilian entrepreneurs. For this purpose, Petrobras created Centers of basic petrochemicals products, independent from the refineries, and stimulated the introduction of second generation companies into a tripartite model, participating with 1 / 3 of the capital, a Brazilian partner with another 1 / 3 and a foreign partner with the remaining 1/3. Thus, this would ensure raw materials needed to establish a modern industry, a national petrochemical sector and provided size and assurances to the system, which had no problem in being installed.

[20] As paradigmatic examples: the development of Minas Gerais, Paraná, Rio Grande do Sul and the Northeast region, and the interior of São Paulo was hindered by lack of oil products at accessible prices and in the needed quantities. The government determined the refining and petrochemicals internalization and decentralization, in a scale necessary to supply future demands. This directive was unthinkable if the refining and petrochemicals were private. The construction of large refineries and major petrochemical plants in areas far from the sea-shore and in remote regions is the basis of the industrial development of São Paulo, Minas Gerais, Paraná, Rio Grande do Sul and Bahia.

[21] Risk contracts were established by Petrobras and the respective production should be forwarded to the company, which would pay the concessionaire company in accordance with pre-set costs and investments.

[22] General Geisel had a strong connection with the oil industry and was president of Petrobras before being the President of Brazil.


[23] Several meetings were held with the National Commission of Energy and the MME (Ministry of Mines and Energy) and even with the World Bank (that demanded the government to provide for such adjustment) to set directions in the refining course.

[24] Reducing the heavy oil volume production by new forms of processing was a crucial problem. This heavy oil processing, with low value in the foreign market would generate more diesel and gasoline, whose prices were twice that of fuel oil processed at that time. Although the export of gasoline and diesel imports were less critical regarding fuel supply volumes and, in some cases, as advantageous as the export of gasoline, the possibility of reducing too much the demand for gasoline and the increased demand for diesel was also a matter of concern.

[25] It is persistently pointed out the fact that it is necessary to establish competition in the refining sector to get better quality products at lower prices. There is no refinery in fact competing with another refinery worldwide. There is no excess of supply due to the respective high investments and costs that otherwise could upset prices. The American market, which can be taken as the example of open market, would be the only important one where it might be possible such competition (it is ten times greater than that of Brazil). In the USA there is a great dispute between authorities and businesses concerning this issue because there is a sense of market manipulation in view of mergers and plants closure and lack of investment in new refineries during 30 years. 

The quality of products is determined worldwide by a consensus which takes into account the total amount of pollutant emitted locally, the equipment requirements and the technological state of the art. In view of the unreasonable costs and production restrictions, there is no "quality surplus" anywhere to progress in a competitive route. If the refining prices are limited by the world market, there will be no way to decrease them because this market vision will prevail, as it occurs for all other products consumed by society. No private company in the world sells products at prices lower than that practiced by the market to gain costumers, unless monopolizing or forming cartel (to remove competitors and then explore the market with high prices).Using the importing difficulties to impose higher prices is what often occurs. This is the rule (this does not occur in Brazil).


[26] After the discovery of Garoupa, the E & P area and the Petrobras’ CENPES decided to develop production schemes never tried before (deep sea unprecedented in the world but within limits of human diving). This motivated Petrobras to move on to further goals resulting in discussions and analysis that led to the configuration of PROCAP 1000 meters, aiming at a new production horizon beyond the possibilities of the human diving and high pressures in the seabed.


[27] Brazil closed its market in the 60s and this lasted until the end of the 80s so that domestic and foreign companies would place their production, without requiring the obligation to go to foreign market. They became, in general, buyers of technology with no chance of conquering the foreign market, except in some niches. Petrobras, nevertheless, used technology to fulfill its supply function (no other oil company of underdeveloped country did so). This market reserve for private companies, although not as a monopoly (it was created oligopolies, cartels and a few competitive activities) should be analyzed in order to understand the role of the State during the critical stage of the national economy.

[28] Although one may talk about conflict of interests, the state-owned company’s logistics (its own ports, ships, pipelines, storage bases and oil stations) was placed always in appropriate time and ahead of others companies worldwide to make practice the propagation of alcohol fuel use in the country. This fact was not reached anywhere and in the achieved scale in Brazil.

[29] When Governor Marcelo Alencar took over the government of Rio de Janeiro, he established Working Groups to set the basis for the resumption of regional development in cooperation with Petrobras. In the opening work, his secretary Ronaldo César Coelho proposed that Petrobras should lead the creation of the Chemical Gas Pole, which would be the largest regional investment of those foreseen for the Campos Basin (although Petrobras has been removed from the petrochemical business in the privatization process). Closing the WG, the Governor made a strong public appeal for Petrobras to take care of the matter without which wouldn’t be viable as a business, given the scale and risks in light of the great competition planned. Later, the Federal Administration created a Special Secretariat for Rio de Janeiro with the main purpose of analyzing the issue. And everything was favorably decided and Petrobras, for its own interest and those of the State, also included the petrochemical business, which served as a basis for the recent restructuring of the sector.


[30] The reader of the Development Policy publication (NR 1) will verify that one of its most important bases is the innovation and the advances of Petrobras regarding the networks research structuring (Centers and Networks of Excellence and Technology Programs) are important steps in demonstrating the state’s strong participation in the national process.


[31] It must be pointed out that it was Petrobras’ action that made possible the government’s intervention in the 9th auction of concessions removing the pre-salt areas. The Company has been indicating that the country should review its legal model in order to raise funds and better control this activity. This attitude contrasts with that of multi-nationals that want to maintain the same type of concessions but only accept an increase in rates.

[32] These plans interconnect all country regions, from Ceará to Rio Grande do Sul, including all states on the Northeast route, all the Southeast and South regions and much of the Midwest region, with pipelines transporting more than 100 million m3 of gas per day, placing Brazil in an advances place regarding the use of this energy. To reach this goal, Petrobras develops an exceptional program to establish centers of excellence cooperating with national authorities and universities to ensure an optimized gas supply to the market. Despite criticism during the recent gas nationalization in Bolivia, supply and demand grow over 10% per year, which is an important event that contributes to the national progress, without future cuts or bottlenecks.


[33] The private interest in refining is not guided by natural increases in local market or small local deficits because that would lead to the immobilization of large funds and to temporarily idle capacity, which inhibit the prices and profitability of oil business.

[34] It is interesting at this point to recall the words of “Auto da Devassa” ( a kind of a trial#) of 1789, a complaint concerning the trial of Tiradentes (Brasilian hero#), which would have defeated interests of the Portugal Kingdom: "The army-paid second lieutenant of Minas, called Joaquim Jose da Silva Xavier spread the seditious proposition that Minas could be a rich and independent Republic, free from subjection to his Royal Majesty, because Minas had all the wealth, all productions and so all America could be free; with these words he tried to persuade the people and to wish anxiously that his plan should be carried out”. If the reader analysis the history, all Brazilian major decisions were taken under strong international pressure to serve foreign interests, always under either military, financial, political or commercial menace. But this year, 2008, for the first time in its history, Brazil may take its own decision on the use of its "mines" and comply with its desires peacefully without fear of any kind of inquiry.

# Notes of the translator




Graphic Edition/Edição Gráfica:
Editoração Eletrônic

Thursday, 08 March 2012

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