But during the good times with high oil prices, it is even more imperative to look closely at corporate governance methods. And that’s what makes Petrobras such a compelling case study.

Petrobras’s management and board of directors

Petrobras is a semi-public corporation accountable to the Brazilian populace. The company’s by-laws establish norms and regulations spelling out how it is controlled by Brazil’s federal government. Thus, Petrobras has to show transparency to its employees, other corporations, suppliers, clients, and competitors. The company reports its performance not only on oil- and gas-related issues, but also on those related to social, administrative, and environmental ones.

Petrobras’ stock ownership is as follows: 32 percent is owned by the federal government, 40 percent by private owners, and the balance by Brazil’s National Bank of Social and Economic Development, the Social Labor Fund, and other minority shareholders. However, the voting rights on those shares break down differently: the federal government has almost 56 percent of the voting shares, private owners hold 30 percent, and the balance is held by the partners mentioned.

State control, however, does not hinder Petrobras’s commercial management.

Before the Oil Law was passed in 1997, the company’s directors were appointed by Brazil’s president. Therefore, the link between the federal government and Petrobras was very close, with many strings attached. But with the Oil Law, the company’s governance structure changed. Now, the company is overseen by a board of directors headed by Dilma Vana Rouseff, who is the chief of staff to Brazil’s president, Luiz Inácio Lula da Silva. That board includes Brazil’s energy and economy ministers, as well as the president of Petrobras, and investor representatives. The board of directors then appoints the members of Petrobras’s executive board – the majority of whom are either current or retired employees – which handles the day-to-day operations of the company.

Since this change in governance, the corporation has been run with utmost professionalism, and with profitability and responsibility as its main goals. The company’s president, Jose Sergio Gabrielli, reports directly to Brazil’s minister of energy and mines. Petrobras’s organizational model must be approved by its administrative council. And since 2000, the company has been operating under a structure that has four main business areas – exploration and production, downstream, gas and energy, and international – as well as the corporate, finance, and services segments. The corporate, finance, and services areas report to Gabrielli, while the others report to their respective area directors on the board.

Another factor that has been a key to Petrobras’s success is its leadership’s technical expertise. Almost all of the company’s directors and top executives have technical degrees and many have graduate degrees, making Petrobras executives on par with the best national and multinational oil companies.

Petrobras is managed more as a commercial entity than a state company. Although it is controlled by the state, its behavior and business orientation is ruled under practical and sound commercial practices. A few basic tenets rule its behavior.

1. The state seeks to preserve the company’s independence because Petrobras’s efficiency allows the state profits and benefits.
2. Petrobras treats state and private interests governing the company more as convergent forces than divergent ones.
3. Petrobras is pragmatic, realistically regarding market conditions, changes in supply and demand, the competitive landscape, and technology breakthroughs. Those factors in turn determine E&P plans, refining projects, new fuels development, and the ability to employ new technologies.

Governance and technology

Petrobras’s structure allows the free flow of business and commercial ideas; the company’s entrepreneurial mission and potential resource base are not limited to Brazil’s borders. The company will go wherever it finds opportunities, wherever its technological capabilities give it an edge. Through Braspetro (the E&P arm that operated abroad until 2002, when the affiliate was folded into the new Petrobras structure), Petrobras has expanded into the Gulf of Mexico and several other regions.

In 1995, Petrobras created its exploration frontiers technology program to reduce exploration risks on new reserves, particularly in deep and ultra-deep water. Out of those efforts came the exploration technology that allows Petrobras to prospect in ultra-deep water. Petrobras has set many firsts in deepwater and now holds a world record in horizons deeper than 12,000 feet.

This program and others at Petrobras have helped it pioneer new ship designs, anchoring systems, better-working Christmas trees, and deep-water ships – built completely in Brazil – that give it the ability to handle water, gas injection, and heavy crude production.

Conclusion

Petrobras has three key factors to its success:

- Management has autonomy.
- Politics are separated from commercial interests.
- Its executives are highly qualified.

Those three elements dramatically diminish the government’s ability to hinder the company’s performance, or to seek greater rents. Thus, it appears that Petrobras will be able to continue its remarkable success, even though Brazil’s president, Luiz Inácio Lula da Silva, likely wants greater control over the money and influence that the company wields.

In Brazil, oil production should increase
by .17 mbpd in 2007 and .3 mbpd in
2008, driven mainly by the continued
ramping up of projects that
came online in 2006, new offshore
oil projects in the Campos Basin, and
increased ethanol production.

Alberto Cisneros Lavaller is the CEO of Global Business Consultants, and a professor in the School of Law and Political Science at Central University, both in Caracas.