November 21, 2008
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Petrobras Outlines Oil Output Plans

Brazil is still trying to get a handle on the magnitude of vast new deepwater oil discoveries, but the president of the country's state-controlled oil company says that the government has every right to assert greater control over the reserves.

During a visit to New York, which included an interview with The Wall Street Journal, Jose Sergio Gabrielli, president of

Petroleo Brasileiro SA, or Petrobras, offered a rough sketch of how the company intends to develop vast new discoveries under more than 6,600 yards of water, rock and salt in the Atlantic Ocean.

Petrobras has riveted the oil industry since November when it announced that the Tupi field could hold from five billion to eight billion barrels of oil equivalent. Analysts think there could be billions of barrels more in the surrounding areas, and Petrobras has said that the new discoveries could vault Brazil to the top ranks of oil-producing nations.

Brazil's oil potential is welcome news at a time when growing concern about the availability of future oil supplies has contributed to a run-up in oil prices.

Mr. Gabrielli said that in the first quarter of next year Petrobras would begin test production in Tupi field, turning out around 30,000 barrels a day. The company plans to have a pilot production program in place by late 2010 that will produce 100,000 barrels a day, he said.

Mr. Gabrielli said that only after doing further work in the entire area, which is known as the "pre-salt" area because the oil lies under a dome of salt, will Petrobras have a more precise idea of the size of the reserves. "If you don't drill, you can't know," he said.

In an indication of its optimism, Petrobras is undertaking a massive buildup of its drilling capacity. Nine leased rigs will start up in 2009 and an additional seven in 2010, Mr. Gabrielli said. He said that Petrobras also intends to lease an additional 175 supply vessels, tankers and other vessels in addition to the 59 that are already being leased.

Petrobras is also staffing up. Mr. Gabrielli said there is no shortage of people willing to work for a company that is considered a national icon. He says the company has 450,000 applicants for 2,600 openings.

Mr. Gabrielli stood by remarks he made earlier this month to the Brazilian Senate that Brazil should revamp its current concession system to give the government greater control over reserves in the pre-salt area. He was emphatic that existing concessions awarded to private companies shouldn't be altered. But he defended greater control in future leases in part because Petrobras had done the costly, high-risk work of finding where the oil is. He said the risk of not finding oil in the pre-salt area was "practically zero."

Mr. Gabrielli didn't specify what kind of system he would like Brazil to adopt. But he said that developing the new oil reserves will be such a massive and lengthy undertaking that Brazilian politicians will have ample time to find a model that works for the country.

Petrobras has flourished over the past decade or so since the government ended the company's monopoly over exploration and production, floated shares on the Big Board and established a truly independent board of directors. Prior to the overhaul, the company used to be mocked as "Petrosaurus" for its inefficiency.

Mr. Gabrielli has been president of the company since July 2005. Prior to that he was chief financial officer. He recalls in 2003 doing more than 500 different one-on-one meetings with investors, "mostly because [Petrobras] was unknown and people were afraid of me." At that time, the company's market capitalization was just $14 billion, he said.

Now, Petrobras has a market capitalization of more than $300 billion. "The ones that stayed with us made a lot of money," he says.

Mr. Gabrielli said he didn't see any reason for crude prices to decline, but wouldn't even venture try to pinpoint where oil was headed. He said, "It's worthless to give a number because it's going to be wrong."

Source: Dow Jones


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