Harvard Case - BRAZIL PRE-SALT: NEGOTIATING FIVE BILLION BARRELS OF OIL
"BRAZIL PRE-SALT: NEGOTIATING FIVE BILLION BARRELS OF OIL" Harvard business case study is written by Nuno Fernandes, Lars-Fredrik Forberg. It deals with the challenges in the field of Finance. The case study is 14 page(s) long and it was first published on : Jan 1, 2011
At Fern Fort University, we recommend that Petrobras adopt a strategic approach to negotiating the pre-salt oil reserves, focusing on maximizing long-term value creation while balancing national interests and stakeholder expectations. This approach should involve a comprehensive evaluation of potential partners, a robust financial strategy, and a clear understanding of the risks and opportunities associated with the pre-salt development.
2. Background
This case study centers on Petrobras, the Brazilian state-owned oil company, facing a monumental opportunity: the discovery of vast pre-salt oil reserves estimated at 5 billion barrels. This discovery presents Petrobras with a unique challenge ' how to maximize the value of these reserves while navigating complex political and economic landscapes.
The main protagonists are:
- Petrobras: The Brazilian state-owned oil company, responsible for developing the pre-salt reserves.
- The Brazilian Government: Holding a significant stake in Petrobras and tasked with ensuring national benefits from the pre-salt development.
- International Oil Companies (IOCs): Seeking to partner with Petrobras to access the pre-salt reserves and contribute expertise and capital.
3. Analysis of the Case Study
The case study can be analyzed through the lens of strategic management, focusing on the following key aspects:
- Strategic Positioning: Petrobras needs to define its desired role in the pre-salt development. Should it be a dominant player, a partner with IOCs, or a facilitator of independent exploration'
- Competitive Advantage: Petrobras needs to leverage its existing infrastructure, expertise, and national support to gain a competitive edge in the pre-salt development.
- Risk Management: The pre-salt development involves significant financial, environmental, and political risks. Petrobras needs to develop a comprehensive risk management strategy to mitigate these risks.
- Financial Strategy: Petrobras needs to develop a robust financial strategy to fund the pre-salt development, considering various financing options, including debt financing, equity financing, and partnerships.
- International Collaboration: Partnering with IOCs can provide Petrobras with access to capital, technology, and expertise, but it also requires navigating complex international negotiations and maintaining control over the pre-salt development.
4. Recommendations
Petrobras should adopt the following recommendations to maximize the value of the pre-salt reserves:
- Strategic Partnership Model: Petrobras should pursue a strategic partnership model with carefully selected IOCs. This model should ensure that Petrobras retains majority ownership and control over the pre-salt development while leveraging the expertise and capital of IOCs.
- Financial Strategy: Petrobras should develop a comprehensive financial strategy that balances debt financing with equity financing and strategic partnerships. This strategy should prioritize long-term value creation and minimize financial risk.
- Risk Management Framework: Petrobras should implement a robust risk management framework to identify, assess, and mitigate the financial, environmental, and political risks associated with the pre-salt development.
- Negotiation Strategy: Petrobras should adopt a strategic negotiation approach that prioritizes national interests, stakeholder engagement, and long-term value creation.
- Technology and Analytics: Petrobras should invest in advanced technology and analytics to optimize exploration, production, and resource management in the pre-salt environment.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: Petrobras's core competencies in oil exploration, production, and infrastructure development are crucial for successful pre-salt development.
- External Customers: Petrobras needs to consider the needs of its customers, including the Brazilian government and international buyers, in its pre-salt development strategy.
- Competitors: Petrobras needs to be aware of the competitive landscape and the potential for competition from other IOCs in the pre-salt development.
- Attractiveness: The pre-salt reserves offer significant financial returns, but Petrobras needs to carefully assess the costs, risks, and potential returns of the development.
6. Conclusion
The pre-salt discovery presents Petrobras with a unique opportunity to enhance its position as a global energy player. By adopting a strategic approach that balances national interests, stakeholder expectations, and financial considerations, Petrobras can maximize the value of these reserves and contribute to the long-term economic prosperity of Brazil.
7. Discussion
Other alternatives not selected include:
- Sole Development: Petrobras could choose to develop the pre-salt reserves independently. However, this approach would require significant capital investment and could limit access to expertise and technology.
- Full Privatization: Petrobras could choose to fully privatize the pre-salt reserves. However, this approach would likely face significant political opposition and could lead to a loss of national control over the reserves.
The key assumptions underlying these recommendations include:
- Political Stability: The recommendations assume a relatively stable political environment in Brazil, allowing for long-term planning and investment.
- Global Oil Market: The recommendations assume a continued demand for oil in the global market, supporting the economic viability of the pre-salt development.
- Technological Advancements: The recommendations assume continued advancements in oil exploration and production technology, enabling efficient and sustainable development of the pre-salt reserves.
8. Next Steps
Petrobras should take the following steps to implement these recommendations:
- Form a Task Force: Create a dedicated task force to develop a comprehensive pre-salt development strategy.
- Partner Selection: Initiate a rigorous process to select strategic partners for the pre-salt development.
- Financial Planning: Develop a detailed financial plan that outlines the funding requirements, financing options, and risk management strategies.
- Negotiation Process: Engage in a transparent and collaborative negotiation process with selected partners, ensuring alignment on key terms and conditions.
- Implementation Plan: Develop a detailed implementation plan that outlines the timeline, milestones, and key performance indicators for the pre-salt development.
By taking these steps, Petrobras can ensure that the pre-salt development is conducted in a responsible and sustainable manner, maximizing value creation for the company, the Brazilian government, and the Brazilian people.
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Case Description
The Brazilian government has just hired GCA to do the valuation of the pre-salt fields on their behalf. At this stage it is clear that Petrobras will go for an equity issue, but the conditions of it are not yet clear, as it depends on the negotiation for the transfer of rights for the new pre-salt oil fields. If successful closure is achieved on this negotiation, Petrobras will have to pay the government for the new pre-salt fields, in addition to getting external capital to support its investment plan 2010-2014. Learning objectives: The learning objectives focus on the approach to the negotiation.
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