Petrobras: The next oil colossus

March 8, 2011: 5:00 AM ET

Boosted by vast offshore discoveries, the Brazilian oil giant is on track to eclipse Exxon.

By Brian O'Keefe with Doris Burke

The Petrobras P-52 oil platform, 80 miles east of the coast of Brazil, produces 180,000 barrels of oil a day.

"Oh yeah, anything goes wrong out here, it's serious!"

I'm standing on the top deck of P-52, an oil platform 80 miles off the coast of Brazil, talking with a senior crew member named Claudio Marinho. Actually, we're shouting. In addition to our flame-retardant jump suits, hardhats, and goggles, we're wearing earplugs to take the edge off the industrial buzz. Turns out oil platforms are loud.

To get here I flew 30 minutes north from Rio de Janeiro to a city called Macaé, donned a fluorescent-orange vest and life jacket, and boarded a helicopter for an hourlong ride out into the South Atlantic. Marinho, a burly, voluble 50-year-old who has been designated my tour guide for the day, is giving me an education in what it takes to extract crude from deepwater fields.

You'd be hard-pressed to find a better classroom. P-52 is one of the largest and most advanced oil-producing structures ever built. It belongs to Petróleo Brasileiro, or Petrobras, the government-controlled but publicly traded Brazilian oil giant. Finished in 2007 at a cost of more than $1 billion, P-52 has a main deck bigger than two football fields, and its displacement of 81,000 metric tons is greater than that of the Queen Mary 2. The platform is what's known as a semisubmersible -- basically a giant hydrocarbon-processing facility floating on top of an enormous pontoon hull. (In the oil industry the term "platform" is used for structures that extract oil from wells, whereas a "rig" is used for those that drill.) Its onboard power plant, fueled by a portion of the gas produced, generates 100 megawatts of electricity, enough to supply a city of 300,000 people. A 180-man crew works in 12-hour shifts -- two weeks on, three weeks off -- to keep the oil flowing 24 hours a day.

P-52 is in the Campos Basin, one of world's richest areas for offshore oil and gas. Petrobras first discovered oil here in the 1970s, and today its fields generate 1.7 million barrels of oil a day, or just under 2% of the world's total daily production. There are 18 wells connected to P-52, producing 180,000 barrels a day -- roughly $15 million worth at current prices.

After two hours of trekking up and down P-52's metal stairs on this sweltering December morning -- we're about 1,600 miles south of the equator, and it's almost summer -- I'm starting to fully appreciate the magnitude of the operation. The platform is a maze of pumps, valves, meters, monitors, and most of all pipes -- from the 24-inch lines that bring oil up from the wells to the seven-inch tubes that push water down into the reservoirs with 3,000 pounds of pressure per square inch. Altogether there are some 125 miles of color-coded pipes onboard: green for gas, yellow for water, and gray for oil. Lots of stuff that could break. Or blow up.

When I point this out to Marinho, he assures me that safety is at the top of his mind. "There's always something going on," says the 30-year Petrobras veteran. "Every day we have guys doing maintenance -- painting, cleaning, testing systems. Always something. If there's a problem, it can get really stressful. People will be running around: 'What happened? Why did it happen?' But on a day like this it's pretty relaxed."

He spreads his arms. "You like the view?"

We're perched about 10 stories above the surface of the water, but there isn't much to see. Land is out of sight. To the west, two other Petrobras platforms are dimly visible on the horizon. The water is a vibrant cobalt blue and choppy because of the 40-mile-an-hour winds; a storm system moving up the coast is due to arrive in a few hours. A fishing boat nearby is getting tossed around in the waves. But thanks to its computer-controlled anchoring system, the platform is swaying more like a boat docked at a lake.

Behind Marinho, I notice that his boss, the stone-faced platform manager, Celso Tadayoshi, wants to make a point. He steps forward. "We face many challenges every day," says the 53-year-old, who, like Marinho, has spent three decades working offshore for Petrobras. "But we don't have accidents here. The main thing is the production. We must operate at 100% efficiency." And with that, he nods.

Slideshow: Inside Petrobras

Since BP's (BP) disastrous Deepwater Horizon accident in the Gulf of Mexico last April, the risks of offshore oil drilling have been a hot topic. One place it isn't questioned much is Brazil, whose oil production industry is one of the fastest-growing in the world because of vast new deepwater oil reservoirs discovered in the past five years. The largest finds are in the Santos Basin, which, at nearly 200 miles off the coast of Rio, is much farther offshore than even Campos. The mega-fields there lie more than three miles below the ocean's surface, underneath a salt layer in the crust of the earth some 6,000 feet thick. The technical and logistical challenges of drilling in these areas are immense.

Together, the so-called pre-salt reserves off the coast of Brazil have been put at 50 billion to 100 billion barrels or more -- potentially a deepwater Kuwait. Vast amounts of money and manpower are being mobilized for what is shaping up to be a historic investment boom. Foreign oil-services companies like Schlumberger, (SLB) Halliburton, (HAL) and GE (GE) are rushing to set up offices. It has been estimated that offshore oil and gas could be as much as a $1 trillion industry for Brazil over the next decade. And as political unrest in the Middle East drives up crude prices, the value of a stable new supply of oil from Brazil is magnified.

The company spearheading all this activity is Petrobras (PBR). By every measure the energy giant is already one of the world's most important corporations -- and it stands to grow vastly more influential. Last year Brazil's biggest corporation ranked No. 54 on Fortune's Global 500 list of the world's largest companies; in its most recent fiscal year revenues jumped 32% to $121 billion. Excluding wholly state-owned oil companies such as Saudi Aramco or NIOC of Iran, Petrobras is the fifth-largest oil company by production (2.15 million barrels a day in 2010) and the third-largest in market capitalization ($240 billion). By the end of the decade, Petrobras is likely to pass Exxon Mobil (XOM) to become the largest publicly traded oil company in reserves and production. It also has the respect of its peers, coming in seventh in its category on this year's list of the Most Admired Companies.

Developing the pre-salt assets is a daunting task. For starters, it will be mind-bogglingly expensive. In its five-year plan through 2014, Petrobras has committed to invest $224 billion, much of it on platforms, rigs, and other infrastructure for pre-salt production. (It's also building five new refineries.) To help fund the effort, last year the company conducted the largest share offering in world history when it sold $70 billion worth of new stock to investors. It plans to sell up to $40 billion in bonds by 2014.

Scrounging up investment capital is only part of the challenge. Critics argue that the government's mandate to make Petrobras the lead operator in the development of all fields in the pre-salt area -- rather than leave it open for bidding from international companies -- puts too much pressure on the company and will prove an inefficient approach to developing the area. It's unclear whether the industry supply chain can grow fast enough to meet the production targets Petrobras has outlined. And there is always the possibility that an offshore accident will throw the whole operation into chaos -- no matter how vigilant Marinho and Tadayoshi might be.

From refining to exploration

The Petrobras headquarters in Rio's Centro business district has been voted one of the world's 10 ugliest buildings.  A product of the brutalist style of architecture popular in the 1950s and 1960s, the 29-story hunk of concrete and metal looks like an enormous box missing square-shaped pieces here and there. (It has been likened to an oversize Jenga game.) When it was built in 1969, Brazil was in the late stages of a long period of post-World War II prosperity and a few years away from a two-decade run of reckless monetary policy that led to hyperinflation and wreaked havoc on its economy.

The office of company president and CEO Sergio Gabrielli is an expansive corner space on the 23rd floor that opens up to a balcony with views of the city's most famous landmarks: Guanabara Bay, Sugar Loaf Mountain, and the iconic Christ the Redeemer statue. A former economics professor, Gabrielli, 61, earned a Ph.D. from Boston University. (He's a Red Sox fan.) He was appointed to his job in 2005 by Lula, the beloved Brazilian President who recently left office after eight years. Tall and barrel-chested, Gabrielli displays both understated confidence and wry humor. He explains his ability to manage such a big company this way: "I work 13 to 15 hours a day, every day. Seven days a week. That is a given."

Asked about the magnitude of the pre-salt finds, Gabrielli hesitates, then smiles. "What we can say is that we have a lot of oil," he says. "In the next four or five years we are talking about a company that is going to have between 30 billion and 35 billion barrels of reserves. Nobody in the world -- none of the publicly traded oil companies -- has anything like that." Surpassing Exxon is not a goal, he says, just the probable outcome: "We have an asset base in our own portfolio that, on an organic basis, can grow faster than anyone else."

This wasn't always true. When Petrobras was founded in 1953, its primary mission was to refine imported oil. For decades Brazil was considered hydrocarbon-poor. The country didn't produce enough crude to meet its own demand -- much less to export -- until five years ago. That's a big reason Brazil developed its sugar-cane ethanol industry. (Virtually every car on the road in the country can run on either gas or ethanol, and pretty much every fueling station offers both. Petrobras is investing $3.5 billion in biofuels through 2014.) Early on, Petrobras took its search for reserves offshore and expanded overseas. While the vast majority of its output today is in Brazil, the company has a presence in 28 other countries, including large-scale operations in the Gulf of Mexico. It produces a quarter of the world's deepwater offshore oil.

The Brazilian oil equation changed in 1997 when the government amended the law to allow foreign oil companies to bid for the right to explore blocks offshore. The competition led to new discoveries. Then improving seismic technology enhanced the ability of the oil companies to "see" through the salt layer in the earth's crust. The first major pre-salt field in the Santos Basin was discovered in 2006.

The industry is keeping a watchful eye on how Petrobras develops those ultra-deepwater fields. "It's the frontier," says David Knapp, chief energy economist for the Energy Intelligence Group in New York, who points out that the geology off the coast of Angola, across the Atlantic from Brazil, is almost identical. "It is seen as a bellwether for potential future development in similar areas at similar depths."

Petrobras has been drilling in the pre-salt fields and has even been producing some oil. But the activity so far has mostly been to verify reserves and get a handle on the technical challenges. There are contaminants in the pre-salt oil that make it highly corrosive, so Petrobras has been working on new alloys for its drilling equipment. And the salt layer is softer than rigid rock, which means that solidifying drilled wells is more difficult and expensive.

Production is expected to ramp up aggressively. The company's strategic plan calls for doubling its total hydrocarbon production rate by the end of the decade, from 2.7 million barrels a day in oil and oil equivalents to 5.4 million. That will require huge investments in infrastructure. "The main constraint we have is the capacity of the supply chain to meet our needs," says Gabrielli.

Consider the company's rig situation. Petrobras has 14 ultra-deepwater drilling rigs -- far short of what it needs. By 2012 it will have added 20 rigs that are now either under construction or being used by other companies. After that there's no supply. The shipyards in Singapore and South Korea that build most of the world's offshore drilling devices are maxed out. So Petrobras is helping create a rig-building industry at home. It is awarding contracts worth a total of about $18 billion to four Brazilian shipyards to supply 28 rigs starting in 2014.

Gabrielli says Petrobras assumes that oil will fluctuate between $65 and $85 a barrel through 2020. To some that estimate might sound low. But the CEO says that he expects strong demand in countries like China, India, and Brazil to be counterbalanced by slower demand in mature markets like the U.S. and Europe. "We don't see why the price is going to be skyrocketing," he says. Gabrielli says the breakeven price for pre-salt oil from the Santos Basin should be $40 a barrel and could go lower as the operations scale up.

Who will buy that oil? It makes sense geographically for the U.S. to be a big customer -- tankers going north from Rio to the petroleum infrastructure of the Gulf Coast don't have to cross an ocean or go through a canal. In 2010 the U.S. purchased about 260,000 barrels a day of petroleum products from Brazil. The Chinese are likely to be aggressive buyers too. Last year China replaced the U.S. as Brazil's biggest trading partner. And in 2009, when credit markets were still tied up, the China Development Bank loaned Petrobras $10 billion in exchange for the right to buy up to 200,000 barrels of oil a day for 10 years at market prices. "They are going to be important customers," says Gabrielli. "The Chinese put a value on the strategic relationship."

Too  much oil to handle?

For all the excitement about the growth in Brazilian oil, investors haven't been all that pleased with Petrobras lately. In 2010 the stock dropped 27% even as the overall Brazilian market was flat. The catalyst was dissatisfaction with the company's stock sale last summer. Regular shareholders had their holdings diluted by the $70 billion stock sale while the government's total stake in the company rose from 40% to 48%. (It holds 54% of the voting shares.) Petrobras handed over $42.5 billion of the $70 billion it raised to the government for the right to produce 5 billion barrels of pre-salt oil in areas not previously awarded to the company. Famed emerging-markets investor Mark Mobius of Franklin Templeton called the transaction an "abomination."

Many investors worry about laws passed last year that increase the government's role in managing the pre-salt assets, closing them off from open bidding and mandating that Petrobras be the lead operator in exploiting them. The company can take on foreign partners but must retain at least 30% ownership of any group. The government, meanwhile, plans to divert pre-salt revenues out of the regular budget and into a special "social fund." Critics believe that these changes will slow the development of the pre-salt area and at the same time overburden Petrobras.

There is lively debate about the best way to handle the newfound oil wealth. The government's approach is endorsed by Ernani Torres, chief economist at the Brazilian Development Bank, known as BNDES. Torres is a 35-year veteran at BNDES, which, with more than $200 billion in assets, is one of the world's largest state-owned lenders. "Oil is the most important structural change in the Brazilian economy since the 1950s," says Torres. If the government were to allow companies to develop the pre-salt without constraint, he argues, the flood of tax revenue could lead to a bad case of the dreaded Dutch disease, in which a country's currency appreciates wildly and kills off its exports. "Oil is a curse, but it's also a blessing," he says. "It depends how you do it, okay?"

Brazilians who suffered through the ugly days of the 1980s and '90s -- inflation reached 1% a day in 1994 -- welcome the challenge of prosperity. Torres remembers attending a presentation years ago by a European banker who, on a map of the world's markets, had labeled Latin America the "Forgotten South." Says Torres: "We have not been viewed as an important country. Oh, we have the Amazon rain forest -- people like to come and see that. Or they like samba. But we are not going to be the Forgotten South anymore for long."

Petrobras, meet Brazil's highest roller

Petrobras has not been the only big winner in the Brazilian oil boom. Indeed, no single person has benefited more than entrepreneur Eike Batista. (First name rhymes with "like.") With a net worth that has been estimated at $27 billion, Batista, 54, is now Brazil's richest person and one of the 10 wealthiest in the world. And he's not shy about saying that he plans to be the richest man on the planet, thanks to a fast-growing empire built on natural resources.

Batista's fame in Brazil has grown as quickly as his fortune in recent years, but he has always led a high-wattage life. His father, Eliezer Batista, is a Brazilian mining industry legend who once ran iron ore giant Vale. Eike struck out on his own in his twenties as a gold miner, building eight mines over the years in Brazil, Chile, and Canada. He also became a champion powerboat racer and married one of Brazil's most beautiful women, the model, actress, and Carnival queen Luma de Oliveira. After he and de Oliveira divorced seven years ago, he decided he had something to prove. "I was more known as the husband of Luma and the son of my father," he says. "It was time to show my two sons I had accomplished something."

Since vowing to make his mark, Batista has focused on building a vast network of related businesses for his EBX Group -- all with his signature "X" in the name. He controls five publicly traded companies: MMX (mining), MPX (energy), LLX (logistics), OSX (offshore oil and gas services), and OGX (oil and gas exploration). South of Rio, LLX is now building a $2 billion superport called Açu, which will be powered by MPX and able to accommodate giant tankers carrying oil produced by OGX and minerals by MMX. The scale and integration of the operations are mind-blowing. If Batista had a white cat and evil intentions, he'd make a good Bond villain.

I went to visit Batista at the offices of EBX in Rio on a blazingly hot Friday afternoon. We sat down in a conference room with Paulo Mendonca, the president of OGX. Mendonca, whom Batista refers to as "Dr. Oil," had just retired as chief of exploration at Petrobras, after 34 years at the company, when Batista recruited him in 2007 to launch OGX. Batista became intrigued when he heard that the hit rate for wells drilled by Petrobras in 2005 was better than 50%. "I thought, 'Jeez, time to put a team together and put some money into this,'" he says.

Batista invested about $400 million of his own money in OGX and raised another $900 million from investors, including the billionaire Ziff brothers from New York. Mendonca, with a team of former Petrobras executives, began preparing to bid on deepwater offshore blocks near the recently discovered pre-salt Tupi field. But two weeks before the auction, the government removed the deepwater blocks from the bidding. Mendonca and his team scrambled to adjust their strategy, and they ended up acquiring 21 blocks in shallower water, what Mendonca calls "ugly ducklings" -- areas that Petrobras skipped over in the quest for bigger fields further offshore.

They chose well. After just over a year of drilling, OGX has already found at least 2.6 billion barrels of reserves and plans to start producing oil this fall. It is already the largest non-Petrobras player in the Brazilian offshore oil business. Batista projects that OGX will produce 1.4 million barrels a day by 2019. Even after a recent dip in the stock, OGX has a market value of $37 billion.

Batista says he has gotten a cool reception from Petrobras, but he thinks that down the road OGX and Petrobras may work together on pre-salt fields. "I believe that Petrobras will invite us to help them in their challenge because it's so big," says Batista. "We have an expression in Brazil: 'They have put a gigantic turkey on a small plate.'"

Over the next several years, Brazil will have a chance to demonstrate its growing economic strength by staging a pair of global events. In 2014 the soccer-mad country will host the World Cup. And in 2016 the Olympic games are coming to Rio de Janeiro. By then the pre-salt fields should be producing hundreds of thousands of barrels of oil a day.

For Petrobras to make that happen, offshore workers like Marinho and Tadayoshi will have to do their jobs well. After our tour we eat a quick lunch of rice and beans in the cafeteria at P-52 and head to the reception area to wait for our helicopter back to land. There is a framed shirt signed by President Lula hanging on the wall near a sign that reads DAYS WITHOUT AN ACCIDENT: 261. I ask Marinho if he'll go to work in the pre-salt fields. "I don't know," he says. "I would prefer to be home with my family, but there's going to be a lot of work there. Probably yes." Some booms are too big to pass up.

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"Oh yeah, anything goes wrong out here, it's serious!"I'm standing on the top deck of P-52, an oil platform 80 miles off the coast of Brazil, talking with a senior crew member named Claudio Marinho. Actually, we're shouting. In addition to our flame-retardant jump suits, hardhats, and goggles, we're wearing earplugs to take the edge off the industrial buzz. Turns out oil platforms are loud.

To get here I flew 30 minutes north from Rio de Janeiro to a city called Macaé, donned a fluorescent-orange vest and life jacket, and boarded a helicopter for an hourlong ride out into the South Atlantic. Marinho, a burly, voluble 50-year-old who has been designated my tour guide for the day, is giving me an education in what it takes to extract crude from deepwater fields.

You'd be hard-pressed to find a better classroom. P-52 is one of the largest and most advanced oil-producing structures ever built. It belongs to Petróleo Brasileiro, or Petrobras, the government-controlled but publicly traded Brazilian oil giant. Finished in 2007 at a cost of more than $1 billion, P-52 has a main deck bigger than two football fields, and its displacement of 81,000 metric tons is greater than that of the Queen Mary 2. The platform is what's known as a semisubmersible -- basically a giant hydrocarbon-processing facility floating on top of an enormous pontoon hull. (In the oil industry the term "platform" is used for structures that extract oil from wells, whereas a "rig" is used for those that drill.) Its onboard power plant, fueled by a portion of the gas produced, generates 100 megawatts of electricity, enough to supply a city of 300,000 people. A 180-man crew works in 12-hour shifts -- two weeks on, three weeks off -- to keep the oil flowing 24 hours a day.

P-52 is in the Campos Basin, one of world's richest areas for offshore oil and gas. Petrobras first discovered oil here in the 1970s, and today its fields generate 1.7 million barrels of oil a day, or just under 2% of the world's total daily production. There are 18 wells connected to P-52, producing 180,000 barrels a day -- roughly $15 million worth at current prices.

After two hours of trekking up and down P-52's metal stairs on this sweltering December morning -- we're about 1,600 miles south of the equator, and it's almost summer -- I'm starting to fully appreciate the magnitude of the operation. The platform is a maze of pumps, valves, meters, monitors, and most of all pipes -- from the 24-inch lines that bring oil up from the wells to the seven-inch tubes that push water down into the reservoirs with 3,000 pounds of pressure per square inch. Altogether there are some 125 miles of color-coded pipes onboard: green for gas, yellow for water, and gray for oil. Lots of stuff that could break. Or blow up.

When I point this out to Marinho, he assures me that safety is at the top of his mind. "There's always something going on," says the 30-year Petrobras veteran. "Every day we have guys doing maintenance -- painting, cleaning, testing systems. Always something. If there's a problem, it can get really stressful. People will be running around: 'What happened? Why did it happen?' But on a day like this it's pretty relaxed."

He spreads his arms. "You like the view?"

We're perched about 10 stories above the surface of the water, but there isn't much to see. Land is out of sight. To the west, two other Petrobras platforms are dimly visible on the horizon. The water is a vibrant cobalt blue and choppy because of the 40-mile-an-hour winds; a storm system moving up the coast is due to arrive in a few hours. A fishing boat nearby is getting tossed around in the waves. But thanks to its computer-controlled anchoring system, the platform is swaying more like a boat docked at a lake.

Behind Marinho, I notice that his boss, the stone-faced platform manager, Celso Tadayoshi, wants to make a point. He steps forward. "We face many challenges every day," says the 53-year-old, who, like Marinho, has spent three decades working offshore for Petrobras. "But we don't have accidents here. The main thing is the production. We must operate at 100% efficiency." And with that, he nods.

Since BP's TK disastrous Deepwater Horizon accident in the Gulf of Mexico last April, TK the risks of offshore oil drilling have been a hot topic. One place it isn't questioned much is Brazil, whose oil production industry is one of the fastest-growing in the world because of vast new deepwater oil reservoirs discovered in the past five years. Tk The largest finds are in the Santos Basin, which, at nearly 200 miles off the coast of Rio, is much farther offshore than even Campos. The mega-fields there lie more than three miles below the ocean's surface, underneath a salt layer in the crust of the earth some 6,000 feet thick. The technical and logistical challenges of drilling in these areas are immense.

Together, the so-called pre-salt reserves off the coast of Brazil have been put at 50 billion to 100 billion barrels or more -- potentially a deepwater Kuwait. Vast amounts of money and manpower are being mobilized for what is shaping up to be a historic investment boom. Foreign oil-services companies like Schlumberger, TK Halliburton, TK and GE Tk are rushing to set up offices. It has been estimated that offshore oil and gas could be as much as a $1 trillion industry for Brazil over the next decade. And as political unrest in the Middle East drives up crude prices, TK the value of a stable new supply of oil from Brazil is magnified.

The company spearheading all this activity is Petrobras. TK By every measure the energy giant is already one of the world's most important corporations -- and it stands to grow vastly more influential. Last year Brazil's biggest corporation ranked No. 54 Tk on Fortune's Global 500 TK list of the world's largest companies; in its most recent fiscal year revenues jumped 32% to $121 billion. Excluding wholly state-owned oil companies such as Saudi Aramco or NIOC of Iran, Petrobras is the fifth-largest oil company by production (2.15 million barrels a day in 2010) and the third-largest in market capitalization ($240 billion). By the end of the decade, Petrobras is likely to pass Exxon Mobil TK to become the largest publicly traded oil company in reserves and production. It also has the respect of its peers, coming in seventh in its category on this year's list of the Most Admired Companies (see foldout). TK

Developing the pre-salt assets is a daunting task. For starters, it will be mind-bogglingly expensive. In its five-year plan through 2014, Petrobras has committed to invest $224 billion, much of it on platforms, rigs, and other infrastructure for pre-salt production. (It's also building five new refineries.) To help fund the effort, last year the company conducted the largest share offering in world history when it sold $70 billion worth of new stock to investors. It plans to sell up to $40 billion in bonds by 2014.

Scrounging up investment capital is only part of the challenge. Critics argue that the government's mandate to make Petrobras the lead operator in the development of all fields in the pre-salt area -- rather than leave it open for bidding from international companies -- puts too much pressure on the company and will prove an inefficient approach to developing the area. It's unclear whether the industry supply chain can grow fast enough to meet the production targets Petrobras has outlined. And there is always the possibility that an offshore accident will throw the whole operation into chaos -- no matter how vigilant Marinho and Tadayoshi might be.

TK SUB

The Petrobras headquarters in Rio's Centro business district has been voted one of the world's 10 ugliest buildings. TK A product of the brutalist style of architecture popular in the 1950s and 1960s, the 29-story hunk of concrete and metal looks like an enormous box missing square-shaped pieces here and there. (It has been likened to an oversize Jenga game.) When it was built in 1969, Brazil was in the late stages of a long period of post-World War II prosperity and a few years away from a two-decade run of reckless monetary policy that led to hyperinflation and wreaked havoc on its economy.

The office of company president and CEO Sergio Gabrielli is an expansive corner space on the 23rd floor that opens up to a balcony with views of the city's most famous landmarks: Guanabara Bay, Sugar Loaf Mountain, and the iconic Christ the Redeemer statue. A former economics professor, Gabrielli, 61, earned a Ph.D. from Boston University. (He's a Red Sox fan.) He was appointed to his job in 2005 by Lula, TK the beloved Brazilian President who recently left office after eight years. Tall and barrel-chested, Gabrielli displays both understated confidence and wry humor. He explains his ability to manage such a big company this way: "I work 13 to 15 hours a day, every day. Seven days a week. That is a given."

Asked about the magnitude of the pre-salt finds, Gabrielli hesitates, then smiles. "What we can say is that we have a lot of oil," he says. "In the next four or five years we are talking about a company that is going to have between 30 billion and 35 billion barrels of reserves. Nobody in the world -- none of the publicly traded oil companies -- has anything like that." Surpassing Exxon is not a goal, he says, just the probable outcome: "We have an asset base in our own portfolio that, on an organic basis, can grow faster than anyone else."

This wasn't always true. When Petrobras was founded in 1953, its primary mission was to refine imported oil. For decades Brazil was considered hydrocarbon-poor. The country didn't produce enough crude to meet its own demand -- much less to export -- until five years ago. That's a big reason Brazil developed its sugar-cane ethanol industry. (Virtually every car on the road in the country can run on either gas or ethanol, and pretty much every fueling station offers both. Petrobras is investing $3.5 billion in biofuels through 2014.) Early on, Petrobras took its search for reserves offshore and expanded overseas. While the vast majority of its output today is in Brazil, the company has a presence in 28 other countries, including large-scale operations in the Gulf of Mexico. It produces a quarter of the world's deepwater offshore oil.

The Brazilian oil equation changed in 1997 when the government amended the law to allow foreign oil companies to bid for the right to explore blocks offshore. The competition led to new discoveries. Then improving seismic technology enhanced the ability of the oil companies to "see" through the salt layer in the earth's crust. The first major pre-salt field in the Santos Basin was discovered in 2006.

The industry is keeping a watchful eye on how Petrobras develops those ultra-deepwater fields. "It's the frontier," says David Knapp, chief energy economist for the Energy Intelligence Group in New York, who points out that the geology off the coast of Angola, TK across the Atlantic from Brazil, is almost identical. "It is seen as a bellwether for potential future development in similar areas at similar depths."

Petrobras has been drilling in the pre-salt fields and has even been producing some oil. But the activity so far has mostly been to verify reserves and get a handle on the technical challenges. There are contaminants in the pre-salt oil that make it highly corrosive, so Petrobras has been working on new alloys for its drilling equipment. And the salt layer is softer than rigid rock, which means that solidifying drilled wells is more difficult and expensive.

Production is expected to ramp up aggressively. The company's strategic plan calls for doubling its total hydrocarbon production rate by the end of the decade, from 2.7 million barrels a day in oil and oil equivalents to 5.4 million. That will require huge investments in infrastructure. "The main constraint we have is the capacity of the supply chain to meet our needs," says Gabrielli.

Consider the company's rig situation. Petrobras has 14 ultra-deepwater drilling rigs -- far short of what it needs. By 2012 it will have added 20 rigs that are now either under construction or being used by other companies. After that there's no supply. The shipyards in Singapore and South Korea that build most of the world's offshore drilling devices are maxed out. So Petrobras is helping create a rig-building industry at home. It is awarding contracts worth a total of about $18 billion to four Brazilian shipyards to supply 28 rigs starting in 2014.

Gabrielli says Petrobras assumes that oil will fluctuate between $65 and $85 a barrel through 2020. To some that estimate might sound low. TK But the CEO says that he expects strong demand in countries like China, India, and Brazil to be counterbalanced by slower demand in mature markets like the U.S. and Europe. "We don't see why the price is going to be skyrocketing," he says. Gabrielli says the breakeven price for pre-salt oil from the Santos Basin should be $40 a barrel and could go lower as the operations scale up.

Who will buy that oil? It makes sense geographically for the U.S. to be a big customer -- tankers going north from Rio to the petroleum infrastructure of the Gulf Coast don't have to cross an ocean or go through a canal. In 2010 the U.S. purchased about 260,000 barrels a day of petroleum products from Brazil. The Chinese are likely to be aggressive buyers too. Last year China replaced the U.S. as Brazil's biggest trading partner. And in 2009, when credit markets were still tied up, the China Development Bank loaned Petrobras $10 billion in exchange for the right to buy up to 200,000 barrels of oil a day for 10 years at market prices. "They are going to be important customers," says Gabrielli. "The Chinese put a value on the strategic relationship."

TK SUB

For all the excitement about the growth in Brazilian oil, investors haven't been all that pleased with Petrobras lately. In 2010 the stock dropped 27% even as the overall Brazilian market was flat. The catalyst was dissatisfaction with the company's stock sale last summer. Regular shareholders had their holdings diluted by the $70 billion stock sale while the government's total stake in the company rose from 40% to 48%. (It holds 54% of the voting shares.) Tk Petrobras handed over $42.5 billion of the $70 billion it raised to the government for the right to produce 5 billion barrels of pre-salt oil in areas not previously awarded to the company. Famed emerging-markets investor Mark Mobius of Franklin Templeton called the transaction an "abomination." TK

Many investors worry about laws passed last year that increase the government's role in managing the pre-salt assets, closing them off from open bidding and mandating that Petrobras be the lead operator in exploiting them. The company can take on foreign partners but must retain at least 30% ownership of any group. The government, meanwhile, plans to divert pre-salt revenues out of the regular budget and into a special "social fund." Critics believe that these changes will slow the development of the pre-salt area and at the same time overburden Petrobras.

There is lively debate about the best way to handle the newfound oil wealth. The government's approach is endorsed by Ernani Torres, chief economist at the Brazilian Development Bank, known as BNDES. Torres is a 35-year veteran at BNDES, which, with more than $200 billion in assets, is one of the world's largest state-owned lenders. "Oil is the most important structural change in the Brazilian economy since the 1950s," says Torres. If the government were to allow companies to develop the pre-salt without constraint, he argues, the flood of tax revenue could lead to a bad case of the dreaded Dutch disease, in which a country's currency appreciates wildly and kills off its exports. "Oil is a curse, but it's also a blessing," he says. "It depends how you do it, okay?"

Brazilians who suffered through the ugly days of the 1980s and '90s -- inflation reached 1% a day in 1994 -- welcome the challenge of prosperity. Torres remembers attending a presentation years ago by a European banker who, on a map of the world's markets, had labeled Latin America the "Forgotten South." Says Torres: "We have not been viewed as an important country. Oh, we have the Amazon rain forest -- people like to come and see that. Or they like samba. But we are not going to be the Forgotten South anymore for long."

TK SUB

Petrobras has not been the only big winner in the Brazilian oil boom. Indeed, no single person has benefited more than entrepreneur Eike Batista. (First name rhymes with "like.") With a net worth that has been estimated at $27 billion, Batista, 54, is now Brazil's richest person TK and one of the 10 wealthiest in the world. And he's not shy about saying that he plans to be the richest man on the planet, thanks to a fast-growing empire built on natural resources.

Batista's fame in Brazil has grown as quickly as his fortune in recent years, but he has always led a high-wattage life. His father, Eliezer Batista, is a Brazilian mining industry legend who once ran iron ore giant Vale. Eike struck out on his own in his twenties as a gold miner, building eight mines over the years in Brazil, Chile, and Canada. He also became a champion powerboat racer and married one of Brazil's most beautiful women, the model, actress, and Carnival queen Luma de Oliveira. After he and de Oliveira divorced seven years ago, he decided he had something to prove. "I was more known as the husband of Luma and the son of my father," he says. "It was time to show my two sons I had accomplished something."

Since vowing to make his mark, Batista has focused on building a vast network of related businesses for his EBX Group -- all with his signature "X" in the name. He controls five publicly traded companies: MMX (mining), MPX (energy), LLX (logistics), OSX (offshore oil and gas services), and OGX (oil and gas exploration). TK South of Rio, LLX is now building a $2 billion superport called Açu, which will be powered by MPX and able to accommodate giant tankers carrying oil produced by OGX and minerals by MMX. The scale and integration of the operations are mind-blowing. If Batista had a white cat and evil intentions, he'd make a good Bond villain.

I went to visit Batista at the offices of EBX in Rio on a blazingly hot Friday afternoon. We sat down in a conference room with Paulo Mendonca, the president of OGX. Mendonca, whom Batista refers to as "Dr. Oil," had just retired as chief of exploration at Petrobras, after 34 years at the company, when Batista recruited him in 2007 to launch OGX. Batista became intrigued when he heard that the hit rate for wells drilled by Petrobras in 2005 was better than 50%. "I thought, 'Jeez, time to put a team together and put some money into this,'" he says.

Batista invested about $400 million of his own money in OGX and raised another $900 million from investors, including the billionaire Ziff brothers from New York. TK Mendonca, with a team of former Petrobras executives, began preparing to bid on deepwater offshore blocks near the recently discovered pre-salt Tupi field. But two weeks before the auction, the government removed the deepwater blocks from the bidding. Mendonca and his team scrambled to adjust their strategy, and they ended up acquiring 21 blocks in shallower water, what Mendonca calls "ugly ducklings" -- areas that Petrobras skipped over in the quest for bigger fields further offshore.

They chose well. After just over a year of drilling, OGX has already found at least 2.6 billion barrels of reserves and plans to start producing oil this fall. It is already the largest non-Petrobras player in the Brazilian offshore oil business. Batista projects that OGX will produce 1.4 million barrels a day by 2019. Even after a recent dip in the stock, OGX has a market value of $37 billion.

Batista says he has gotten a cool reception from Petrobras, but he thinks that down the road OGX and Petrobras may work together on pre-salt fields. "I believe that Petrobras will invite us to help them in their challenge because it's so big," says Batista. "We have an expression in Brazil: 'They have put a gigantic turkey on a small plate.'"

Over the next several yers, Brazil will have a chance to demonstrate its growing economic strength by staging a pair of global events. In 2014 the soccer-mad country will host the World Cup. And in 2016 the Olympic games are coming to Rio de Janeiro. By then the pre-salt fields should be producing hundreds of thousands of barrels of oil a day.

For Petrobras to make that happen, offshore workers like Marinho and Tadayoshi will have to do their jobs well. After our tour we eat a quick lunch of rice and beans in the cafeteria at P-52 and head to the reception area to wait for our helicopter back to land. There is a framed shirt signed by President Lula hanging on the wall near a sign that reads DAYS WITHOUT AN ACCIDENT: 261. I ask Marinho if he'll go to work in the pre-salt fields. "I don't know," he says. "I would prefer to be home with my family, but there's going to be a lot of work there. Probably yes." Some booms are too big to pass up.

+ FEEDBACK bokeefe@fortunemail.com

with Doris Burke contributed to this article.

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