Global Players from Emerging Markets: Strengthening ... - Unctad

28 Outward Foreign Direct Investment by Enterprises from Brazil
targets of Brazilian companies, mainly due to
its vast consumer market, cheap labour and
strategic location as an exporting base in Asia .
• The evaluation of Brazilian currency.
The strengthened domestic currency has
increased pressure on Brazilian enterprise
internationalization. The appreciated Brazilian
Box 1. The international expansion of Petrobas
The Brazilian energy company Petrobras has invested $8.8 billion in foreign activities in the past
10 years. In 2005, international activities accounted for around 8 per cent of its net operating revenues,
totalling $56.3 billion, 10.1 per cent of its total asset, amounting to $78.6 billion, and 11.4 per cent of
its 54,600 employees. In the early 1970s, when the first oil crash took place, Brazilian production was
small and did not meet consumption needs. In that scenario, the Brazilian Government, Petrobras’
main shareholder, felt the need to access foreign petroleum reserves to guarantee domestic supplies,
since there was no expectation that new petroleum reserves would be found in the country. Towards
this goal, Braspetro was established to manage the company’s international businesses. The targets
for the international expansion were the Middle East, North Africa and Colombia, for their great oil
exploration and production (E&P) potentials. During the 1970s the foreign operations were centred
on the E&P segment, and in 1976 Braspetro discovered huge oil reserves in Iraq, but it withdraw after
nationalization. At the end of the 1970s, when the first reserves of the Brazilian Campos Basin were
discovered, Petrobras’ investments concentrated into domestic oil reserves. In the mid 1980s, the giant
deepwater pools in the Campos Basin - Marlim and Albacor - were developed, while the international
activities under Braspetro’s responsibility were refocused on trading. Almost all resources were invested
in Brazil. Due to the small size of the businesses, Braspetro’s results worsened and in the beginning
of the 1990s international activities further reduced. However, with the end of the domestic monopoly
Petrobras revived its internationalization process. The company intended to become the regional leader
in Latin America, as an integrated oil company, while searching for new of oil sources in other regions.
Three regions were selected for its expansion: the West Coast of Africa, the Gulf of Mexico and Latin
America. In Africa and the Gulf of Mexico, Petrobras planned to apply its technological capabilities
for deep-water petroleum exploration. In the Gulf of Mexico Petrobras intended to generate strong
currency cash flows in a low-risk political environment, contributing to the reduction of its cost – a main
constraint in Brazilian financial markets. In Latin America, the advantage against other competitors
was the knowledge of the region, the economic integration with the southern countries (Mercosur) to
grow as an integrated energy company, in upstream and downstream gas and energy activities. To
strengthen international expansion, Petrobras created in 2000 an International Business Area. With
this new structure, Petrobras then promoted its restructuring and new FDI. In the United States of
America, for instance, the small swallow water investments was sold and substituted by new deepwater
wells. Aiming for fast growth, the company expanded through acquisitions. In 2001, Petrobras
and Repsol concluded an assets swap, where Petrobras obtained 99.5 per cent of EG3 (company with
refinery processing capacity of 30.5 million barrels/day and around 700 service stations). It marked
the expansion into the refinery and distribution segments. The acquisition of Petrolera Santa Fé and
Perez Companc (PECOM), which, at the time, was in financial difficulties, increased its petroleum
and gas production capacity from 20,000 barrels of oil equivalent (BOE)/day to 120,000 BOE/day.
With an investment of around $2.5 billion, Petrobras incorporated diverse operations, including energy
generation and high-tension transmission. However, there were also setbacks. In early 2006, Petrobras
announced it was suspending its investments in Bolivia (including the plans to expand a gas pipeline
between Brazil and Bolivia) after the nationalization of energy resources announced by the Bolivian
Government. Besides growth, portfolio diversification, and development of human resources, Petrobras’
benefits from the internationalization included a significant capital cost reduction. In 2005, the company
reached Moody’s Investor Service’s investment grade level for its debt in foreign currency — four levels
above the Brazilian sovereign risk classification.
Source: Company’s web site and the authors.
currency reduced the cost of investing overseas
and of acquiring foreign assets. The strengthened
currency also affected the cost of production
denominated in reais (e.g. raw materials, labour
and other locally-incurred costs). Thus, while the
strengthened real reduced the profitability of pure
exporting strategies for companies that depend