Brazil by Greenfield?
Search for an entrance strategyRijksuniversiteit Groningen Faculty of Economic and Business
MsC Business Administration - Business Development
Author: William Veldman
1st supervisor: Dr. J. Kratzer
2nd supervisor: Dr. K.R.E. Huizingh
Brazil by Greenfield?
Search for an entrance strategyPreface
When X asked me to do an assignment at their Headquarters in Bogota, the capital city of Colombia, my first thoughts were; Colombia is that safe? Now after almost 6 months I only can say, I had the time of my life. The diversity of the country, from the tropical rainforest to the snow at an altitude of 5300 meters and from the most luxury discothèques and shopping malls to poor areas just a few blocks away. As soon as I arrived, there was that unbelievable hospitality of the Colombian people, they really helped me with everything possible and especially practicing the Spanish language. Unfortunately Colombia still is an unstable country, daily the military forces have conflicts with the guerillas. One really heavy occasion with one of the top managers did decide X to relocate me on Curacao because of safety issues. At that moment it was really difficult for me to leave Colombia because I only had good experiences.
Once relocated in Curacao the main question was; how to finish my assignment. The headquarters in Bogota were a much easier entry to contact people and gather information. Finally I decided together with my supervisor to finish the assignment in Curacao. And now writing this preface I am really confident with the result.
Without the help from a lot of people it was impossible to get here, I want to thank everybody who supported me in the last few months, but especially:
• Machiel Monninkhof; who was my colleague investigator and a really good friend. I like to thank him for all the support in this period and the discussions we had about the assignment through which it received a higher level.
• Mr. W; who was the president of X Americas and with who I worked close together, his feedback, experiences and knowledge helped me during my investigations.
• Mr. O; the financial director who always was available for helping me from a financial perspective.
• Mr. C; the business development manager who is very experienced in expanding abroad and
his ideas often helped me.
• Jan Kratzer; the supervisor from the University who always gave support were necessary from an academic point of view.
• Gregory Horm; I like to thank him for introducing me in Bogota and for all the time he spend
for checking and improving the quality of English in this report.
• Laura Aguilar; great thanks go to her for the private Spanish lessons and all other support where necessary.
• Family and friends; who always supported me from Holland.
This is the final assignment for me as student and finishing my student time in Colombia was Unique, I will miss it, but; It’s better to leave wanting more than wishing to go back home. Hastaluego,
Management summary
Brazil is a beautiful country with lively and diverse people. Brazil is also a country of contrasts and extremes. Along the side a beautiful row of million dollar condominiums, children surviving on the pennies tourists give them, sleep on the side walk, huddled and still high from the glue they just sniffed. It is that same contrast that can be identified in its government and economy. Brazil is a bountiful market with 196 million people, but crippled by a government culture that protects its industries and its laborers with cumbersome tariffs and Corporate Laws that clearly deters foreign investments.
X (X Industry Services Americas) wants to expand in Latin America. Their goal is to grow to a turnover of $500 million dollars. To realize that, they want to enter Brazil with the best strategy. In general there are two options to enter a foreign country, by Greenfield or by Acquisition. I choose to investigate: “if entering Brazil by greenfield is a feasible and good solution”. To define the best entrance strategy for Brazil information is gathered with the DESTEP analysis and Porters 5 forces model.
Brazil is dangerous to the foreign investor because it is so beautiful, and so different. In particular, Petrobras which represents close to 90% of the Brazilian Oil and Gas Maintenance Service Industry, encourages foreign investors to align themselves with national partners. I believe that Brazil, if X enters with the right strategy, is an excellent investment possibility. The Oil and Gas Industry has been growing exponentially for the last half decade, and it has only begun, with the enormous Tupi oil fields that were officially announced in 2007. Brazil will be oil rich for as long as it needs. Petrobras, as a result, has become one of the most profitable companies in the world, registering in 2006 the largest profit for a corporation in the history of Latin America.
Petrobras has money, and needs companies that can meet its present and future Asset Management needs. X Industry Services can enter this market tomorrow and start making money, but not without the right strategy. A growth market attracts competitors, and the Brazilian Oil and Gas Maintenance Service Industry has attracted dozens of international competitors.
The Industry is relatively young, opening up in 1996, and with the type of growth it has experienced, there have not been enough companies to manage the quantity of work available. New comers have entered the market, usually gambling on lower price strategies, as they cannot compete on quality. However, Petrobras’ gamble has usually not paid off, and the result has been a cemetery of bankrupt companies that used to have contracts in the Oil and Gas Industry. Petrobras has learned, and it values “tradition”, far more than just price. Tradition, for Petrobras means experience, and that means that a company has completed contracts on time, or if possible before. Consequently, there is great competition between companies for qualified technicians and laborers, and this will only get worse. The market is made up of many small companies that specialize in an area, large companies that receive the large construction contracts and sub-contract the smaller companies, and mid-size companies that are looking for investments to become large companies. All of them, if administered competently, have space to be profitable. It is not an Industry categorized by high rivalry, as most of these companies need to work with each other on present or future projects. Consortiums are very common, which by consolidating companies, both reduce competition and reduce the risk for billion dollar contracts.
business in Brazil, but once it is open, a business has enormous labor benefits which can almost duplicate salary costs. Environmental licenses are almost arbitrarily determined. Capital investments are taxed, and there are many restraints against foreign investors taking profits out of the country. Equally distressing is that Petrobras heavily protects national companies. Without representation in Brazil, no company can offer services to Petrobras. It has established a bureaucratic bidding process for its contracts, which can be appealed multiple times by dissatisfied bidders and held up for an indefinite amount of time. It is no great surprise to learn that Petrobras is partly state-owned. This relationship makes dealing with Petrobras complicated and difficult, and if there are infringements in contracts, they may be federal crimes.
I analyzed all of these difficulties, and still, without doubt believe that Brazil is an excellent investment opportunity. All investments have some barriers, and indeed without risk there would be little rewards. Considered all these points it will take a long time and a lot of bureaucratic issues before it is even possible to enter the country. Once entered, the competition is fierce and a certification in Petrobras CRCC system will take a lot of energy, time and money. Furthermore Petrobras encourages foreign investors to align themselves with national partners. Another difficulty is that two thirds of the labor force is assigned to Brazilian citizens. This will make it even more difficult to establish in Brazil, especially in the beginning which is the most difficult period for a Greenfield company. Brazil is an attractive market with a lot of potential, however for X it is not advisable to enter this market Greenfield.
Another researcher did the acquisition part, after discussing these parts the outcome was to invest in an acquisition. X was also highly interested and therefore we explored the different options as far as possible. The most interesting question for X is of course who is the best partner to acquire.
Therefore we developed a general selection tool, with help of many studies, for selecting partners in Brazils Oil and Gas industry. This tool consist out of three steps; Market research, first screening and finally judge the companies based on the criteria as shown in the table below.
Entering a foreign Country Importance in %
Company 1 Company 2 Company 3
Market Knowledge/Access 15 Culture 15 Complementarity of Capabilities/ Compatibility 10 Growth Potential 10 Managerial Capabilities 10
Capabilities to Provide Quality Product/Service
10
Intangible assets 10
Financial 10
Technical Capabilities 5
Previous Alliance Experience 5
Total 100
This general framework will be filled in for the selected companies who came through the first screening, which is based on the market analysis. In this framework the 5-point Likert scale is used, where 5 points are the highest/best amount and 0 point the lowest/worst. These numbers will be multiplied by the relative weight of each objective. The total summation than will make the company with the highest outcome the best candidate for acquisition.
database of 1,500 companies, provided by the National Organization of the Petroleum Industry (ONIP). This database can be the input for the developed selection tool which will carry on the best partner to acquire for X.
Index
Preface ... 3 Management summary ... 4 1. Introduction ... 9 1.1 Content of thesis ... 9 1.2 Organization ... 9 1.3 Problem ... 9 1.4 Persons involved ... 9 1.5 Objective... 9 1.6 Methodology ... 10 1.6.1 Theoretical Framework ... 10 1.6.3 Main question... 12 1.6.4 Limitations ... 122. DIAGNOSTIC OF X INDUSTRY SERVICES AMERICA ... 13
3. DESTEP Analysis Brazil Oil and Gas ... 14
3.1. Demographic Analysis ... 14
3.2 Economy ... 15
3.2.1 Production and Employment... 15
3.2.2 The Petroleum Industry ... 15
3.2.3 Macro-Prices ... 16 3.3 Social Analysis ... 17 3.3.1 Crime ... 17 3.4 Technology Analysis ... 17 3.4.1 Transportation ... 17 3.4.2 Communication ... 17 3.4.3 Energy ... 17 3.5 Ecological ... 18
3.5.1 Pollution And Deforestation ... 18
3.6 Political Analysis ... 18
3.6.1 Executive and Legislative Branches ... 18
3.6.2 Taxes And Labor Laws ... 18
Concluded ... 19
4. The 5 Forces of Porter – Brazilian Oil and Gas Industry - ... 20
4.1.1 Degrees of differentiation ... 23
4.2 The threat of the entry of new competitors ... 23
4.2.1 Petrobras CRCC ... 24
4.2.2 Switching costs ... 25
4.2.3 Number of competitors ... 26
4.2.4 Product Differentiation ... 26
4.3 The bargaining power of customers ... 26
4.4 The bargaining power of suppliers ... 26
4.5 The intensity of competitive rivalry... 27
4.5.1 Level of advertising expense ... 27
4.5.2 Exit barriers ... 27
4.5.3 Competitors ... 27
Concluded ... 29
5. Entrance strategy Greenfield ... 30
6. Conclusion ... 32
7. Developing a selection tool ... 34
Why a selection tool ... 34
Partner selection process ... 35
Literature about identifying and selecting partners ... 35
Setup of a selection tool ... 37
First screening ... 37
Selection tool ... 38
General selection tool ... 38
8. Recommendations... 41
Selecting the right partner for X ... 41
Limitations ... 42
1.
Introduction
1.1 Content of thesis
This chapter will discuss the context of the problem of the organization, the objective of the research and the theoretical framework used in this research. The next chapter will discuss X Industry Services Americas. In chapter 3 the DESTEP analysis is discussed and in chapter 4 you will find the 5 forces of Porter. In chapter 5 the entry strategy will be discussed and chapter 6 the conclusions. Chapter 7 describes the development of a selection tool and chapter 8 consist out of the recommendations of the research which ends with limitations and future research.
1.2 Organization
1.3 Problem
X wants to expand in Latin America. Currently they have bought the company Y in Colombia from where they presently operate. Their goal is to grow to a turnover of 500 million US dollars in the region. To realize that, they want to expand in Brazil. However, Brazil is a dangerous market to the foreign investor because it is very different from all other markets. Therefore, the Brazilian market has to be investigated for potential save investments, strategy to entrance, etc.
1.4 Persons involved
The researcher and the president of X Americas will play a dominant role in this research. Also the main management team of X will play an important role.
Interests of the people involved
1. The researcher have to finish this study before February
2. The management of X wants to focus the investigation on the Brazilian Oil and Gas maintenance service.
1.5 Objective
Giving the management of X advice:
- Determine if Brazil is a market in which X should invest;
- Determine key groups (competitors, possible partners, providers, clients) in the Brazilian Oil and Gas industry;
1.6 Methodology
All research problems entail their own approaches. Since every research problem is unique in some ways, the research procedure is typically customized. This research will contribute especially to the practice of the management of X, since this research focuses on entering Brazil. The problem will be indentified within X and literature will be used to support the content of the problem and finally find a well stated solution for this problem.
For this research it is of great interest to systematically structure the analysis of the internal and external environment. This research will use the following structure. Firstly the problem will be discussed. Secondly the internal environment of X will be diagnosed. After that the external environment will be analyzed by the DESTEP analysis. This will be followed up by an analysis of the Brazilian Oil and Gas industry which will be executed by the 5 forces model of Porter. After this the greenfield entry will be discussed and after that the main question will be answered, if entering Brazil by Greenfield is a feasible and good solution. This information will be presented to the board of X and will be followed up by a recommendation.
1.6.1 Theoretical Framework
A company can decide to enter a new country in different ways. According to Holger (2000) and Slangen ea. (2008), to enter the Brazilian market, X has two possible entry modes; to go greenfield or with an acquisition. To enter a market by greenfield means that a company will start up a company from zero. However, entering by acquisition means taking over a part or the whole company which is already settled in the foreign country. Both methods have their own pros and cons which in each case must be considered what the best possible solution is and will be analyzed.
According to Buckly and Casson (1998) market knowledge is very important when discussing the choice between greenfield and acquisition. E.g. entry by greenfield increases local capacity and intensifies competition whereas entry by acquisition does not. To gain market knowledge, to have enough information to focus on an entry strategy, external and internal analysis’ have to be executed.
A research of the external environment in a country can be executed by different models and theories. In this research it is necessary to analyze Brazil as a country in general and the field in which X want to be active namely, the oil and gas industry. Therefore two well known models will be used. The DESTEP analyses will be used to analyze the external environment of Brazil and the five forces model of porter to analyze the industry itself, the oil and gas market.
External analysis of Brazil (Macro)
Industry analysis
The industry analysis is the external environment in which a company is active, however were it could influence its factors, i.e. competitors, suppliers, customers etc. According to Porter (1985) the five forces model can be used to analyze the industrial market environment. This model will be used to analyze the Brazilian Oil and Gas industry.
Meetings
Also data will be collected from important persons by meetings. Key members to contact are:
• Key members of X Industry Services
• Key members of the Oil and Gas Industry in Brazil
• Legal advisors
• Investment promotion agencies
• Future X clients and competitors
Desk research
Every research will require a document analysis, gathering information in an academic way which shows awareness of the current state of knowledge on the subject (Gill & Jonhson, 2006). In order to conduct this, numerous sources of academic literature have been checked in order to perform this research. Thereby market studies and many major consulting companies and institutes have been used e.g. OPEC, CIA factbook, marketwatch, BP, and many more. Furthermore, annual reports of X and company websites have been analyzed. For the first two methods the ‘snowball’ method has been used. This manner entails using relevant literature, tracing of references (Aken, 2007). To accomplish this, several search engines have been used, e.g. business source premier and X sharepoint (in which many annual reports and trustful company information was gathered). Reliability and Validity
According to Aken (2007) there are several methods to evaluate a business problem. The most important criteria are reliability and validity. Below these criteria are described.
Reliability
Especially in a qualitative research reliability is difficult to measure. There are four biases which influences the reliability of a research: the researcher, the instrument, the respondents and the situation. The same study by another researcher, with the use of different methods, with different people and other situations, should have the same results (Aken, 2007). If another person should do this research it probably will have the same outcome. The methods used and the information gathered are all from reliable and academic sources or institutes.
Validity
Internal Validity is the approximate truth about inferences regarding cause-effect or causal relationships. Thus, internal validity is only relevant in studies that try to establish a causal relationship. In this research internal validity is low because of the lack of causal relations.
External validity refers to the question if the research and conclusion are useful for other people, organizations, countries and situations. This research is specially executed for X and is classified, however for competitors, and other companies active in or willing to enter Brazils oil and gas market, this research could be useful.
1.6.3 Main question
To define which entry strategy for X is the best option both strategies have to be investigated. According to Holger (2000) and Slangen ea. (2008) there are two main entrance strategies for X to enter Brazil.
• Greenfield
• Acquisition
However, because of the large scope of this research I choose to investigate the Greenfield side, another researcher will investigate the acquisition-entrance strategy.
The researchers will perform the data analysis together and split their researches up afterwards to meet the requirements of the university. This way the large scope of this research will be fulfilled and the requirements of the university will be met.
• I will investigate if entering Brazil by Greenfield is a feasible and good solution
• Another researcher will investigate if entering Brazil by Acquisition is a feasible and good solution
Both options can give positive recommendation, but it is also possible that one solution will be recommended, another outcome can be that entering Brazil for X is for example to difficult and expensive which can be result for both thesis’s not to enter Brazil.
This project is proposed by X Industry Services America to be a part of finishing the study business development of the university of Groningen.
1.6.4 Limitations
All investigations have limitations, and this one is no different:
• The mandatory relocation to Curacao made it difficult to finish the project as planned. • Language: English is not spoken fluently by most of the business people.
3.
DESTEP Analysis Brazil Oil and Gas
The Macro environment is the environment in which a company is active. The company cannot control these factors, nor influence them. To structure and to analyze the external environment of X the DESTEP analysis can be used, to lead the external analysis by a systematically approach via six clearly defined aspects. It is a tool which will be used to structure all the important external factors when entering a new country, so that all these factors will be taking into account to come to a correct strategy. These six factors are: Demographic, Economical, Social, Technological, Ecological and Political. Systematically from several perspectives the surroundings are mapped to penetrate the impact on the system:
Demographic (age structure, demographic ageing, religions) gives a better view where it is about in the system.
Ecological (environmental impact, climate) indicates frequently the boundary conditions and external factors. Ecological factors can influence slowly but also influence the system abruptly. A quantification is a possible, but frequently an costly activity.
Social (standards and values, feelings in the society, crime,) indicate strengths within a system. Social factors are retrieved frequently with interactive and creative sessions.
Technological (technical progress, communication, energy) gives the possibilities to, which can change sometimes abruptly a system serious.
Economy (competition, economic climate, market development, currency, inflation) frequently plays a dominant role.
Political (Legislation, political climate, degree of government intervention, policy) frequently has a large influence on the system design. 1
3.1. Demographic Analysis
Brazil is enormous, while it is slightly smaller than the whole US. It is the largest country in South America while it shares common boundaries with every South American country except Chile and Ecuador. It has an coastline of almost 7,500 km and its area contains 8,500 square km. The land is mostly flat to rolling lowlands in north; some plains, hills, and mountains. In this enormous area live also many Brazilians.2
According to the IBGE, the Brazilian Statistics bureau, there were 196 million inhabitants as of 16 January 2009. From this population 88,6 % can read and write (age 15 and over) and the official language is Portuguese.
The age structure was equally divided between males and females till the age of 64 years. 27.0% of the population was between the 0 and 14 years old (male 27 million /female 26 million) 66,8 % of the population was between the 15-64 years old (male 65 million/female 66 million). The last but
1
I Ansoff, Corporate strategy, Penquin Books, 1997 2
not least group from 65 years and over counts only for 6,3 % and is not equally dived anymore (male 65 million/female 67 million)
The religions are: Roman Catholic (nominal) 73.6%, Protestant 15.4%, Spiritualist 1.3%,
Bantu/voodoo 0.3%, other 1.8%, unspecified 0.2%, none 7.4%.3
3.2 Economy
3.2.1 Production and Employment
In 2007 and through to October of 2008, the Brazilian economy has experienced a growth of 3,7% and 4,7%, respectively, in its Gross Domestic Product. These numbers are somewhat poorer to the growth experienced in the region as a whole.
The largest production sectors in 2007 are Service (55%GDP), Industry (26%GDP) and Agriculture (4%GDP). The Service sector experienced an increase of 3,7% for the year, with a particular emphasis in financial institutions (+4.3%) and transport (+3.2%). The growth in the Industrial sector is explained by an increase in the extraction of iron (+6%) and petroleum (+5.6%)4. The Agricultural sector had an increase of 4,1%, this is due to an increase in productivity (8.4%), allowing for a reduction (4,4%) in harvested land.
The open unemployment rate in 2007 was 10%, similar to 2006, as well as what is anticipated in 2008. Commerce and the Industrial and Service Sectors accounted for 520,000 new jobs. This has helped increase the formal employment rate, but cause scarcity in qualified human recourses, which may be a bottleneck in reaching high production numbers. This has caused an overheating in salaries, and increased operating costs for companies.
3.2.2 The Petroleum Industry
Brazil ranks third behind Venezuela and Mexico in Latin American Oil Reserves, with 12.2 billion barrels in 20075. This represents 1% of global reserves, but Brazil’s reserves are growing. It has nearly tripled its oil production since 1990 and reached self sufficiency in 2006. Most of Brazil’s crude oil is found in deep waters and consists mostly of very heavy grades, which have to be refined abroad. Over 80% of oil production, and close to 40% of production of natural gas, is concentrated offshore in the state of Rio de Janeiro. Brazil’s Petroleum Industry is led by the partly state-owned (56%) company Petrobras. Its sales for 2007 were US$74 billion, representing 6.2% of Brazil’s GDP. It employs 40,583 people throughout the country. However, all these numbers will change drastically with the recent discovery of an enormous offshore oil reserve. It could propel the Brazilian Industry into becoming one of the world's major exporters. Full-scale extraction will not begin until 2013, and due to of the depth of this reserve, extraction will be very expensive. The ultra-deep Tupi field, off the coast of Rio de Janeiro, could hold between 5 and 8 billion barrels as of recoverable light crude. Petrobras, in its official announcement, indicated that the Tupi field is equivalent to 40 percent of all the oil ever discovered in Brazil. Initial production should exceed 100,000 barrels a day. Presidential Chief of Staff, Dilma Rousseff, described the discovery as “changing our reality to another level, like Venezuela, Arab nations and others.” 6
3
www.worldfactbook.com 4
Informe Banco Central de Brasil, 2007. 5
These number do not include the Tupi Discovery. 6
The Brazilian Oil Industry is regulated by the Petroleum National Agency, and depends on the Ministry of Mines and Energy. Since 1997, the Industry was deregulated, and now 17 companies compete, with Petróleo Ipiranga being the second largest national company producing sales of U$11.6 billion. However, Petrobras still controls over 90% of Brazil’s oil production and retains a monopoly on the wholesale market for oil derivatives. It owns around one-third of Brazil’s pipelines and distribution terminals for petroleum, as well as 16 refineries and over 7,000 service stations. It has developed alliances with Repsol-YPF (Spain), ExxonMobil (US), Shell (UK), BP (UK), ChevronTexaco (US) and Total (France) to facilitate access to capital, provide technology transfer and share risk. Petrobras has stepped up its investment plans and its two main priorities will be boosting refinery capacity and producing natural gas with a view to attaining self-sufficiency7.
In the last three years, Petrobras has received a record volume of investments: US$20,9 billion, of which US$11,68 billion correspond to 2006 alone. Another US$17,27 billion are expected in 2007. As well, on February 18, 2006 record profits of US$10,77 billion were announced. This was not only a company record, but a record for all privately-owned companies in Latin America. In the next five years Petrobras will invest US$ 50 billion in exploration and refineries, increasing their output 54%, as their petroleum exports will increase 190% and their imports will decrease 65%. This growth in investments will create a total of 419,000 new jobs (160,000 direct)8.
3.2.3 Macro-Prices
Inflation
In 2007 the inflation was the lowest in a decade for Brazil (3.14%), as well as the lowest in the region. The targeted inflation range in 2007 is 4.5% (+/- 2%), and in the first half of the year, this range has been successfully met. The Economist has prognosticated an Inflation of 3.5% in the end 2009 and of 3.6% in 2010. Some implications of Inflation Targeting are seen in the stability of its Macro-economy, with the slow growth in the GDP, high interest rates, and appreciating currency, as well as a high Primary Surplus. The appreciating Real, which is encouraging growth in imports, will prevent an accelerating domestic demand from creating higher inflationary pressures.
Exchange Rate
Since Lula’s presidency, the Real’s nominal exchange rate has been somewhat volatile, but with a consistent appreciation versus the dollar. Currently (2008) the exchange rate is at R2.35:US$1, compared to R4:US$1 during the 2002 presidential elections. This appreciation has been created by the inflationary policies stated before, as well as an improving debt ratio. The Economist forecasts a slight devaluation in 2009 (R2.50:US$1).
Wages
Real Wages have increased an average of 4.5% over the last three years, based on a healthy growing GDP, a controlled inflation, and a real appreciation of the Real. This growth has been relatively even on all the sectors, both public and private. Currently, the average earning in dollars is $564, up from $508 in January 2008, with a total of 20,790,000 occupied people9. The growth in wages is also stimulated by the Growth Acceleration Plan, which has stipulated an increase in the minimum wage for the years 2009-2012. This has become a law, and the minimum wage will increase annually the
7
The Economist, “Brazil Country Profile 2007” p 33. 8
http://www.petroleo.com 9
equivalent of the sum of the rate of growth of the GDP (the next to last year) and the increase in the National Consumer Price Index (the last year). The growth in Wages for 2008 is expected to be 3.6%, and 4.0% in 2009.10
3.3 Social Analysis
Brazil’s population is unfairly distributed across the regions. The wealthiest region, encompassing the states of São Paulo, Rio de Janeiro, Minas Gerais and Espírito Santo, accounts for over one-half of Brazil’s GDP. Manufacturing is concentrated in the state of São Paulo. After a long period of decline, the state of Rio de Janeiro has recovered in recent years, boosted by oil development, where Petrobras is based. Fourteen cities, including the federal capital, Brasilia, now have a population of over 1 million citizens.
Although income inequality is a problem, increases in the minimum wage, combined with anti-poverty programs, like Bolsa Família, have had a significant effect in distribution of wealth.
3.3.1 Crime
The level of crime in Brazil’s major cities is high, particularly in the two largest, São Paulo and Rio de Janeiro. Absence of the security forces underpin concerns about the ability to contain the problem. Sporadic conflicts between security forces and armed gangs have the potential to spread panic and disruption among the population. A 3,000-strong federal security force has been deployed in Rio de Janeiro since January 2007 to restore order following an escalation in violence. Organized criminal groups are involved in robbing cargo from shipments, with incidents concentrated in São Paulo and Rio de Janeiro states.
3.4 Technology Analysis
3.4.1 Transportation
Brazil’s transportation infrastructure is below the curve of other countries with similar economic development. Investment by the Ministry of Transport accounted for only 0.23% of GDP in 2006, with only 12.5% of existing roads are cemented. This situation stands even though roads are the most common means of transportation, with nearly 60% of freight transported through the road system, and Brazil’s enormous geographical extension. Rail or waterway transportation is underdeveloped, even though it is significantly cheaper. Airline deregulations have brought price reductions in Air Cargo and now more than 150 cities have direct access, but it is still comparatively expensive.
3.4.2 Communication
As in most of the world, privatizations and liberalization in the 1990s attracted major inflows of private investment into the telecommunications sector. Mobile-phone penetration overtook fixed lines in 2003. Cheaper mobile technology has become the major driver of increased telephony penetration among low income users.
3.4.3 Energy
Since 1975 Brazil has used multiple sources of fuel for its transportation: petroleum, ethanol, and liquid gas. This diversification was a result of high petroleum prices, and it is unique in the region. As the world searches for alternate fuels, Brazil is a leader in ethanol production, and in 2005, in a joint
10
venture with Alcohol Nippon Hanbai, started exporting to Japan. In 2007, renewable sources of energy represented 45% of total provision compared with the world average of 14%. In recent years, the use of sugar cane alcohol (ethanol) as a source of power has intensified. The share of gas in the energy grid has increased to more than 9% following the launch of the pipeline that links Bolivia and the south of Brazil in 1999. In 2006, Lula’s government has tried to reduce dependency on Bolivia’s gas and has announced plans to set up at least two plants to process liquefied natural gas.
3.5 Ecological
3.5.1 Pollution And Deforestation
Brazil is a world leader in the use of renewable energy sources, namely hydroelectricity and ethanol. Nonetheless, rapid urbanization has contributed to high levels of pollution in major cities, where gases emitted by vehicles and industry often reach dangerous levels. The Amazon forest and Brazil’s temperate forests are under threat from the expansion of forestry, farming and mining. Over the last 30 years of the 20th century around one seventh of the Amazon’s forested area was lost. The rate of deforestation has tended to decline in Brazil in recent years.
3.6 Political Analysis
3.6.1 Executive and Legislative Branches
The re-election of president Luiz Inácio Lula da Silva, “Lula”, from the Partido dos Trabalhadores (PT), was a step further in the process of democratic consolidation, started at the end of the military rule in 1985. Greater macroeconomic stability achieved during Lula’s first administration, owing to the maintenance of orthodox expenditure policies, permitted an increased importance on anti-poverty initiatives. This boosted Lula’s popularity despite a vote-buying scandal that emerged in 2005, damaging the PT’s reputation.
At the beginning of his second term, Lula announced an economic program that aimed to accelerate the country’s slow GDP growth through increased Government investment. The “Growth Acceleration Plan” started in January, includes investment projects and two long term fiscal norms that will influence more than a third of the federal primary expenditure. The norms are:
• Increase in the minimum wage (2008-2011). This proposal already became Law;
• Limit annual increase in spending on federal government personnel, including retirement and
pensions. Not surprisingly this proposal is under pressure to pass congress.
The Growth Acceleration Plan will be the central piece of fiscal policy for Lula’s presidency, and its main goal is to increase growth to approximately 5% a year. It is believed that the Growth Acceleration Plan will be effective in the short term, but total reforms in the government structure are needed for it to have a long term effect. These reforms will only be possible with a complete modernization of the excessively complex federal system. Despite reforms, weaknesses in the federal and state governments, as well as in the tax and social security structures, limit the effectiveness of the political and legal system. Lengthy procedures and bureaucratic constitutional structures hamper political process.
3.6.2 Taxes And Labor Laws
control of fiscal management. The new national accounts’ methodology showed that the average ratio of investment to GDP in Brazil has been even lower than previously estimated (16.4% in 2000-07 against 17-19%), slowing down the expansion of industrial capacity and resulting in high costs and bottlenecks in infrastructure services. Other factors contributing to the high business costs that slow down competitiveness and constrain investment, known as Custo Brasil, are a burdensome tax regime, restrictive labor laws, a costly and slow judicial system. An indepth break down of taxes in Brazil, both Corporate and Individual, can be found in Addendum 2. Labor laws will be developed in the Suppliers analysis.
Concluded
4.
The 5 Forces of Porter – Brazilian Oil and Gas Industry -
After analyzing the macro environment with the DESTEP analysis the 5 forces model of Porter can be used to analyze the industry of X. Porter subdivides 5 forces (‘competitive forces’) which are important in a competitive environment (see figure 1). The 5 forces determine the competitive intensity and therefore the attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment (DESTEP). They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. In the figure beneath the external factors are measured. These are; bargaining power of customers, threat of new entrants, threat of substitute products and bargaining power of suppliers. If these treats are strong the intensity of rivalry will be high. The threat of new competitors is high when the entrance barriers are low. The power of suppliers is high when their power is concentrated, if they are not sensitive for price fluctuations and if there is less product differentiation. The treat of substitute products depends on the scope of the market taken into account in the analysis.
Figure (1): Porters 5 forces model
4.1 The threat of substitute products
For Oil Companies, the perfect substitute to contracting a Service and Maintenance Company to service their assets is to create an in-house maintenance team. Developing their own team of experts and their own manual of procedures would make it unnecessary to hire a company to perform those duties. However, this is neither as easy nor as simple as it might seem. While in its history Petrobras has developed its own internal maintenance, there are factors that have forced it to change. Factors in the international and national market have made Petrobras need the help of Maintenance Service companies that can provide a better service than it can provide for itself, with better completion times and lower overall costs. This change in philosophy is not only motivated by a search for efficiency, but also because the Global Petroleum job market is suffering from shortage, producing higher salaries and competition for recruits. Oil companies in a region like South America are not only competing with countries in that region for top talent, they are now competing with oil companies all over world. Salaries are rising as quickly, and a qualified employee can pick and choose from multiple competing options. This is leaving Petrobras vulnerable and in need of help.
Brazil’s oil reserves are growing exponentially, and so are their investments in assets:
Despite its size, the Tupi field poses significant engineering hurdles that will drive increased costs in tapping the field. Petrobras currently pumps 1.8 million barrels daily from its Brazilian fields and expects to boost its $112 billion in planned spending over the next five years to assume the Tupi project. […] In one rough estimate, Petrobras' Repsold says the company might need to drill 100 wells to develop Tupi. Shaw believes that means Tupi may cost between $50 billion and $100 billion to develop. A first well at Tupi cost $240 million and required two years to drill.11
This type of investment would require roughly between 1 to 5%12 in maintenance. The major difficulty for a company with growth perspectives that are this abrupt is finding qualified human resources to manage those investments. This is not only a problem for Petrobras. Once oil prices raised over U$50 a barrel many more companies entered into exploration & production, creating a much higher demand for qualified human resources. For Petrobras this may be even more intense, because of the type of deep-sea sub-salt drilling that they specialize, which is the most expensive with the highest risk. With employment agencies offering job placement around the world through the Internet, the competition became truly global. A company in the United States or Europe is now competing with companies in Russia or Australia for top talent:
The two most popular words in oil and gas these days are “help” and “wanted.”Whether it is engineering talent fresh out of global universities or skilled hands for field services, the industry faces its most difficult human resource challenge in 25 years. Today’s help wanted sign ranges from immediate needs involving tens of thousands of global workers to long-term issues that address a form of industry reincarnation as one generation retires and another comes to the fore to tackle the evolving challenge of generating more oil and gas from ever-more difficult reservoirs to serve a growing global population.13
11
Business Week Online (http://www.wpxi.com) 12
Conversation with Mr. Francisco Cartagena – Business Development Manager / X Industry Services Americas 13
These difficulties will continue until more qualified laborers enter the market, and this excess in the demand will last for at least five more years14. The situation is further complicated by Brazil’s labor laws which insist that two thirds of the labor force and labor salary is assigned to Brazilian citizens. Several factors make the skills ‘reservoir’ of the Oil & Gas industry a real issue:
• High average age of the present professionals
• Reduced amount of engineers at western universities
• Increase in energy demands
• Increase in technology
The first two are typical for the baby boomers generation and other industries have similar problems. However due to the restructuring and lay-off rounds of the last 15 years in Oil & Gas the industry has them worse.
The last two are due to the fact that the size of the world population is growing rapidly, the standard of living is increasing and it is becoming more difficult to increase the world’s oil and gas supply. At the same time the world has become more dependent on oil and gas and less on coal and nuclear energy. The gains in efficiency will not compensate the gap caused by the baby boomers leaving. The increase in demand and technology will mean that the industry has a continued need for skilled people.
If you look at recruitment and human capital management for a global industry than it has many challenges. Differences in culture, education levels, pay scales, laws, pensions, etc.. The challenge for companies is how to recruit on a global basis and how to make sure that the employees will develop and stay. For that reason very few companies have recruited on a global basis, most have recruited in their country of origin which for a large part of the industry is the US or Europe.
In the next 10 years a major shift to more international recruitment is needed to meet the gap that will occur with the baby-boomers leaving, the reduced output at the western universities and competition of other industries. This limitation will affect Petrobras, as much as an international Maintenance Service Company trying to develop their maintenance team.
To be able to combat this difficulty, a company like Petrobras would have only a few options: invest more in developing their own in-house team or outsource this service. Currently, in one of the larger Global Oil and Gas Recruiting Websites Worldwideworkers, their database contains over 230,000 contacts, of which 8%, 18,690 are from South America or speak Spanish. Considering the market’s growth in Brazil, as well as other countries in the region, it will be very difficult to comply with the law and have high qualified labor. Projects will be continually delivered later, and maintenance work stoppages will be the norm:
"Our production growth has been affected by some operational problems, such as maintenance stoppages at platforms and delays with the delivery of some production projects," Chief Executive Sergio Gabrielli said this to Brazil's stock market regulator on third-quarter results.15
14
WorldWideWorker.com – First break, May 2008 (recruitment Special) 15
This delay resulted in a reduction of 22% in production over last year (2008 vs 2007). With these difficulties, Petrobras will need help for the next few years, if not decades, as it continues to find new oil fields, but is unable to provide for its own service and maintenance needs.
4.1.1 Degrees of differentiation
Given the high demand for service companies, strategic differentiation is not needed for the success of a company in this Industry (till 2014). However, it is applied because of the limited resources of any given company. There is a high degree of differentiation in smaller companies, like Alphatec, that cannot bid by themselves, or can only bid in a certain type of work. This type of company will focus not only on one of the areas, i.e., Upstream, Midstream or Downstream, but in one type of labor in that area, i.e., Pipe maintenance in Upstream. This is further reduced by region, i.e., Pipe Maintenance in Upstream in Macaé. When a company is larger, with greater resources, it can add virtually any link in the Value Chain to its products and services. There is enough offer of contracts that a large company does not need to specialize, it can in fact benefit from having a wide variety of skills, as it can participate and win in more bids. Again, the only limit being the resources of the individual company, or the access to subcontract resources.
4.2 The threat of the entry of new competitors
A market that yields high profit margins attracts the attention of new competitors. This increase in competition will effectively decrease profitability. Established competitors can, through strategic measures, create barriers against the entry of these possible new competitors, and protect their industry from more competition. In the case of the Brazilian Oil and Gas Service and Maintenance Industry, there is great expectation for growth. The market’s main client, Petrobras, is the partially government-owned oil company of a country that has recently confirmed its oil reserves to be around 18.7 billion barrels, making it the 12th largest reserves in the world, with still more oil fields expected to be discovered. Petrobras’ goal is to produce 3 million barrels of oil a day, and make Brazil a major global oil player16.
This future will demand the investment of billions of dollars worth of new assets in Platforms, Refineries, FPSO’s, all of which will require Service and Maintenance. Maintenance costs represent 1%-5% of Capital Investment on a project, will definitely make the Maintenance Service Industry in Brazil an attractive industry for international competitors. However, it will not be easy for new competitors.
For a foreign company to enter the market with a Greenfield strategy, there are two major sources for barriers: The Brazilian Government and Petrobras, in particular its CRCC requirements. In general, Brazil does not restrict foreign ownership of domestic enterprises; nonetheless, its Corporate Law does open doors for foreign investments. Originally Brazil, like most South American countries, had closed borders to foreign investment. The main industries were regulated and run by government-owned companies. In 1995, the world’s largest privatization plan opened up most of those industries in Brazil. As a result, prior permission is not required to establish a business in Brazil. Opening a new corporation in Brazil takes 18 different procedures that last 152 days on average. Addendum 2 identifies each procedure, along with the organizations where the procedure has to be completed, and the length of time it can take to complete each procedure. In the Doing Business Report 2008,
16
which includes 182 different countries, Brazil ranked 122 in ease of opening a new company. Establishing a new corporation is one of the most difficult and time consuming barriers for new
competitors. Another government issue would be environmental licensing17. There is no
predictability in two aspects: when the environmental license will be issued, and what the cost of environmental compensation will be. As well, Brazil is one of the few countries in the world that taxes investment. This is a distortion that increases costs for those who decide to invest funds in the Country. With higher charges in one place and several options for investment, many companies decide to allocate investment where charges are lower, generating jobs and development in these areas. More detailed information about the rules and regulations of starting up a legal entity can be found in addendum 3.
4.2.1 Petrobras CRCC18
Petrobras’ control on the market, its concentration of power, is best illustrated by two examples: • The requirements it places for its authorized product or service providers;
• The number of companies it has bankrupted as a result of its requirements in its contracts. The main focus of this chapter deals with the first of those two. The CRCC is what Petrobras has named its process of making sure that a company will be Technically, Managerially, Economically, and legally suitable and able to complete its contract. This process also includes the SMS, which evaluates the company’s environmental, health, and labor situation. The authorization is provided not only for a company, but for an individual “item”, be it a service or a product. This authorization needs to be renewed each year, for the company and each individual item that is authorized.
Registration (CRCC) itself is initiated in the Petrobras website, where basic information, such as Company Name and a Login name are solicited19. Once this is filled, the company receives a password. With the new login name and password, one can enter again, and access to follow the progress in registration. A company initiating the registration must then send a letter, as expected signed by the legal representative, soliciting addition to the list of authorized providers. Petrobras then sends the Candidate Company another login name and password for a webpage in which it would include further information, such as Technical, Financial, Legal, Safety, Health and Environment, and Management and Social Responsibility. Once this information is filled and Petrobras receives it, an on-location interview is arranged. These findings, along with more field research, are then included in the file. After this, a company would expect to receive notice if it met the requirements for acceptance into the Vendor’s Registry. When a company has received its acceptance into the Registry, it is classified in the Service Provider Roll of Petrobras, according to the nature of the services, in accordance with the following guidelines:
1. Tradition;
2. Technical capacity; 3. Economic-financial status.
17
This procedure is also explained in the Doing Business Brazil 2008 18
www.petrobras.com.br 19
1. Tradition is assessed by taking into consideration how long the company has been operating in the activity to which it is a candidate, considering the continuity, scale and purpose of the services performed. This is divided and quantified into three Degrees, Under 5 years, till 5 years, and Over 10 years in the specialization.
2. Technical capacity is appraised by examining the following documentation, to which, for purposes of classification, are divided into three Degrees:
b.1) List of works or services performed by the company, indicating the kind, characteristic, name of owner, value, duration of execution, start and completion and name of the inspection agency, if any; b.2) A statement that, under the company's responsibility, or as an effective representative of a joint venture, it has satisfactorily performed services of its specialization listed in item b.1 herein above, or a statement of technological transfer that makes it appropriate to perform a certain work or service; b.2.1) The performance shown by the company in providing a service to Petrobras will also be considered;
b.3) List of equipment of its ownership or whose use has been guaranteed by agreement, grouping them by similar areas whenever considered necessary;
b.4) Curriculum Vitae of the director(s) and/or manager(s) and skilled personnel of a university and/or intermediary level.
c) The economic-financial status is obtained by weighing the following indicators, obtained from the balance sheet and financial statements of the last company year:
3. The Economic-financial status is evaluated on the company’s Profitability, Liquidity, Capitalization and Fixed Assets.
All three of these aspects of the company are quantified 20 and then a Ranking of A, B, or C is provided. The company's registration, however, will not prevent Petrobras from reviewing its registration and classification at every and any moment, and it may be canceled, suspended and even excluded if it sees fit. Petrobras may visit a site and solicit information concerning any object that it finds on the premises. Such attention to detail can delay the progress of any project, especially if the company is not well prepared for such visits. Failure to comply with these requirements can result in fines, or even the termination of a contract.
The consortiums diversify risks, even for the largest companies. Recently Halliburton, a former client of IESA, had to cancel a US1 billion platform contract, because of general difficulties, and had to pay Petrobras close to US600 million. Projects of this size, while extremely lucrative, are incredibly risky. All of these requirements for foreign investors and procedures for its vendors create barriers for new competitors, to such an extent that most international companies are better off purchasing a local company than risking certain difficulties. More information about Petrobras certification process can be found in addendum 5.
4.2.2 Switching costs
Petrobras Maintenance Contracts for Platforms have a five year lifespan. These bids have many restrictions in place to protect Petrobras and the Bid Winner. They are not easy to close, and there are many difficulties, financial and otherwise, that make switching a provider greatly unwanted. In fact, the lifespan of these contracts was extended by Petrobras from a one year standard to five
20
years to help stimulate competitors, as the longer contracts are more attractive for companies; Petrobras is also able to demand higher standards of quality. As such, rivalry is reduced by Petrobras’ high switching costs and the longer contract lifespan. There are only a number of contracts that one company can handle adequately, and if a new contract bid opens, a company with many contracts will have to refuse participating. This is relatively common, for example Skanska had to do it a number of times to maintain the level of quality required in their other contracts.21
4.2.3 Number of competitors22
Petrobras assigned Service Contracts to 815 different companies between January and October 2008. The size and dimension of the market is enormous, and many more are entering every day, especially International Firms. They enter from other industries that are similar, in particular for the construction industry. Nonetheless, although there is a constant entry of competitors, there is still not enough for the demand. This will change in the coming years, as more companies recognize the opportunities in the market, and develop qualified resources to enter the market.
4.2.4 Product Differentiation23
While there is no true “Brand identification” in this industry, there are clear levels of product differentiation, developed and identified by Petrobras. The CRCC, a catalog of what items a company is authorized to provide, also has a qualification on the working history of that company. It is based on an alphabetical ranking, “A” being the highest, and so forth down. An “A” ranking definitely differentiates one company from the others, as this ranking is the most difficult to achieve. The ranking and authorization lasts one full year, and to receive it again, there are many requirements that must be met. Some companies invest many resources full-time to be able to maintain these qualifications.
4.3 The bargaining power of customers
The Brazilian Industry is regulated by the Petroleum National Agency, and depends on the Ministry of Mines and Energy. Since 1997, the Industry was deregulated, and now 17 companies compete, with Petróleo Ipiranga being the second largest national company producing sales of U$11.6 billion. However, Petrobras still controls over 90% of Brazil’s oil production and retains a monopoly on the wholesale market for oil derivatives. It owns around one-third of Brazil’s pipelines and distribution terminals for petroleum, as well as 16 refineries and over 7,000 service stations. It has developed alliances with Repsol-YPF (Spain), ExxonMobil (US), Shell (UK), BP (UK), ChevronTexaco (US) and Total (France) to facilitate access to capital, provide technology transfer and share risk. Petrobras has stepped up its investment plans and its two main priorities will be boosting refinery capacity and producing natural gas with a view to attaining self-sufficiency24.
Due to all the strict regulations and the complex process of registrations, Petrobras have great or better mentioned full power over their suppliers.
4.4 The bargaining power of suppliers
There Petrobras controls over 90% of the whole market they are fully in charge. The strict regulation for suppliers makes it impossible for companies to choose for example their own material supplier.
21
Conversation with Mr. Mario Schiattarelles, Plant Manager Macaé Skanska L.A. 22
Petrobras Service Contracts List from January to October, 2007 - Addendum No. 6 23
Information from Mr. Fabian Martins – Technical Evaluation of Suppliers Manager for Petrobras 24
All companies must be registered in Petrobras CRCC system. The power of suppliers here is difficult to mention because Petrobras always choose their own suppliers in the whole value chain. Most important is to get a good reputation within the Petrobras organization.
4.5 The intensity of competitive rivalry
The Competitors in this Industry have a low level of competitive rivalry. This conclusion is based on two particular realities of the market:
1. there is more work available than the service providers can manage;
2. around 38% of Petrobras Service Contracts are financially too large to be assigned to individual companies, even the largest International companies like Skanska L.A. or Halliburton25. As a result of the second of those two issues, competitors have to create Consortiums to manage and comply with bid requirements. The level of competitive rivalry is limited by the need to work with each other to supply the single client. The need for cooperation will further increase as the size of the bids also increase in value and quantity for the exploitation of the Tupi fields. This does not stop, however, low level barriers placed at the initial stages of entrance. This may be manifested with lobby inside Petrobras, delaying paper work or confirmation visits for CRCC authorization.
4.5.1 Level of advertising expense
One client represents almost 90% of the market. The only advertising needed is to develop a close level of communication with Petrobras. This may be done by placing ads in Oil and Gas related magazines and literature. ONIP, Abespetro, ANP, ABDIB, Energia Brasil, IBP, APEX, ABRAMAN, ABEMI, all publish in the industry, and provide space for advertising. This is relatively small, and it is done by the largest companies, like Queiroz Galvão Perfurações and Engevix.
4.5.2 Exit barriers
There are relatively large exits barriers, as entering the industry demands large investments in equipment, and closing down a business will be expensive. However, the activity in the market makes the possibility of selling those assets relatively easy. Of course, with all the interest from International Companies, selling controlling interest of a company is an excellent exit strategy, with large rewards.
4.5.3 Competitors26
There are many different competitors, hence we cannot analyze them all. Therefore four different examples of competitors that entered the market differently are chosen. Skanska L.A. and Wood Group are international corporations that used different strategies to enter the market. Skanska entered Greenfield, while Wood Group purchased and partnered with smaller national companies. The other two companies are Brazilian, IESA Oleo and Gas, a midsized competitor that has a fifty year history with Petrobras, and PCP Engenharia, a smaller competitor, that as a result of working in a couple of consortiums with Engevix, has grown to the point that it can begin to bid by itself for Service Contracts.
25
Petrobras Service Contracts List from January to October 2007 26
SKANSKA27
Skanska Latin America is an organization that for 60 years has worked in Engineering, Construction and Services for the development of regional projects. It belongs to the Skanska AB Corporation, and offers international experience and, an extensive trajectory in the region, which has provided it with a detailed knowledge on local characteristics as from Mexico down to southern Argentina. They categorize themselves as “an international company holding strong local routes, as likewise, a local company with global fortitude” (Hernan Morano, President & CEO, www.skanska.com).
WOODGROUP28
Wood Group ESP is the world’s third largest electric submersible pump manufacture and Service Company, and offers a comprehensive range of electric submersible pumps and solution-oriented services to the world-wide oil production industry and to the water well industry. Wood Group ESP is headquartered in Oklahoma City, Oklahoma, has sales of $2.0bn, and employs more than 13,000 people worldwide and operating in 34 countries. The Group has three main business areas: Engineering & Production Facilities, Well Support, and Gas Turbine Services, providing a range of engineering, production support, maintenance management and industrial gas turbine renovate and repair services to the oil & gas, and power generation industries worldwide. Wood Group Engineering & Production Facilities is a provider of engineering design and project management services for the development of new offshore oil and gas fields as well as the enhancement, modification, operation and maintenance of existing infrastructure in offshore and onshore oil and gas facilities.
IESA OLEO & GAS S.A.29
IESA is one of the few companies in the Brazilian market that is able to provide complete solutions for the Oil and Gas industry, developing Integrated Projects from the conceptual engineering stage to the construction and assembly. In Downstream it works in providing maintenance, engineering and Revamp services in Refinery, Petrochemical, and Processing Units. In Upstream it services platforms, designs FPSO’s and builds them in its shipyard in Niteroi. It has been contracted to work in over 17 of Petrobras’ platforms. In Midstream it works in Piping, Units of Gas Storage, Units of Oil Storage, Compression station, and REVAMP. In Distribution it can work in Measurement Systems, Pipes and REVAMP. Its greatest strength is held with its Engineering talents, which allow it to provide its clients with a complete level of confidence, and a level quality in the ventures that guarantees time limits and minimizing costs.
PCP ENGINEERING30
Engevix allowed them access to larger contracts, and helped them grow to be able to bid independently. With its 40.000m² Industrial plant located in Macaé, housing machinery, equipments, tools and its technical and operational personnel, PCP has become one of Petrobras’ best Maintenance Service Providers in the Upstream Segment. In particular it was a winner of PETROBRÁS CAMPOS BASIN SMS PRIZE in 2002 for its environmental, health and safety performance based in its continuous improvement policy.
Concluded
Taken into account all the forces of Porter it can be said that the oil and gas industry is a special market to participate in. Petrobras is the most important player in this market and everything is situated around this giant. Due to the discovery of the Tupi fields Petrobras wants to invest between 50 to 100 billion dollar to develop these. An investment like this will require maintenance between 1 to 5%. This potential makes the market attractive to enter.
Unless the market seems very attractive and profitable there are some regulation and restrictions which create barriers to enter this market. Brazilian labor laws insist that two thirds of labor force is assigned to Brazilian citizens. Furthermore it is difficult to reach Petrobrass CRCC requirements and it will take a long time to get a certification in this system. The number of competitors is high but there is a large market, however Petrobras has full control over the suppliers.
With 90% of the market Petrobras is the major player. Certification in the CRCC system is required to get work. The entrance barriers for the market are relatively large because large investments are needed to become an interesting player.
