Projectus: Engineering in the Oil and Gas Refinery Sector in Brazil

Interview with Márcio Alberto Cancellara, President of Projectus

Could you give us an overview of the industrial engineering business in the oil and gas refinery sector here in Brazil?

The engineering sector here in Brazil has really grown over the last years based on the growing needs of Brazil and primarily due to the necessityof increasing the national production of petrol, gasoline and diesel. Therefore,we are implementing a new refinery in the north east of Brazil called the Abreu e Lima Refinery and another in Rio de Janeiro which will be a refinery complex called Comperj. Additionally, Brazil committed itself to improving the quality of its diesel and gasoline to achieve international level of quality. Petrobras has implemented various special units for all of its refineries in order to improve quality.Consequently all of this has led to the development of the refinery sector and has provided a large volume of work for the engineering sector over the past 8 or 10 years. We are now coming to the final stage of completing all of these units.

There has been a lot of investment into the sector on behalf of Petrobras and this really helped the growth of the engineering sector in the field of oil and gas. The engineering sector had to grow along with Petrobras and it had to keep up with all the latest technological developments for all of the projects. It was a large challenge because the country was going through an economic crisis in the 1990s. As of the year 2000, the engineering companies in this sector practically had to reinvent themselves. We really had to invest in the training and qualifications of our staff. Nowadays engineering companies in Brazil are fully prepared for this kind of project.

How was Projectus founded?

Projectus began in the 90s, to be precise in the year 1990. We began to work in the area of infrastructure. However despite our partners and staff having experience working in the industrial sector, the company itself didn’t have much experience in the infrastructure and industrial fields. That made it quite hard to sell our services to clients as they always wanted to know what previous experience our company had.

In 1993, we did our first job for Petrobras which qualified us to then be able to be registered with them. We carried on working with them and growing alongside of them. We also gained more and more experience in the field of infrastructure and we became quite successful. The issue is that investment into the oil and gas sector was much greater than the investment into the infrastructure sector. Investment into infrastructure has a much slower return and there is a whole element of politics involved. We can see this is in what is happening at the moment with the investment for infrastructure for the World Cup this year. These kind of investments take a long time. The majority of engineering companies like us, therefore really focused on the oil and gas sector precisely because of the issues like speed and the pure amount of work available in that area. Engineering companies like ours really owe a lot of their growth to the growth of the oil and gas sector.

We are now starting to look again at the field of infrastructure whilst not forgetting our speciality in oil and gas. It really took a lot of investment for us to become specialised in that sector, particularly in qualifying our staff, therefore we do still want to maintain our speciality and focus in oil and gas.

We are getting ready to participate more fully in the offshore sector because the technical migration necessary for a company that works in the refineries sector to move into working in offshore is not automatic, the projects are a bit different. In terms of complexity, projects to do with refineries are much more complex. Working offshore has its own challenges such as working in the middle of the sea. We have been training ourselves and have been qualified by Petrobras to begin working in this sector. We are hoping to get more work in this sector, we have achieved our first contract and obviously over the next few years work in this area will really increase for us.

You have been working for the last 25 years alongside some of the big players in the oil and gas refinery business. What are the challenges that Projectus faces?

When a company like Petrobras wants to invest in offshore, it means putting a lot of their investment towards something that at that moment doesn’t generate income immediately because most of the income for Petrobras comes from production and exploration. Therefore we end up being dependent on the decisions made about investments going into this sector. As I said before, all of the investment that is going into the projects for the refineries is now coming to an end. Therefore investment coming in drops down suddenly and the company has to be ready to go through this difficult moment. Obviously later things start up again, for example Petrobras is going to open two new refineries called Premium do Ceará and Premium Maranhão but there is always that period when the big projects are being finished and you have to be prepared for that and make sure that your team stays together and in work. The most important tool for a team of engineers are the brains of those engineers. It is really important to maintain a good knowledge and team because it isn’t like construction where you can rely on a lot on machines. It is really important that we don’t allow this knowledge to be lost, which is what happened a few decades ago.

There is a famous story about an engineer in the 1980s who couldn’t get work as an engineer so he opened a bar on the Avenida Paulista in São Paulo and started to sell fruit juice, he called the bar “The engineer who became a juice seller”. His story became famous all over and is a reminder that we don’t want anything like that to happen again. Therefore one of the major challenges is making sure that there are enough jobs for our qualified staff. We need to make sure that there is a continuous workflow and that there aren’t any periods where work contracts reduce and become hard to find. That is one of the most important challenges facing the companies working on these projects today.

In the sector that Projectus deals in, what is your perception of the opportunities for doing business in Brazil?

I think it is very different to talk about Projectus and about Petrobras. I would say that Petrobras is a very good company to work for; they always fulfil their obligations, we have never had any problems with them. Petrobras is a huge company with nearly 80 thousand employees. They have various management positions and they do projects all over Brazil. Obviously it is a very demanding company; you have to give them top quality design plans to a standard that is much higher than that which is demanded from other kinds of clients. They are ISO 9000 and 14000 certified which has to do with the quality and environment, they are also OSHAS 18000 certified which has to do with occupational health and sanitation and if you don´t also hold these certificates you can´t provide services to Petrobras. They carry out audits annually on the companies that work for them to verify how these companies are doing, what their quality systems are like, what their safety systems are like, etc. Therefore this kind of strictness does mean we have to do a bit more work to fulfil these requirements but at the same time it ensures that we are working with the best quality companies. This is really important, it means that we can´t just sit back and relax, on the contrary, we always have to be working hard to make sure we achieve these required standards. You only get asked to work on these large projects if you have the top class level on Petrobras´ database. For many years we have been at the top of that list. They are a very demanding client but working with Petrobras has the added benefit of being a company that works on such large projects and really is respected by others in the market. It is a state owned company and so it does have elements that are dependent on the government which means it is different from working for an international company in the oil and gas sector which normally tend to be totally privately owned. We are very satisfied with the partnership that we have with Petrobras.

In terms of globalisation, what is the position of Brazilian companies in this sector abroad?

Brazilian companies are at a disadvantage in this sense which isn’t caused by them as such but rather by the high taxes that are involved in the sector, both in terms of taxes and also employment charges. This makes it hard for them to participate internationally. We have a situation here whereby the cost of the services is now more than in the United States. It´s not that the salaries are higher but that the labour taxes are more expensive. This makes it really hard for us to compete. Now with the strong presence of China and India and other countries in the market we just can´t compete. I think that this is impeding the advancement of Brazilian companies.

Engineering all over the world is an area that generates a multiplying revenue. Let me explain… if I were to do a project here in Brazil, I am going to specify the use of Brazilian equipment, which I know is of good quality. An international company is going to specify equipment from their own country, in the same way: it´s quite normal and to be expected. If a Chinese company is going to work on a project they are going to specify Chinese equipment for example. Therefore I don’t think that here in Brazil the government hasn´t really grasped this concept and the potential that comes from engineering companies. Engineering companies can really multiply the quantity of work for other companies in the production chain. I think there are various countries that offer incentives to such project sectors. When the economic crisis happened you didn’t see a single engineer in France become a fruit juice seller whereas here you did see engineers become motorbike taxi drivers. Engineering is the top of the productive chain in this sector so Brazil has to protect this chain. We can’t allow companies here who are technologically developed to find themselves in a situation in 5 years’ time where they can’t find and work. The main cost in the engineering sector is the engineers´salary, there is some cost in software but not a lot. Therefore I really think it is an important issue for the associations and for the country to make sure we don’t have a repetition of the situation in the 1990s. I really think we have to address this issue for us to be able to play on an international playing field.

I know that many companies have offered to enter into partnership with your company. Are there still opportunities for partnerships? Are you still open to new ventures?

We are still open to new partnerships but they would have to be very direct ventures in the sense that we wouldn’t like to go into anything that would take years to begin. We have seen other companies go into partnerships where they have had to spend two years in discussions alone. It would also have to be a partnership that adds value to our work. I would welcome a partnership that would allow me to add value to my services and increase my sales. For example, in the oil and gas sector we could think about partners in the naval area, because the largest platforms are now floating and are mounted on large ships. Brazil doesn’t yet have the technology to put these oil and gas rigs on these ships. It is something that has to be developed here in Brazil. In terms of infrastructure, Brazil is really behind in railways. Last year the government of São Paulo had to contract a railway project and the company that was awarded the contract was an Italian company. There are very few people here in Brazil who work in the field of railways so all the companies who bid for these projects are international which is a real shame because such a large country needs so much railway! We can’t compete with the foreign companies. It would be great if a foreign company that has experience and technology for working with railways were to become a partner and add value to our services. Today there are really very few companies in Brazil that do that kind of work. I believe that an association or an exchange of services can be part of a company´s growth. I think we have a responsibility to our employees to make sure our companies are around for a long time. Companies here have to be preserved like the international companies that are now 80 or 100 years old.

What is the outlook for engineering companies in the oil and gas refinery sector in 2014 and coming years?

I believe that 2014 is going to be a very critical year because we are coming to the end of many investment projects in refineries. All of the improvement projects of all the refineries have to be finished by the middle of this year. I believe that the projects for the Premium refineries in Maranhão and Ceará will begin in 2015. I think that from that moment we should have a lot of work in the refinery sector once more. There are other projects that are yet to be defined such as a project to do with fertilizer units but this is also going to be for 2015. I think that 2014 is going to be a very weak year for our sector.

What about in 5 years´ time?

Brazil does have expectations for a very large growth in consumption of oil and gas. In 2020 we expect to produce 4,2 million barrels whilst at the moment we are only producing 2 million. For now we have to continue buying petrol from abroad, which is a real disadvantage for Petrobras. Brazil is importing diesel and petrol and it is selling it at a lower price than it pays for it. That equation needs to be resolved. The price of petrol has not been frozen but it has been restricted again. There is a policy to incentivise the purchase of cars for example with the reduction of the IPI tax but on the other hand there is a policy to freeze the price of petrol and that is a dangerous policy to have and is why we are seeing more and more congestion. The policy of retention of the prices of petrol is provoking a huge deficit for the country, something like 20 billion dollars. That is going to have to be resolved or if not the government is always going to have to be paying off this huge debt or else Petrobras is going to have to pay this huge difference. Petrobras needs to increase its production but its cash is not available. There are a whole series of electoral issues to do with this including inflation but I believe this is going to be resolved.

I think that a lot of the challenges facing our country are in this area. The politicians need to look at the situation more closely: they talk about urban mobility and improving public transport but at the same time they are encouraging people to use their own cars by freezing the price of petrol to encourage the automobile market! These contradictory policies aren’t working. I am sure that this is going to be resolved because these kind of policies are holding the country back. Here we struggle to invest in infrastructure, we can see that with the World Cup there are many projects that are not ready yet because a lack of money. All of this has to be resolved with inflation or deflation, I hope for deflation, but in any case the situation has to be resolved urgently.

What are the great strengths of Projectus? What keeps the company ahead of the competition?

I think it is our quality and the fact that we fulfil our obligations in terms of deadlines and quality. This gives our brand credibility. When a client comes to speak to us about a project, what we offer at the beginning is what we deliver. Our clients know that they can talk to me or any of the management team at any time. I think that Projectus is known for its credibility.

A services company relies a lot on word of mouth to become prominent. A company gains new business from what other clients say about it. To go back to Petrobras, which is an enormous company with so many departments. A certain department of Petrobras will invite a company to work on a tender but before they doso they are going to ask around about that company to see what people say about it. That’s the way it is with engineering companies, recommendations are made by word of mouth.

How much does Petrobras represent of your portfolio?

Today, I think that it represents 70% of our portfolio.

Would you not say that is a bit of a dangerous balance?

Well as I said, we need to be prepared for the moments when Petrobras is reanalysing its investments and concluding areas that we dominate. We need to diversify and so we have signed a contract with GM and with John Deere precisely in order to diversify our work. Now, it must be understood that Petrobras has proposals to invest 240 billion dollars over the next 5 years. There is no other sector that is investing even 10% of that kind of money. Our specialisation is focused in the oil and gas area but we are looking to diversify. We are looking for new partners so we are giving proposals for various different areas.

Is there no other way of staying in the same sector instead of having to diversify?

No. Here in Brazil, the oil and gas sector is really centred on Petrobras. All the refineries belong to Petrobras. There are petrochemical units, we work with Braskem among others. That sector is also currently reanalysing its investments. There is now an impact being felt because of shale gas in the United States elevating the cost of gas here which is the raw material of various products. Therefore the price of gas in Brazil is not competitive and so companies that use gas in the production of their goods are beginning to reconsider whether they should invest in Brazil or not. Gas in the United States costs 3 dollars whilst here it costs 15 dollars. Over there they are using shale gas as they have the largest shale reserve in the world. The petrochemical sector is thus a little bit retracted also. So I think these are things that need to be resolved this year or else our country is going to be left behind in many areas. A few years ago people said that Brazil was auto-sufficient in terms of oil but we certainly are not now as we are importing oil. I am however confident that this will change and our production will increase. Despite these problems, Petrobras is still a huge company that employs so many people and companies in terms of engineers, construction, equipment production, etc. It is a very important company.

Can you tell us where you would like to see your company in 5 years´ time?

Projectus has always been in the top ten engineering companies. It is not our main dream to be in the top two companies.My dream and the dream of my partners is over the medium term to encourage more share participation for our employees which is a form of making sure the company is preserved. We want to continue improving the quality of the technical aspects of our company and we want to be recognised as a company of excellence. Petrobras carries out an evaluation of each contracted company biennially and it attributes a score to each company from 0 to 100. Today we average a score of 87, on occasions we have reached a score of 90 and we are classed as a company of excellence within Petrobras. Very few companies have achieved such high scores. That is something that we always will strive for. We want to be recognised as an excellent provider of services.

Additionally, we also could in the next 5 years have an international partner, it is an option we are looking into. Some companies will have objectives to increase their revenues by 4 or 5 times, but I would be lying to you if I said we had that kind of objective right now. I think these things can be seen as goals but I can´t guarantee anything because we don’t know exactly what is going to happen in the future; we depend a lot on what happens in the market. For us, it is really important that we ensure that this company be sustainable and long lasting.

 

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