One of the most promising petroleum producers in the world, Petroleo Brasileiro SA (or Petrobras), controls huge new oil deposits off Brazil’s southeastern coast. For years, pumping oil has been its only business and the key to its profitability as the world’s third-biggest energy company. But The Wall Street Journal (July 27,2011) reports that Petrobras has decided to embrace vertical integration, a topic we discuss in Ch. 11, Supply Chain Management (see Figure 11.2). In an effort to boost its “downstream” business, the giant firm is now in the shipbuilding, petroleum refining, and petrochemical businesses.
Petrobras is in the process of building 4 refineries across Brazil to make the country self-sufficient in refined fuels. (Its fast-growing consumer base is buying cars and fuel at a faster rate than the nation can refine without importing). It is also adding a $2 billion petrochemical plant in an effort to squeeze more revenue out of every drop of oil. Like other big energy firms that have moved into plastics and other derivatives, Petrobras will be adding plastic bottles and polyester fibre to its product list. “We see opportunity for profits in many other businesses beside crude”, says a Petrobras director.
Is vertical integration always a good idea? Private investors in the firm say the $18 billion being put into building ships (at a cost higher than they would pay to have them built in Korean shipyards), the refineries, and the plastics factory, are a waste of money. “The company has enough to do just to get that oil”, says a BlackRock fund manager. “Everything else is a distraction”.
Petrobras responds that the new ventures are creating jobs and helping to develop the towns in which the new facilities are being built.
Discussion questions:
1. What are the advantages of this “forward integration”?
2. Why is vertical integration a danger to firms like Petrobras?