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1. There are several reasons of why Petrobras has a higher cost of capital compare to
other multinational oil producing companies:
- The lack of international diversification. Even though that Petrobras is considered as
one of largest publicly traded company in Latin America, its operation is not
international at all. Petrobras was focus on the domestic sales and distribution of
gas and other energy. However, the oil and gas market had been considered “dollar-
denominated”, and an international company that just focus on the domestic sale
increase currency risk. The lack of international diversification has lower the
possibility of Petrobras to look for cheaper capital sources.
- The focus of the globalization strategy. Petrobras has involved into several
globalization investments with the objective of expanding its company, and make it
more “international” and diversified. Yet, the two transactions were related to
Argentine oil companies (Repsol-YPF and Pecom), which experienced a great
financial crisis exactly at the time when these two transactions occurred (2001-
2002). Thus, the globalization strategy didn’t help in reducing its capital cost later,
but worsen it.
- Sovereign Risk (country risk) higher than other similar oil producing companies.
Brazilian economy has been considered as an economy with high inflation, economic
instability, and currency devaluations and depreciations. It increases the risk of
foreign investors thus, to attract foreign investment, Petrobras must add an
