Quo Vadis
Petrobras – Quo vadis Brazil?
It is a fact that Brazil which is South America’s
largest economy, faces an economic crisis. The GDP growth attained only 0.15%
in 2014, inflation climbed to 8.4% and investment flows gave Brazil a wide
berth. Most recently, unemployment figures are rising and added up to 6.4% in
April 2015. A strong symbol for the sluggish performance of the Brazilian
economy is the status quo of Brazil’s largest corporation – Petrobras. At
present, Petrobras is facing the largest corruption case in its history and its
shares dropped to a 10-year-low. What happened to Petrobras – which enjoyed a
promising outlook back in the years 2009 and 2010? In the following, I will provide
a detailed insight into Petrobras’ most recent developments.
Petrobras is by far Brazil’s largest publicly listed
corporation. Headquartered in Rio de Janeiro, Petrobras employs approximately
85,000 people. The major focus of Petrobras‘ operating business encompasses oil
and gas. In total, Petrobras controls more than 135 oil rigs, 15 refineries and
the company is operating in 25 countries worldwide. Its oil reserves add up to
16.4 billion barrel. In the peak time in 2007-2008, Petrobras’ market capitalization
climbed to US$ 310 billion.
The starting point for Petrobras’ recent boom was the
discovering of the promising salt layer (Portuguese: “pré-sal”) oil reserves in 2007. The oil reserves are hidden in
ultra-deep waters of the South Atlantic Ocean under a thick salt layer. In
November 2007 when Brazil was still ruled by the Lula government, the country
witnessed one of the most promising discoveries throughout its history. The
government announced the discovery of the Tupi oil field (renamed into “Lula
oil field” after the discovery) which is localized in the large oil province
called ‘Santos Basin’. Altogether, the Santos Basin has approximately the same
size of Germany. Beneath the Santos Basin, in a depth of 5,000 m until 8,000 m
below sea level, one of the world’s largest oil reserves is situated. This
discovery boosted Brazil’s oil reserve by 50%. At that time, a large wave of
enthusiasm caught Brazil which was further propagated by the Brazilian media.
Brazil saw itself on the threshold of becoming a new “tropical” Saudi Arabia
located on the South American continent. This hype spread to the financial
markets as Petrobras market cap went through the roof and reached a level of
more than $ 300 billion. For a short period, Petrobras was the fourth most
valuable corporation worldwide. Record sales amounting $ 30 billion spurred on
the fantastic success story. In 2011, Petrobras drilling rigs managed to pump
71,000 barrels per day out of the pré-sal
reserves. On its peak which is expected during the next decade, the pré-sal has the potential to increase
Brazil’s oil output from 2.1 million barrel to 3.5 million barrel per day. Everything
seemed to be well on the way. However, one year later in 2012 Petrobras’ market
cap dropped to $ 130 billion.
In the end of 2012, the enthusiasm of the pré-sal success story began to slowly
recede. What has happened in the meantime? Since 2006, the Brazilian government
has capped oil prices in order to fight inflation. On account of rising demand a paradox situation
arose: Brazil had to import oil and sell this oil at a loss due to the
mandatory price cap which was imposed on the oil companies by the government.
As a matter of fact, Brazil needs to import a certain amount of oil because the
oil produced in Brazil is heavy and sour which means its quality is lower
compared to the desired light sweet crude oil (which can be found for instance in
Libya, Iraq, Brunei or Angola). In addition, Petrobras was forced by government
regulations to build refineries in Brazil’s poor northeast and moreover it was bound
to hire and buy parts locally in order to support Brazilian jobs and industries.
As a result, Petrobras turned into a plaything of the government and became an
all-purpose policy tool. During the bidding process for concessions to explore
the pré-sal, most of the
multinational oil corporations such as Exxon Mobile, Chevron, BP and BG stayed
away. From a total of 40 oil companies which were expected to take part in the
auction merely eleven oil companies appeared. Numerous multinational oil
companies remained reluctant to bid for a concession in Brazil’s new discovered
oil fields on account of the regulations to accept Petrobras as an operator –
even if complex offshore operations are their own key strength – and the
requirement to contract local companies for equipment and service purchases. The
lack in competition due to bureaucratic hurdles repelled various multinational
oil corporations. At the same time, shale oil displaced pré-sal as the world’s most exciting energy prospect. Besides, the
auction was accompanied by protests which were led by oil workers, unionists
and masked anarchists in order to revolt against private sector participation
in the oil industry. In the end, a consortium led by Royal Dutch Shell, Total
and the Chinese state oil corporation CNOOC acquired the Libra oil field which
is located in the Santos Basin. In 2014, the pré-sal oil production accounted for 492,000 barrels per day.
But this is not
all. In 2014, the largest corruption scandal in Brazil’s history shook Brazil’s
flagship corporation. The so called “Petrolão”
scandal (word combination of “petróleo”
[Portuguese for “crude oil”] and “Mensalão”
which denominates a famous corruption case in Brazil) has broken all records.
Approximately $ 3 billion have been stolen from the company. Several contractors
which aimed at obtaining orders by Petrobras had to hand back circa 3 % of the
volume of orders to the principal. Various high-ranking politicians and top
level business leaders have been involved in this corruption case. One of the pivots
was Petrobras manger Paulo Roberto Costa who led the purchasing department of
Petrobras since 2004. In order to save his own skin, he revealed his
participation in the corruption case and he returned his private helicopter as
well as his beach villa. All this led to a sharp fall of Petrobras’ share
price. Being Brazil’s most influential and distinctive corporation, the decline
of Petrobras became symbolic for the overall situation of Brazil’s shaken
economy. Within the last 18 months, Petrobras share price oscillated between $
3.10 and $ 10.90. Currently, it is staggering on a level of $ 4.60. While the
revenues remained stable over the past four years, Petrobras’ profits are
plummeting. In 2014 Petrobras posted a loss at the amount of R$ 21.6 billion ($
8 billion). A large part of this loss is made up of the damage from the corruption
affair but also it is the consequence of low oil prices as well of the
decreased demand for petrochemical products. For the current five-year plan,
Petrobras adjusted its planned investments for the upcoming four years which
now add up to $ 130.3 billion. This value is 37% below the envisaged amount of
investments which Petrobras held out one year ago for the period between 2014
and 2018.
What can be done
to overcome this difficult and intricate situation? The following measures and
steps are vitally important to get Petrobras back on track:
·
Restructuring of
the energy system and the role of Petrobras in the context of the Brazilian oil
industry; a single public agency is required which sets policy, negotiates
contracts but does not make operational decisions.
·
Remove of the oil
price caps
·
Enhancement of
transparency: establishment of a system in which qualified local and
international firms compete with Petrobras for contracts and operatorship on
equal terms.
·
Change of the local
content laws in order to open the market and get the best products and services
through international bidding
·
Thorough and
diligent solution of the “Petrolão” corruption scandal
It is now in the
hands of the Brazilian government and top managers to implement reforms, which
will help the Brazilian oil industry to return to its former strength. After
the mentioned measures have been accomplished, Petrobras will have the
capability to regain trust on the investor side and return to the path of
prosperity. This won’t be easy but it is hugely important to lift Brazil’s
largest corporation out of the slump. Again, a well-functioning oil industry
can stimulate further growth and extend this growth dynamics to its suppling
industries.
