Quo Vadis Petrobras – Quo Vadis Brazil?

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.