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Brazil Interference in Petrobras to stop diesel and gasoline readjustment leaves state adrift

 

                                                         At the center of the electoral debate and the target of constant changes in command, the oil company postpones strategic decisions and energy transition

                                                 

The meeting of Petrobras' Board of Directors on the 8th was focused on the business plan for the next five years. Did not work. The meeting was dominated by the debate on the then possible departure of José Mauro Coelho from the presidency of the state-owned company and the pressure to avoid further increases in fuel prices.

It is an example of how the lack of definition and uncertainties in command over the last year and a half have been impacting the oil company. The trigger came in February 2021, when the price of oil began to rise amid the resumption of the post-pandemic global economy, along with rising inflation. As Petrobras follows the parity of oil prices in the international market, the gasoline and diesel readjustments displeased the government, resulting in the resignation of three presidents of the company until now.

While the Council prepares for a new meeting tomorrow to assess the arrival of another president, now Caio Paes de Andrade, secretary of Debureaucratization at the Ministry of Economy, strategic decisions, especially those in the medium and long term, are being postponed by Petrobras.

The brake on asset sales, investments and approval of strategic actions is visible.

“Leadership is consumed by the discussion of fuel prices,” says one executive.

'Who will sign?'

The planning for the next five years is to be traced from the first quarter. It is still standing, waiting for the new presidency and board. There are executives, among the most optimistic, already predicting that the 2023/2027 plan will only be released in December.

—Who will sign important document? Or authorize the contracting of a new billion-dollar platform? Who will determine the start of the project feasibility study? asked an executive who prefers not to be identified.

The paralysis, according to another source, prevents Petrobras from defining a plan to access essential resources to start bidding for platforms and expand production. For months — with the debate on the risk of fuel shortages — state-owned managers have been discussing the role of the company's refining.

The question is whether the company will continue to sell refineries or not. The processes would be paused since the departure of Joaquim Silva and Luna, say Petrobras professionals. The state-owned company had signed an agreement to sell eight units, but only got rid of four.

The deadline for sale ended at the end of 2021, but it was renegotiated with the Administrative Council for Economic Defense (Cade). Political uncertainty, say sources and analysts, makes negotiations difficult, because the state-owned company either did not have interested parties or received less-than-expected proposals. It was then decided to reinvest in improvements in units such as Rnest (PE), regardless of whether or not attracting new interest in refineries.

The impasse involving refining reflects the slower pace of asset sales. In 2020, 27 teasers were launched on the market with gas assets, oil fields, wind farms and thermal plants. Last year, that number dropped to six. In 2022, so far, there were three, of which two (the Turtle field and the Nitrogen Fertilizer Unit) were relaunched on the market.

No long term plan

Between 2019 and February this year, Petrobras, according to financial information released by the state-owned company, has already recorded in its balance sheet the entry of US$ 24 billion from the sale of assets - US$ 5.6 billion since the beginning of 2021. In December Lastly, the state-owned company signaled to the market that it would sell assets between US$ 15 billion and US$ 25 billion by 2026. At the table are its stake in Braskem and the company that owns the Brazil-Bolivia gas pipeline. The sale of Transpetro remains undefined.

Within the oil company, 2022 is already seen as a lost year.

The Strategic Plan with a long-term vision also left the scene. The last one was made in 2018, under the management of Ivan Monteiro. Without this vision for the next ten years, there is indecision in key areas such as energy transition. The world's leading oil companies are investing in renewable energy. The topic had been the subject of internal debates between directors since the beginning of the year, but it was suspended, since the board must change.

Carlos Augusto Junqueira, a lawyer specializing in Corporate Law and a senior consultant at FGV Projetos, underlines that successive interruptions in the natural process of replacement in charge are “salting the earth”, undermining the company's strategy to flourish.

— The big victim of this unnatural change is the Council, which is unauthorized. The natural thing would be for the Council to decide to change the president. Only the Board can have the company's long-term vision. If it can't do that, the company is left without leadership.

After the Lava-Jato Operation, Petrobras' statute was improved and the State-Owned Companies Law was approved, with the objective of shielding the company from political interference. As a result, attempts to change the pricing policy through the replacement of the president had no effect.

Luiz Carvalho, senior analyst for Oil and Gas at UBS BB, points out that the changes in president of Petrobras come from afar. But that repeated change in command, at the very least, slows down some advances.

— In the collective imagination there is a reading that there is a button that the government can press to intervene in Petrobras and control fuel prices. Due to improvements in the statute and the State-Owned Companies Act, this button became too expensive to press. The political damage of this act is very high — he ponders, who believes that changing the State-owned Companies Law would be a “setback”.

As of 2016, he says, there was a big improvement in governance and profitability. Petrobras has become one of the most profitable companies in the world, hitting R$44.56 billion in net income in the first quarter, more than 38 times the amount recorded in the same period in 2021.

— Even if the oil dropped to US$ 30, it wouldn't have a cash problem — says Carvalho. — Any maintenance of what has been done will bear good fruit. The main line of action has been maintained since the management of Pedro Parente (in the Temer government), with financial discipline, making divestments, following the parity of prices in the international market.

The downside is that Petrobras has an “extremely discounted” assessment, compared to major global oil companies.

— The market assigns an intervention risk. This pollutes the investor's perception. The risk of a change in direction raises questions about which direction the company will follow — says the analyst.

The most discounted

A parameter that points out Petrobras as the cheapest oil major in the world, according to a report by XP, is the multiple that results from the relationship between the firm's value (EV) and Ebitda (cash indicator). Petrobras is at 1.7, well below competitors such as Chevron (4.9x), Exxon Mobil (4.7x) and Shell (3.2x).

Inside the company, employees are scared, reports a source. And there are already professionals wanting to leave the company. The fear is that an eventual interference in the pricing policy will pave the way for, subsequently, changes in management and, later, in the cash register. - If you put people without qualification, it makes it clear that there is a decision-making process that has nothing to do with a company with good governance - says this source.

Marcelo de Assis, director of upstream research for Latin America at Wood Mackenzie, highlights the concerns around the government and Congress signaling that the State-Owned Companies Law may be amended to allow greater interference in the state-owned company:

— This type of interference can again affect the company's ability to invest. If there are heavy subsidies with fuel, it could raise the company's debt again and impact cash, which would bring more problems to Petrobras. It is the type of electoral intervention and does not solve the fuel problem.

uncertain path

Changes in the statute, on the other hand, trigger crises, starting with the dismissal of Pedro Parente amid the truck drivers' strike in 2018. From January 2021 to June this year, the value of gasoline in refineries rose 121% and that of diesel, 177%, reflecting the opening of the economy after lockdowns in the pandemic and war. Petrobras makes adjustments in parity with international prices.

— Fragmented management impacts mainly on medium and long-term strategy. The pre-salt is increasingly mature and there have been no significant discoveries in the last five years. What is the future strategy, as it has been selling assets in gas, energy and renewables in recent years? What will the investments be? Is the way? asks Assisi.

The fear today is that the company will cut back on investments. The state-owned company, based on its five-year business plan, has been slamming on the brakes. In 2019, the goal was to invest US$ 75.7 billion between 2020 and 2024. In 2021, the number dropped to US$ 68 billion between 2022 and 2026. These data reflect the timid projection of growth in oil production. The expectation is to rise from around 2.6 million barrels of oil equivalent per day (boe/d) this year to 3.2 billion boe in 2022.

This lower appetite to invest occurs with a record level of oil prices. This month alone, the barrel reached US$ 130. For analysts, the state-owned company could have higher production, benefiting from the good moment in the market. Production, however, dropped from 2.770 million barrels of oil equivalent per day (boe/day) to 2.462 million barrels, on average in the first quarter of this year.

Brazilian state-owned companies  Government Petrobras

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