Petrobras' strategic challenges
As a mixed-capital company controlled by the Brazilian State, Petrobras’ top management is constantly forced to balance economic, political and social interests.
Historically, this challenging dynamic is more evident during times of greater fuel price volatility, given its impact on consumers – and, by extension, on the popularity of the sitting government.
Today, the challenges faced by the national oil company have become even more complex due to the expected changes in the global energy matrix over the coming decades.
This is all happening at a time with Petrobras embarked on a strategic shift since President Luiz Inácio Lula da Silva assumed power in January 2023.
Against this backdrop, BNamericas looks at the company’s most pressing challenges on the strategy front.
ENERGY TRANSITION
Like other large state-owned and private oil companies, Petrobras must adapt to a future in which fossil fuels will play a declining role in the global energy matrix. This means investing in renewable generation projects, such as biofuels, green hydrogen, and carbon capture, utilization and storage (CCUS).
The dilemma for Petrobras is that such projects require large investments that may only pay off in the long term. But a narrower focus on its core E&P business could see the company missing the train in the renewables field, where many international rivals are making big bets.
Its low-carbon budget for 2024-28 includes US$ 5.2bn in wind and solar energy, US$3.9bn in solutions to decarbonize operations, US$1.5bn in biorefining (renewable diesel and aviation biokerosene), US$700mn in R&D, and US$300mn allocated to hydrogen and CCUS.
Petrobras has started mapping geological reservoirs that could be configured as suitable carbon storage options and is also studying existing facilities in several Brazilian states.
"The steel segment is one of the areas where Petrobras can add a lot of value in possible low-carbon business partnerships or by exploring potential commercial agreements linked to the projects that Petrobras is developing in the sector, involving not only CCUS but also renewable energy, hydrogen and its derivatives, and low-carbon fuels," said Petrobras' energy transition director, Maurício Tolmasquim, during the signing ceremony of an MOU with ArcelorMittal Brasil last month.
REPLENISHING RESERVES
In the short and medium term, it is safe to assume that the world economy will continue to depend on oil and natural gas to guarantee the high standards of living that many rich countries have become accustomed to – while many poor nations aspire to those same standards.
"We live in a world of inequalities and differences. We still face energy poverty in many places. That's why we must be unanimous in seeking a just energy transition that is carried out gradually and responsibly," said Petrobras CEO Jean Paul Prates on Tuesday at CERAWeek in Houston.
"In this context, Petrobras, like Brazil, has the advantage of having quality, low-cost, low-emission oil," he added.
Petrobras is focused on maintaining its ratio between proven reserves and production (R/P), which requires exploring of new geological frontiers.
The company’s main eye is on the Equatorial Margin, where it is drilling despite growing pressure from local and international environmentalists, civil society groups and politicians due to the region’s environmental fragility.
While exploring new assets in the pre-salt is not yielding significant results, Petrobras is also looking at the Pelotas basin on the country's southern coast.
The company plans to invest US$7.5bn in exploration by 2028, which breaks down to US$3.1bn in Equatorial Margin, US$3.1bn at the southeast basins, and US$1.3bn in other countries such as Colombia.
At CERAWeek, Petrobras' E&P director, Joelson Mendes, said that the NOC plans to drill two exploratory wells in Colombia's Tayrona block.
The executive stressed that the company has once again invested in exploring new areas and that new technologies have made it possible to substantially reduce the cost of wells compared to the start of pre-salt exploration around 15 years ago.
"Petrobras' history comes from exploration. We don't have a history of acquiring areas. We have internal programs that have allowed us to increase our chances of discovery and reduce costs in wells," said Mendes.
VERTICALIZATION
During the administrations of Michel Temer (2016-18) and Jair Bolsonaro (2019-2022), Petrobras sold a wide range of its assets in Brazil and abroad. The list includes exploration blocks and producing fields on land and sea, gas pipelines, refineries, thermoelectric plants and gas and fuel distributors, as well as biofuel plants and renewable energy assets.
The plan was to focus on deepwater and ultra-deepwater E&P activities and open the midstream and downstream markets to private sector firms. The strategy was welcomed by industry insiders and financial markets as it would spur competition and generate cash to reduce the company’s heavy debt load.
However, some analysts have criticized the company's de-verticalization, warning that the move runs contrary to the trend among large international oil firms, which have kept their refining and petrochemicals businesses. They see this path leaving the company too exposed to E&P and unprepared for the energy transition.
In addition, the almost total reduction of Petrobras' footprint abroad would eliminate a long-standing tradition of projecting the country geopolitically through the NOC. When Lula came to power, the government asked Petrobras to suspend the sale of assets due to a reassessment of the national energy policy.
With Brazil’s antitrust authority Cade, the company is currently discussing the terms of cessation commitment (TCCs) signed in 2019 to reduce its participation in the refining and natural gas areas.
At the same time, Petrobras is negotiating to regain control of the country's second largest refinery, Mataripe in Bahia state, while studying the possibility of returning to the fuel distribution business and once again expanding its investments in the downstream sector.
This change of strategy is generating a backlash from those who consider the company's dominance in key sectors, such as refining, detrimental to competition and the country's development and those who advocate for concentrating investments in the E&P segment, which offers greater financial returns.
Halting the sale of assets also means fewer sources of non-recurring income for Petrobras.
LOCAL CONTENT
Another key issue for Petrobras is local content now that it plans to offer more contracts to domestic engineering firms as part of a major policy change.
The “change of heart” is taking place after almost a decade during which the country’s main contractors were unable to sign new deals with the company due to their past involvement in the massive Lava Jato corruption scandal.
Among the large construction works expected to be carried out by Brazilian firms – alone or in partnerships with foreign groups – are those related to FPSOs, tankers, refineries and fertilizer plants.
But concerns remain about compliance, potential labor bottlenecks, delivery times, and high local costs compared to Asian shipyards.
CAPEX
Petrobras' 2024-28 business plan foresees investments of US$102bn, 31% more than in the previous five-year period. The strong growth is in line with the Lula administration’s view of Petrobras as an agent for socio-economic development.
The higher capex is intended to support the energy transition investment plan, the exploration of new oil and gas frontiers, and the expansion and modernization of the company's refining park. The ambitious plan imposes challenges such as new efforts to obtain financing and maintaining Petrobras’ financial health.
The strategy could also have potential effects on the dividends for its shareholders – including the federal government – which could have an impact on the share price.
In a recent interview with a local broadcaster, Lula described financial markets as "a voracious dinosaur that wants everything for itself and nothing for the people.”
He added: "What I think is that Petrobras needs to take the following into account. [It] is not just a company that thinks about the shareholders who invest in it – because Petrobras has to think about the investment and the 200 million Brazilians who are the true owners of the company."
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