A spat over fuel prices last month saw Brazil’s President Jair Bolsonaro replace the CEO of national oil company Petrobras Roberto Castello Branco, who is popular among investors with former Defense Minister and army general Joaquim Silva e Luna. Brazil’s federal government was able to exercise such a monumental power because it is the majority owner of Petrobras. The Brazilian state directly owns 28.67% of Petrobras with another 8.08% held by the Latin American country’s national development bank, giving a total controlling interest of 36.75%. Bolsonaro’s decision roiled investors triggering a sharp sell-off of Petrobras stock which plunged by over 20% while the broader Brazilian bourse, as measured by IBOVESPA index which measures the performance of the top 70 stocks in Latin America’s largest economy, lost over 5%. This event reawakened investor fears of a return to resource nationalism, government interference in Brazil’s energy sector and heavy-handed intervention in the operations of Petrobras which in the past precipitated institutionalized malfeasance as well as corruption. Such affairs during the presidencies of Lula and Rousseff destroyed billions of dollars of shareholder value and saw Petrobras become ensnared in what was described as the biggest corruption scandal in Brazil’s history and potentially even the world. Those happenings along with a debt engorged balance sheet almost destroyed Brazil’s national oil company. The fallout from the scandal, known as Lava Jato (Car Wash), flung Brazil into a deep recession where annual gross domestic product shrank by over 3% during 2015 and 2016, making it the worst on record. For those reasons, it is easy to understand how Bolsonaro’s actions triggered such a tremendous wave of fear among investors. While there is still significant risk attached to Petrobras and its operations the outlook is not as dire as the market and some analysts perceive.
Petrobras reported a solid 2020 despite the severe impact of the global COVID-19 pandemic on energy demand and crude oil prices. The national oil company announced record full year oil production of 2.28 million barrels per day and hit a new high for total hydrocarbon output of 2.84 million barrels of oil equivalent daily. This is an impressive milestone at a time when the energy sector was under considerable pressure because of sharply weaker crude oil prices, which forced integrated energy majors slash spending leading to a marked reduction in production. Petrobras’ crude oil exports for 2020 were an outstanding 33% higher than 2019, despite the pandemic and a material reduction in oil demand across the world. This was primarily driven by unwavering demand from China for petroleum, especially sweet light and medium grade crude varieties, creating greater demand for Petrobras’ sweet medium crude extracted from its offshore pre-salt oilfield. Notably, Brazil’s national oil company opened 2021 with record oil exports as China’s insatiable demand kept growing.
Importantly, under Branco’s stewardship Brazil’s national oil company was able to substantially reduce the massive pile of debt it had built up under previous management. By the end of 2020 Petrobras had reduced its gross debt to $75.5 billion, which was a healthy 13% decrease compared to a year earlier. The integrated energy major intends to lower gross debt even further to less than $60 million between 2023 and 2025. The pandemic, March 2020 oil price collapse and heightened uncertainty around crude oil prices saw Petrobras cut capital expenditures while renewing its focus on developing petroleum projects with a breakeven price of less than $35 per barrel.
While Bolsonaro’s meddling in Petrobras’ affairs has startled investors and financial markets it is unlikely that the new CEO will decide on any material changes in strategy. This is especially the case when it is considered that a leaner nimbler Petrobras was unlocking considerable value not only for investors but for the Brazilian state. The integrated energy major is the key driver of Brazil’s monumental offshore oil boom. Brazil’s oil production was steadily growing despite the pandemic and its impact on global energy consumption. Nevertheless, February 2021 oil output (Portuguese) fell 6% year over year to 3.55 million barrels daily, primarily because Petrobras had shuttered some operations for maintenance.
Despite Bolsonaro’s decision, outgoing Petrobras CEO Branco still hiked gasoline and diesel prices at the refinery gate in response to higher international oil prices. While the latest development has alarmed investors there are signs that incoming CEO Silva e Luna will take a balanced approach. It is speculated that while he will seek to blunt the impact of higher fuel prices on Brazil’s delicate economy, which according to the IMF shrank by 5.8% last year, he will keep domestic fuel prices at parity with international energy prices. This is an acknowledgement of Petrobras’ need to remain profitable and not be once again looted by the federal government to support its financial goals to the detriment of shareholders. It is estimated by analysts that Petrobras lost anywhere up to $40 billion between 2011 and 2014 when the company was forced to sell imported gasoline and diesel at a loss in Brazil by the government of Dilma Rousseff. In the wake of the Car Wash scandal Petrobras implemented an imported oil product parity pricing policy which while being refined and made more flexible since then still applies. While it has been modified to make it more flexible since being implemented the policy still applies.
Brasilia, even after the latest events appears focused on completing further reforms of Brazil’s hydrocarbon sector and the privatization of other state-owned assets. Those policies are key to attracting the additional investment required to sustain Brazil’s increasingly economic important oil boom and drive greater foreign direct investment so the economy can recover from the fallout caused by the pandemic. As part of those reforms, Petrobras is supposedly ending its monopolies in refining and natural gas production. That saw the integrated energy major plan to sell eight of its refineries over the course of 2021, but two sales have been delayed despite the requirement to complete the transactions by the end of 2021. it is difficult to see any material changes being made to those plans because of Petrobras’ economic importance, even after Bolsonaro’s replacement of Branco indicating that greater state intervention could be on the cards. After the event, Brazil’s president was quick to point out that the privatization of state-run electric utility Eletrobras was still proceeding, hoping to bolster his pro-business non-interventionist credentials. Petrobras five-year strategy focused on selling non-core higher-cost operations including shallow water and onshore oil assets, opening Brazil’s natural gas industry to private players and ending its refining monopoly is important to unlock value for not only private investors but Brazil’s government. There is every indication that despite Bolsonaro’s decision indicating that government intervention in Brazil’s energy sector is an ever-present threat, the fallout will not be as severe as markets and analysts initially believed.