PETROBRAS – the wounded giant seeks a way forward

Over a period of the last three years Petrobras, the Brazilian state-run oil company has reached both the unprecedented heights of success and some terrible blows. Corruption scandals, government interference in management and low oil prices have come together to form the perfect storm that has severely wounded the oil giant as well as the supply chain which both supports and depends on it.

Oslo, June 2011 - picture a crowded room at the Nor-Shipping Conference with people listening attentively to Mr. Sergio Gabrielli, who at the time was CEO of Petrobras. Not long before, in 2008, Petrobras had announced to the world the discovery of major reserves of oil and gas offshore Brazil, in ultra-deep waters and underneath a thick layer of salt; the so called “pre-salt”. The discoveries were so large that it was expected that it would put Brazil in the group of oil exporting countries.

In order to explore the pre-salt areas, it was recognized that Petrobras needed to contract a massive number of rigs, platforms, support vessels, specialized offshore workers and more. And up there at the centre stage in 2011 was Mr. Gabrielli on a road-show inviting the Norwegian companies to come to Brazil. The demand was unprecedented in the offshore market. The Norwegian offshore community took good note of this. Many of the players who had not yet made the move, arrived in Brazil shortly afterwards.

Another symbol of this era was the Sete Brasil Project that involved the construction of 28 state of the art drilling ships at an estimated cost of around USD 1 billion each, intended to be chartered to Petrobras.
The fact was that demand was higher than the current worldwide offer. The international offshore market was excited and eager to learn how to comply with local content rules and enter the Brazilian market. The oil price had been stable for some time at comfortable levels and it seemed that the future had finally arrived to the “country of the future”.
But things changed and now only a few years later the picture looks dramatically different.

What went wrong?

Undoubtedly the most dramatic development came in 2014 when the results of a huge investigation campaign called “Operation Carwash”, which had been carried out secretly by the Federal Prosecution Office, became public and revealed a major bribery and political kickback scheme involving Petrobras’ executive directors and high representatives of the party in power – the Workers’ Party (Partido dos Trabalhadores, “PT”). Private shareholders, contractors and the Brazilian public in general have had to face the fact that Petrobras had been a part of the Government plan to win elections and perpetuate power.

The projects contaminated by corruption were numerous and the sums were astronomic. Pre-salt exploration, new refineries, petrochemical complexes – everything was involved – and in all of these business areas Petrobras entered into multimillion dollar contracts with construction companies, offshore contractors and other service providers.

Quite apart from this in order to implement a very ambitious investment plan, Petrobras needed substantial finance with the consequence that it increased its debt exposure considerably. In addition, as the controlling shareholder, the Government consistently used Petrobras to generate positive numbers and control inflation – Petrobras was for instance obliged to sell gasoline below market prices for substantial periods of time.

To complete the perfect storm, from mid-2014 oil prices started to fall all the way to below USD 30 per barrel. This hit Petrobras at the worst possible moment and its value decreased dramatically. Petrobras’ troubles have had a direct knock-on effect on the suppliers: Contracts have been terminated and orders were cancelled. Penalties started to be applied and the financing for the Sete Brasil Project was never closed.

The Petrobras crisis crossed Brazilian borders when a US judge ordered Petrobras to face class-action litigation by investors seeking to recoup billions of dollars in losses stemming from the Carwash scandal.

In fact, the Carwash operation showed that the controlling shareholder had been using the company to serve its own interests. A credibility crisis began to emerge. In view of the chaotic scenario, a new administration took office in Petrobras in February 2015 and accounting was revised to allow signature by external auditors.

The impeachment of Brazil’s president may improve the fortunes of Petrobras with the appointment of Mr. Pedro Parente as the new CEO, very well regarded by the market. However, few will relish the challenge given that Petrobras is the most indebted oil company in the world and the continuing low oil prices make that debt burden increasingly difficult to manage. The company is also seeking to sell off assets but appears to be currently falling short of the USD 15.1 billion in asset sales that it is targeting in 2015 and 2016.

In the meantime Petrobras’ technical teams continue to work hard in the hope that better days will come. Petrobras is focusing on cutting costs and increasing production. New FPSOs, such as the “Cidade de Maricá”, are starting operations. A new tender for the Libra field early this year is also a part of the positive agenda.

In the short and medium term, some opportunities may be created for other oil companies to step up and acquire Petrobras’ assets given that it is likely that the law that established the sole operatorship by Petrobras in the pre-salt areas will be changed to allow other oil companies to operate. Also some dominant players in the offshore sector involved in the Carwash scandal will have to shrink and sell assets, generating opportunities for other market players as well.

In the longer run, provided that Petrobras’ new management is capable of restructuring the company, focusing on upstream high value assets, and if the Government adopts a healthier control of the company, Petrobras can rise again. More efficient than before and hopefully in a less corrupt environment and within a more equal and balanced market.

Brazil is and always will be a country where only long term bets pay off. Resilience and long term commitment may lead to a good position when the market picks up again. 

Written by Daniela Ribeiro Davila, Vieira Rezende