Petrobras has rebounded, but reforms will continue, president says

Dec. 5, 2016
Ambitious reforms across state-owned Petroleo Brasileiro SA (Petrobras) have improved the operations and the outlook there since the company became embroiled in a bribery scandal in 2007, said its president and chief executive officer.

Ambitious reforms across state-owned Petroleo Brasileiro SA (Petrobras) have improved the operations and the outlook there since the company became embroiled in a bribery scandal in 2007, said its president and chief executive officer. Petrobras officials and employees, however, will have to continue working hard if they expect to meet more ambitious goals set by the company's leaders, Pedro Parente said.

"Our efforts have been very well received by the markets," Parente said in remarks at the Woodrow Wilson International Center for Scholars on Nov. 16. "They believe we have a good plan because we involved more than 100 people from the company in each operation. Now, we have to execute it-not a simple task with a state-owned company. We know that."

Petrobras's vision is to be an integrated energy company focused on oil and gas that evolves with society, creating high value, with a high technical capability, Parente said. "We expect to be focused on oil and gas for the next 5 years, but it's important that we consider renewables."

He said, "We're a company that's supposed to generate profits. By no means do we see a contradiction between fulfilling our legal obligations and the reasons for which the company was created, and profits. Actually, it's much better that we do have profits to help create a sustainable situation in which we can fulfill our legal obligations in the years ahead."

Parente, who was instrumental in dealing with Brazil's energy crisis in 2001 when he was President Henrique Cardoso's chief of staff, was called back into public service in 2016 by President Michel Temer to lead Petrobras. The company now has a new business-oriented strategic plan, with a talented workforce. It also seeks to move beyond policy issues which have hampered its success in the past. And it will try to accomplish all this in the wake not only of the 2007 Lava Joto, or Car Wash, bribery scandal, but also dramatically altered global oil and gas markets.

Even without the crude oil price plunge that began in 2014, Petrobras would have had to adjust its operations, although not necessarily as dramatically as when the company's main revenue was reduced by more than half when prices whipsawed from more than $100/bbl down to the $20-30/bbl range before settling at $40-50/bbl, Parente said.

'A kind of tsunami'

This followed the Lava Joto scandal, which he said involved a small number of executives who violated company rules to benefit themselves, contractors, and a number of corrupt politicians. "It's important to stress that Petrobras was a victim of this gang that was formed. It was kind of a tsunami for the company, a really bad moment according to some reports I received from people who were there."

Brazilian federal police arrested 13 people on charges of corruption in 2007 in a scheme involving Petrobras managers who took bribes in exchange for privileged information enabling private firms to win public partnership tenders with the state firm (OGJ Online, July 12, 2007). The company took a $2.1-billion write-down from improper payments identified in the federal police's anticorruption investigation (OGJ Online, Apr. 23, 2015).

"There was a fiscal imbalance in the federal government as well that is affecting reforms. I believe it will pass," Parente said. "We now have a ceiling in expenditures that has been approved in the lower house and now is being discussed in the senate. The government expects to have it approved before yearend."

Petrobras also had a higher-than-desirable debt level stemming not only from Lava Joto, but also other investments that were costlier than anticipated or took so long that they did not produce financial returns, he said. There were high levels of debt, with concentrated maturities, and increasing costs associated with debt renewals.

The company also had to deal with local content requirements that Parente said are too onerous. "I really think Petrobras can help a lot, taking into account the scale of its investments," he said. "But it needs to be a different local content policy than what exists now. It's heavily based on the sticks, not the carrots, because it's so detailed. It needs to be improved."

Consequently, Petrobras has launched a 5-year plan with two metrics instead of one, he said. In the realm of safety, this involves a 36% reduction of the total recordable injury frequency rate (TRIFR) from 2.2 in 2015 to 1.4 in 2018. Financially, it involves reducing leverage, or the ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), from 5.3 in 2015 to 2.5 in 2018.

"We plan to reach our financial target with a good safety position in the company," Parente said. "We have been improving our safety record already year-by-year, but we have not yet closed the gap between ourselves and the industry. We will be within the average, and then aim toward moving into the first quartile. Financially, the 2.5 number was a target for the company already, but for 2020."

He noted that Petrobras's four main drivers for reaching these targets are:

• A new pricing policy, taking into consideration the import parity price and market share analysis. "The price at the refinery will be from the addition of the IPP, margin and risk, and tax in a volatile commodity environment where we do not have any influence on prices," said Parente.

• Reduced capital expenditures without affecting its production profile dramatically. Production in 2017 will rely on investments that have been made already-including a high completion rate of Petrobras-owned floating production, storage, and offloading facilities, and efficiency gains and project optimizations which reduced required investments, leading to high well productivity and reduced well construction times, Parente said. "We forecast a 25% reduction in capex from $98.4 billion in the 5 years ending in 2019 to $74.1 billion in the 5 years ending in 2021. It has raised questions because at the same time we've talked about reducing our capex, we kept the forecast for our oil production," he said.

• Lower manageable operating costs. "We are projecting an 18% reduction in the 2071-21 period from $153 billion to $126 billion. Much of these involve personnel," Parente said. "We are finishing the second round of voluntary leaves. The two programs reduced our work force by about 20,000 people. When you consider contractors as well as our own employees, we now have around 200,000 people at Petrobras.

• Partnerships and divestments. Partnerships provide the benefits of risk-sharing, lower capital outlays, an increased capacity to invest along the value chain, technological exchange, and strengthening of corporate governance, Parente said. The partnerships and divestments program at Petrobras leverages third-party investments that might surpass $40 billion in the next 10 years, he said. "We have a two-year target of $15.1 billion of transactions to be completed by the end of this year," he said. "In addition, we are forecasting $19.5 billion of transactions for the 2017-18 period. It's very good when we have partners with very high standards of governance because it helps us improve our own standards and raise the bar. This will be very important when we discuss downstream partnerships."

The company's new management system will be an important feature to help it reach all these targets, Petrobras's president said. "Our strategic plan has 21 strategies and 72 initiatives that we will cascade first into the 5-year period, then into each year, and finally into all of the areas," he said. We are going to use methodologies like a zero-based budget to introduce a new way to manage the company."

Most important will be reviving Petrobras's tradition of innovation and technology more fully, Parente said. "We have been recognized and received prizes in numerous international conferences for our technology. It makes us feel very confident that the company as a whole will overcome this very bad period we had, and make Petrobras management and employees and Brazilians as a whole feel very proud of the company again," he said.

About the Author

Nick Snow

NICK SNOW covered oil and gas in Washington for more than 30 years. He worked in several capacities for The Oil Daily and was founding editor of Petroleum Finance Week before joining OGJ as its Washington correspondent in September 2005 and becoming its full-time Washington editor in October 2007. He retired from OGJ in January 2020.