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Against All Odds: The Return Of An Oil Giant


Only a year ago, the Brazilian state company Petrobras seemed a complete basket case, an exemplary case of how not to lead a company that is rich in both resources and know-how. Today, however, the Brazilian state giant has demonstrated unhoped-for prowess in its quest of ridding itself of the disagreeable label of being the most indebted oil & gas company in the world.

Brazil is still susceptible to sporadic political earthquakes, emerging from revelations of which the Operation Car Wash has still not exhausted itself – like the sudden death of Supreme Court Justice Teori Zavascki in a plane crash this January – and it will take Petrobras, having played a major role in previously existing kickback schemes, write-downs and money laundering, a good deal of time to clean itself of the acquired bad optics. Still, Petrobras, it seems, has bent to task.

The new management of Petrobras decided that a healthy combination of austerity and liberalization is just about what the company needs. Bolstered by higher oil prices, which led to Petrobras’ debt burden easing from $122 billion in 2015 to $116 billion by 2016, it has slashed capital expenditure and investment by 25 percent for the 2017-2021 Business Plan, voiced its intent of laying off 20 percent of its workforce and divesting almost $20 billion, concentrating on selling stakes in its Brazilian subsidiaries, as well as assets which are outside Brazil in adjacent countries.

Petrobras has also identified another income-gathering instrument, opening up the tightly controlled pre-salt oil sector to foreign investment. This, in itself, is a groundbreaking development for it carries on where the Lula government has closed the books in 2006.

In the early 2000s, Brazil was taking the last steps of opening up its oil & gas sector to international investors. Foreign majors could lay claim to hydrocarbon concessions as Petrobras’ exploration and production monopoly was called off in 1997, what is more Petrobras saw its exclusive rights on importing oil products scrapped and fuel prices were no longer regulated by the government.

Yet then “Tupi” happened, or as it is known today, the Lula oil field was discovered, the largest oil discovery in 30 years in the Western hemisphere (at that time). Soon followed by other pre-salt oil fields, containing light and sweet crude, among others the Libra, Iracema, Carioca and Guará fields.

The 7.8 BBbl Libra field turned out even bigger than the 7.5 BBbl Lula, thus bettering the record. It was in this context that in 2006 the Lula government decided to exempt pre-salt fields from the hydrocarbon law and affix them under Petrobras’ authority.

Following a ten-year period during which Petrobras was obligated to operate in at least 30 percent of every single pre-salt block in Brazil’s offshore, President Michel Temer signed into law a new regulatory framework in November 2016 which relieves Petrobras from doing so mandatorily.

The new concession allocation system is still far away from what one might call liberal. During new licensing rounds – another presalt one was expected to take place sometime in 2017 – Petrobras will be offered rights to operate the blocks it wishes, in case Petrobras does not express interest in a given block, its owner will be determined by means of a regular auctioning procedure.

It remains to be seen whether majors would be up for blocks which were not cherrypicked by Petrobras, however, the new legislation should provide the Brazilian state giant with more space to introduce them into already existing projects.

Notice the usage of the word „should”. As one could suspect, Brazil’s trade unions are anything but satisfied with the sweeping transformations Petrobras is going through. Hence, as soon as they saw an opening, they went all out on it.

When Petrobras sold in November 2016 its 66 percent stake in the 1 BBbl Carcara field to the Norwegian Statoil for $2.5 billion, the National Federation of Oil Workers filed a lawsuit against Petrobras, stating that there ought to have been an open-bidding process and managed to suspend the deal.

Similarly, when Petrobras initiated the selling of its gas pipeline unit to a group of Canadian investors for $5.2 billion, trade unions lobbied for a thorough review of the deal and the Sergipe federal court blocked the transactions, alleging discrepancies in the transaction.

With the ouster of the trade union-affiliated Workers Party whose links to the previous management of Petrobras went beyond the traditional definition of a constructive partnership, one might anticipate more roadblocks down the road. For instance, as Petrobras is offering seven shallow-water offshore fields for sale, they can easily fall prey to the „Petroleum is ours!” (Petroleum é nosso) protest movement.