Petrobras: the PT strikes again

“They learned nothing, they forgot nothing.” This single phrase would be enough to summarize the management of Petrobras in PT’s new government. Spoken by the French politician Charles Talleyrand after the restoration of the Bourbon dynasty to the throne, the phrase fits perfectly with the choices of the newly inaugurated board of the state-owned oil company. Almost identical to the period from 2003 to 2016: maintaining artificially low prices, grandiose investment plans, and political staffing. The same recipe that, in the recent past, led Brazil’s largest company to disaster.

The only difference is the corruption cases uncovered by the Operation Car Wash (Operação Lava Jato). So far, none have been registered.

Petrobras in Lula’s crosshairs

During the 2022 election campaign, Petrobras was one of the favorite targets of then-candidate Luiz Inácio Lula da Silva. Any occasion was valid to attack the policy of international price parity for fuels (PPI), the sale of less profitable assets, and the distribution of dividends.

After being elected, Lula appointed former senator Jean Paul Prates (RN-PT) as the president of Petrobras. Immediately, the old PT playbook began to be applied to the state-owned company. The PPI was shelved, and Petrobras went back to selling fuels in the Brazilian market at a lower price than the international market. Obviously, this resulted in losses on their balance sheet.

“The last time this happened, between 2010 and 2014, Petrobras accumulated a deficit of about R$ 240 billion,” explains Pedro Rodrigues, director of the Brazilian Center for Infrastructure (CBIE). At the time, then-President Dilma Rousseff tried to keep inflation artificially low by forcing Petrobras to reduce fuel prices. It worked until the election, and Lula’s successor secured a new term. But the state company’s accounts were devastated.

When Dilma entered the Planalto, Petrobras was the seventh-largest company on the planet. By the end of her presidency, the oil company had become the most indebted in the world. Share prices plummeted, dropping from R$ 40 to R$ 6. One of the most rapid and intense value destructions in Brazil’s economic history.

According to Rodrigues, this time the negative outcome will take a bit longer to appear, as the crude oil price is lower than before, as is the dollar exchange rate. “But it’s inevitable,” emphasizes the CBIE director. “There’s no escaping the math. Petrobras has become the only oil company in the world that hopes oil prices don’t rise. Every additional dollar doesn’t become profit, as is the case with any other company in the sector, but a loss.”

Calculations by the Brazilian Association of Fuel Importers (Abicom) indicate that Petrobras is currently pricing 20% below the international rate for diesel and 21% for gasoline.

“Diesel should increase by R$ 0.90 per liter to align with the rest of the world,” explains Sergio Araújo, executive president of Abicom. “Otherwise, it’s a R$ 0.90 loss per liter that Petrobras has to bear. Multiplied by billions of liters sold per year, this turns into a huge deficit. It’s a relatively small gain for the consumer’s pocket, but it’s a massive hit to Petrobras. And to all of Brazil.”

Negative results began to show in the second quarter’s financial statement of the year, the first under the management of the board chosen by Jean Paul Prates. Net profit plummeted by 47%. Debt increased by 8.2%. Dividend payouts collapsed by 83%. Still, Prates stated that the performance was “consistent” and “profitability was sustained in a sustainable manner, with full attention to people”.

It’s impossible to accurately estimate the size of the loss that the state-owned company will face in the coming months, as the company accounts for about 80% of all Brazilian refining capacity. This complicates a more precise analysis since there are many regional variables involved depending on the refinery’s location. In the case of imports, this calculation is easier. However, they account for only 20% of Brazilian consumption. Experts have made calculations suggesting that the impact should be around R$ 14 billion per quarter.

Predatory competition

Artificially maintaining low prices also causes collateral damage throughout the national economy. For the state-owned company’s private competitors, competition becomes impossible. Petrobras’ predatory actions end up forcing private extraction and refining companies to halt their production, posing a risk of undersupply to the domestic market.

“In Brazil, about 20% of fuel production comes from private companies,” says Evaristo Pinheiro, president of Refina Brasil, an association that brings together private refineries. “If Petrobras continues to operate in this manner, keeping prices so low, the activity of these plants will become uneconomical. Unlike the state-owned company, they cannot bear an operational loss. Hence, it’s very likely that we’ll face supply problems in September.”

Not coincidentally, Prates ordered Petrobras plants to intensify fuel refining activities, reaching up to 93% of their productive capacity, putting its infrastructure under intense stress.

“If this policy of artificially low prices continues, there’s a risk of the closure of private refineries in Brazil,” Pinheiro explains. “Leading to the loss of thousands of jobs and the exit of foreign investments, as well as reduced competition in the sector. Petrobras would regain its monopoly. For President Lula, competing with Petrobras is seen as a bad thing. But it isn’t. It’s good for the entire Brazilian economy. Killing private refining in Brazil means harming the country’s future growth.”

The Return of Extravagance

If by maintaining prices lower than the market Petrobras is losing billions of reais, with the return of the grandiose investment plans, it will spend billions more. The government wants more investments from the state company, following what was done in past PT administrations. Even if this results in less remuneration for shareholders, among which the government itself holds the majority of shares. Therefore, last week, Petrobras announced a revision of its dividend policy, reducing profit distribution from 60% to 45% of free cash flow.

Lula’s electoral demands have been met. However, the government will soon realize that it was the primary beneficiary of Petrobras’ dividends, being the company’s largest shareholder. It was thanks to this money that the then Minister of Economy, Paulo Guedes, managed to ensure that public accounts remained in the black during the pandemic years, even with the massive spending on emergency aid.

It might seem surprising, but the market reacted relatively well to the change in dividend policy. Petrobras’ shares remained around R$ 33. “It was bad, but investors expected much worse,” explained Rodrigues. “The same happened when the fiscal framework was approved: expectations for this government are so low that when a negative, but not disastrous, decision comes out, the market goes up.”

Petrobras’ own strategic investment plan for the period from 2023 to 2027 foresees an increase from $72 billion to $100 billion in investments. However, it’s still less than the $236.5 billion invested during Graça Foster’s management from 2012 to 2016. In other words, there’s still room to spend more.

Much of this money should go to the construction of new refineries. Another déjà vu from Petrobras’ recent past, with tragic outcomes.

The Abreu e Lima Refinery, in Pernambuco, which was supposed to cost R$ 12 billion, exceeded R$ 100 billion and became the most expensive refinery in the world. An international embarrassment for Petrobras and Brazil. The construction, which began in 2003, was never completed. It was supposed to be a joint venture with Venezuela, aiming to refine heavier Venezuelan oil. In the end, Caracas didn’t invest a single cent. The Lava Jato operation discovered numerous irregularities and corruption cases involving the plant. In the previous administration, Petrobras tried to sell the infrastructure, but it wasn’t successful. The new board removed the refinery from the list of assets to be sold and wants to invest more money.

Not to mention the poor use of Petrobras’ funds abroad, emblematically represented by the Pasadena refinery (United States). A deal that cost the company nearly R$ 2 billion for the purchase of an old plant, useless for the company’s production strategy.

It was also because of these reckless decisions that Petrobras accumulated a monstrous debt, exceeding R$ 492 billion. After six years of diametrically opposite management, this amount decreased to R$ 280 billion.

“Even if Brazil really needs to increase its refining capacity to meet domestic demand, Petrobras does not have a good investment management track record during the PT governments,” says Rodrigues. “Moreover, it doesn’t make sense for Petrobras to invest in an already old technology, like refineries. It should focus on what it does best and ensures a higher return: deep-water oil extraction. In this sector, it is already a world leader and could improve even more.”

If Petrobras returns to investing in refineries, it will be violating an agreement signed in 2019 with the Administrative Council for Economic Defense (Cade) to reduce its dominant position in the market. The state-owned company had committed to selling 50% of its refining capacity to private operators.

The only place where Petrobras is truly held accountable is not even in Brazil. It’s in a New York court, in the United States. Due to the havoc in the state-owned company’s accounts caused by poor management and corruption scandals, Petrobras was forced to pay more than R$ 3.6 billion in fines to close a criminal investigation. And another approximately R$ 15 billion to American investors who were harmed. This was Brazilian money wasted due to the responsibility of boards appointed by the PT in the past.

Hidden Cronyism

The triad of the PT’s management of Petrobras could only be complete with the return of cronyism. The very appointment of former Senator Prates at the helm of the state company occurred in violation of the State Companies Law and the company’s own bylaws, which prohibits politicians and party leaders for 36 months after the end of their term. Prates was a senator until 2023.

Three other members of the Petrobras Board of Directors were appointed despite being deemed ineligible. They are: Pietro Mendes, Secretary of Oil, Natural Gas, and Biofuels; Efrain Cruz, Executive Secretary of the Ministry of Mines and Energy (MME); and Sergio Rezende, a leader of the PSB.

All internal governance bodies of the state-owned company vetoed these names. The government forcefully overruled using its majority in the shareholders’ assembly to approve them. Unsatisfied, they appointed Mendes as the Chairman of the Board. Many observers expect him and Prates to be the conduits for the government’s wishes in managing Petrobras, which will once again be used as a tool for fiscal, social, and political policies, to the detriment of its business function of extracting oil.

Another clear rule violation was the appointment of Sergio Caetano Leite as the CFO of the state company. In the past, he and Prates were partners at Expetro, a consultancy linked to the oil sector. Leite also served as Deputy Secretary of the Northeast Consortium while his colleague was a senator for Rio Grande do Norte. And his wife, Fernanda Hauptli Caetano Leite, was a parliamentary advisor to Prates in the Senate. For Petrobras’ Digital Transformation and Innovation, Prates appointed Carlos Augusto Barreto. In 1985, the two studied in the same class at Colégio São Bento — one of Rio de Janeiro’s most traditional schools.

Cronyism on the Board is Just the Tip of the Iceberg

The manipulation of the Board is just the beginning. The very collegiate body requested that Petrobras evaluate the hiring of advisors for each of the 11 board member positions, with salaries of up to R$ 90,000. Positions and salaries would be chosen by the board members themselves.

“Petrobras could become a gigantic job warehouse again,” says Rodrigues. “This political cronyism will be difficult to undo. It will have repercussions in the coming years.”

Indeed, in the management of Petrobras, the PT [Worker’s Party] has forgotten nothing and learned nothing. Just like the Bourbons two centuries ago. The European family repeated the same mistakes and lost the throne in just a few years. Permanently. In the case of Petrobras, Brazil will once again face the bitter consequences of management errors seen in the past. It remains to be seen if the outcome will be the same.