Petrobras: fuelling the future or stuck in the past? | FT Film

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We're looking at one of the most important oil companies in the world, one of the most important companies in Brazil, that has, over the years, developed a fantastic technology for deep sea oil drilling.

Petrobras has had lots of superlatives over the years. It was at one point the world's most indebted oil company. A few years ago it was the world's biggest corporate dividend payer. It was also at the centre of the world's largest foreign bribery case.

The question now is, in what direction is it going and at what cost, both for investors and Brazilian society?

Petrobras has huge importance to the Brazilian economy. It's the largest tax payer. Crude oil is now Brazil's largest export, and a lot of that comes from Petrobras, so it's a big source of foreign currency earnings. It also has this multiplier effect in the economy by helping to create jobs in other sectors.

It employs hundreds of thousands of people. It's traded on stock markets all over the world. It's got a market cap of, I think, about $70bn. It was well over $100bn just a few years ago.

Brazil is about the ninth largest oil producing nation in the world, and the government wants it to become the fourth biggest by the end of the decade. And Petrobras is central to those ambitions.

It is a massive, successful oil company. It delivers huge dividends to its shareholders, one of which is the government. But both sides of the argument would say that Petrobras could be contributing a lot more to the Brazilian economy. It's just that they would disagree dramatically on how it should do that by becoming more focused and more highly profitable, or by being more diverse and being a bigger driver of industrial development.

Under the previous government, led by right-winger Jair Bolsonaro, they sold off lots of Petrobras assets, and they tried to get it to slim down and really focus on its core of oil and gas exploration. Jair Bolsonaro even said that eventually they would be interested in privatising that. However, with the return of Lula, that is now completely off the table.

And so Petrobras is being asked to fulfil this role of a driver of economic expansion. But people have very strong recent living memory of it having gone badly wrong last time. It ended up with Lava Jato. It ended up with Petrobras being massively indebted, with having to cancel projects, with stuff being sold, with people just going out of work.

In the previous decade, Petrobras was at the centre of a huge political corruption scandal in Brazil called Lava Jato, or car wash, named after the investigation that uncovered it.

Petrobras was one of the big companies that was handing out huge contracts to construction companies. And the bribes were being skimmed off the top.

Essentially, you had a cartel of construction companies who were paying bribes to have contracts with Petrobras, and then politicians and high-ranking company executives were receiving kickbacks in exchange.

And it escalated and escalated. And they ended up putting big national business people in prison. The boss of Odebrecht, the huge construction company that operates across Brazil and all around Latin America and beyond, he had his head shaven and went to prison. This was the kind of thing that just never happened in Brazil. Big people could afford big, expensive lawyers and just never went to prison. And these people did.

Carwash had a high connection link with politics, all the way to President Lula.

They sent former and future President Lula to prison. He was implicated in the Lava Jato scandal. There was the question of a beachside property that he never actually occupied. Had he received this as part of this scandal or hadn't he? He was convicted. The conviction was overturned.

The carwash operation put Brazil and put Petrobras on the global spotlight. That was a pivotal moment in the recent history of Brazil. And think about the business context in Brazil. A lot of companies start implementing integrity and compliance programmes after carwash.

Petrobras itself had to implement a very strong compliance and integrity programme. They had to sign a deal with the DOJ. So there was a major, major repercussion.

The US Department of Justice got thoroughly involved, described this as the biggest international corruption case in history.

At the same time as Lava Jato, Petrobras became the most indebted oil company in the world. And critics said that was because it was stretching itself too far. It was investing in these kind of refinery projects and other areas that weren't going well, and that money was wasted. And at the same time, it was being pressured by the government to subsidise fuel prices, which cost it tens of billions of dollars.

During the government of Dilma Rousseff, who came in after the two big, successful periods of Lula, she really heavily intervened, and not just in Petrobras but across industry.

Petrobras had been used vociferously, really, as a government vehicle and had ratcheted up quite a meaningful amount of debt, at a time when oil prices collapsed, and we were mixed with all the headlines of corruption allegations, led to quite a substantial crisis of confidence as to whether Petrobras could actually refinance itself and continue to operate.

How do you balance those two missions? What is the mission of Petrobras for Brazil versus what is Petrobras should return to investors? I think that's a very fine kind of balancing act that we don't run the risk of just forgetting that Petrobras has private investors, that Petrobras competes globally.

The key pressure points that have existed is the downstream refining business that is more of a political vehicle to help smooth petrol prices at the pumps for the population, against the upstreaming element that is highly profitable with very strong margin.

And Petrobras is really good at what it does in its core activity. It's a really, really smart operator in very difficult ultra deep water conditions, expertise that it's built up over decades.

Petrobras was founded in the 1950s under President Getulio Vargas, and it was created under this slogan of 'petroleo e nosso,' which means the oil is ours. It was a nationalist rallying cry for Brazil to actually take advantage of its own natural resources.

It started from scratch, drilling for oil on land. And then when that didn't go so well, it started moving offshore in shallow waters. And then it got good at that, and then it developed expertise in deep waters because the Brazilian coastal shelf falls away quite quickly.

It really made progress offshore in areas like the Santos Basin. But the real game changer was in the early part of the 21st century, when it made these massive discoveries off the Coast of Rio de Janeiro and Sao Paulo, known as the Pre-Salt Region. And that's because the oil is deep below the ocean bed, beneath a thick layer of salt.

And Lula would go down there and get his hands dirty with oil. And you know, it would be a great moment when the first oil from these things came out.

It took a long time, lots of investments, but that's now proving really profitable for the company, and it's recognised as one of the world's best offshore oil operators.

So in 2015, we were still dealing with very high leverage, low oil prices, and debt that needed to substantially come down. And what we have seen since then has been a significant deleveraging programme that's taken place over the last decade.

During the boom of a few years ago, Petrobras was literally the biggest corporate dividend payer in the world, so the government is getting a lot of money from it. But as a tool of policy, all kinds of governments want Petrobras to do stuff that boosts the government's popularity.

So the current government, led by President Lula, wants to go back to Petrobras being a motor of economic activity.

So Recife is a regional capital in northeastern Brazil, but it's also kind of strategically placed. It has a huge natural harbour called Suape, which has been developed over the decades. And the northeast is highly supportive of Lula. He gets massive amounts of votes from up there, and partly because his governments have done a lot to develop the economy of the northeast, to have some kind of wealth creation, job creation.

It was in Recife that Petrobras decided to build this huge new refinery and was kind of not just a symbol, but an actual motor of regional regeneration.

So what's happening now is that the government is, again, right now investing in the refinery.

We know that the refining business is different from oil exploration and production because the margins used to be very thin. We made a calculation in 2018. The refining business produced an economic loss of $6bn to Petrobras.

There's the Port of Suape, which has attracted clusters of other businesses to it. And central among those things is the Atlántico Sul shipyard, which was an attempt, during the time of the first Lula government, to develop a shipbuilding industry in Brazil.

So it is going to be interesting to see to what extent this is something that they can do well and is worth investing. Some people may say, no, it's better not to invest. And this is what you're good at. Your core capability is not in building refineries. So there's a tension already there on this.

There's another tension that all oil companies are facing today, which is, what do you do as you think about energy transition?

We have to very rapidly make the transition. We cannot slowly make a transition up to 2035. We have to accelerate. Therefore, does not justify this argument that we have to continue exploring fossil fuels, even new exploration to do the translation. No.

For decades, Petrobras was fully state-owned. And then in the 1990s, it listed some of its shares on the stock market. Private investors own about two-thirds of Petrobras's equity, but the government still has 50 per cent plus 1 of all the voting rights, so it controls it. It decides who's the CEO and ultimately the direction of the company.

There's nothing too unusual about a company having multiple stakeholders. It's just that Petrobras has two different groups of shareholders whose interests may or may not be aligned. There may be a government in power that agrees with the minority shareholders that Petrobras should do what it does really well, and lots of it. Or you may have the minorities on the one hand with a majority shareholder that's saying, no, we want to do all this loss-making stuff as well. So it depends how long you're investing for and what your tolerance levels are.

The problem with Petrobras is management. Due to the political game, if you take the history of Petrobras over more than 70 years, the average mandate of a CEO is one year and a half. There's no company in the world managed to win with such a volatility.

There's a dilemma.

So Petrobras is making loads of money from the pre-salt operations, and that gives it a certain financial cushion, which means that a lot of investors aren't so worried about its investments in other areas and its increased capital expenditure budget. But at the same time, there are some who are very attentive to the fact that in the previous decade, when it went on this big expenditure splurge, not all of its projects went right either because they were plagued by corruption or because they ran over their budgets, and they weren't completed, and a lot of money was wasted.

I mean, this really is - and I don't think it's an exaggeration to say that this really is a pivotal moment for Petrobras because the thing is, it's been here before to use Petrobras as a driver of other bits of the economy. And the big question is, will it work this time around?