Petrobras and Brazil's Industry
Petrobras Unlikely to Meet Projections
November 26, 2014
Main Contributors: Tom Jones and Omar Mashnuk
The economic policies implemented by Rouseff’s government during her tenure have had an adverse affect on many industries in Brazil. One of the hardest hit has been the oil industry, headed by Petróleo Brasileiro S.A (Petrobras). Petrobras, a semi-public corporation, which the Brazilian government owns 54% of, has declined rapidly in the past five years. In the past month, its stock price has plummeted by 35%, and it has become embroiled in a corruption scandal, reaching deep into the ranks of both the company and the ruling Workers Party. Petrobras’s debt has also risen 81% over the past two years as it struggles to find equity to finance its operations.
This lackluster performance, the systemic corruption amongst the company’s executives and Rouseff’s victory in the recent presidential elections have all caused a decrease in investor confidence, fuelling the downward spiral taken by the company’s stocks. Investors displayed their displeasure further when it was recently revealed through a third quarter report, delayed by the ongoing corruption investigations, that the company would not be able hit its oil production targets for 2014.
However, the systemic corruption is not the main reason for Petrobras’ decline. The mismanagement of the company by its government owners and its use as a driver for fiscal and industrial policy has been the main contributor. Petrobras must buy and hire from a local oil services provider, and was forced to build refineries in the poor northeast of the country, despite the regions unfavourable conditions. Furthermore, oil prices have been capped since 2006 to combat inflation, but since oil production has stagnated at 2m barrels a day, Petrobras has been unable to meet domestic demand and has been forced to import expensive petrol to then sell at a loss.
This has put Rouseff in a bind however, as she cannot risk allowing domestic oil prices to rise and match international prices, as it will alienate the poor within her country, who make up most of her supporters. However, Rouseff’s government has promised changes and future economic growth, especially in the oil industry.
Petrobras’s goals for the near future hope to change the downward trend in their stocks. Theodore Helms, executive manager of investor relations at Petrobras, claims that Petrobras is finishing a cycle of refinery expansion and modernization. With this expansion complete Petrobras’s refineries will be more environmentally friendly and more capable to meet rising domestic fuel demand. In 2013 Petrobras was producing 1.93 million barrels per day (bpd), with a goal of 3.2 million bpd in 2018. As of September, 2014, 2.23 million bpd were being produced by Petrobras, a record high for oil production in Brazil. The increase of 0.3 million bpd is the result of increased production from platforms in the Campos and Santos basin. Another contributor to this increase has been the exploitation of the pre-salt oil fields off the coast of Rio de Janeiro. The pre-salt fields are the fastest growing producer of oil for Petrobras producing 618,000 bpd with twenty-five wells after only eight years of it’s discovery in 2006. In comparison it took twenty-one years and four-hundred eleven wells to reach this same level in the Campos Basin. As of September the pre-salt fields account for 27.7% of Petrobras’s oil production and is expected to reach 52% of the company’s production by 2018. With continuing discoveries of oil and gas, the expansion in the pre-salt fields and convergence to international prices, Petrobras can improve their financial situation.
The current success of the pre-salt fields are meaningless, however, if the economic policies pursued by Rouseff are not altered. Continuing to use Petrobras as an engine for macroeconomic policy will further stunt the growth of the company. Furthermore, as the corruption scandal continues to unfold, it will create lasting damage to the image of the company, further reducing investor confidence. While oil production may continue to increase in the pre-salt fields, unless the systemic issues affecting Petrobras are dealt with the long - term projections for the company will continue to be grim.
