One of the most notable developments in the oil and gas industry in recent years has been its rebranding: what were once oil majors are now striving to be known as energy groups.
For Petrobras — for years Brazil’s largest company by revenue — such marketing ploys can wait. It says its focus is still on expanding oil production and exploration.
“We are not facing an identity crisis. We are an oil company,” says Rafael Chaves Santos, chief strategy officer of the state-controlled, Rio de Janeiro-based company.
“The demand will not disappear, and we don’t see other technology able to replace fossil fuels on a large scale [soon].”
It is a stance that puts Petrobras at odds with many of its global competitors, which are striving to diversify their production base amid predictions of an end to the dominance of oil as well growing environmental pressures.
Petrobras thinks that demand for oil will not decrease in the short and medium term, giving the company plenty of time to profit from its existing knowhow. While it has pledged to cut carbon emissions in its operations by 25 per cent by 2030, chief executive Roberto Castello Branco recently made clear that big investments in renewables are highly unlikely over the next five years.
But analysts believe that Petrobras’ approach owes a lot to domestic political and economic factors, and may ultimately work against it.
“There is a strategic myopia,” says Claudio Porto, founder of energy advisers Macroplan Consultancy. “The company seeks short-term profit but lacks medium- and long-term vision.”
Sharpening Petrobras’ profit motive is a large debt pile, racked up during years of subsidised oil prices under Brazil’s former leftwing Workers’ party administrations, together with heavy capital investments. It has one of the highest debt-to-equity ratios among energy companies — 1.81, compared with 0.38 for ExxonMobil and 0.69 for Shell.
Since 2016, the company’s focus has been on tackling its debt by cutting expenses and selling assets. It is in the process of ending its effective monopoly over refining in Brazil by selling half of its operations in the sector — a move that analysts say will increase competition.
However, the group has been hit hard this year by the coronavirus pandemic and the resulting drop in demand for oil. In the third quarter, its debt decreased less than expected, from US$91.2bn in the previous quarter to $79.5bn.
Debt is not the only problem that has preoccupied Petrobras’ management in recent years. Luiz Francisco Caetano, an analyst at investment firm Planner, points to the existential threat posed in the mid-2010s by Brazil’s Car Wash scandal, which implicated scores of politicians and businessmen — including Petrobras executives — in a contracts-for-kickbacks scheme. “Above all, it needed to survive,” Mr Caetano says.
While the company has been battling these difficulties, political pressure to move towards green energy has abated.
Latin America’s largest country has one of the world’s greenest energy mixes, with renewables generating more than 80 per cent of electricity. In 2023, more than 45 per cent of Brazil’s total energy consumption, including fuel for transportation and domestic use, will come from green energy, according to the International Energy Agency — a significant contrast with the 12 per cent it forecasts for the US.
But though Brazil made great strides towards developing more low-carbon energy sources in the late 20th century, interest has ebbed lately, with few politicians actively championing it.
“We have serious concerns about Brazil’s energy transition,” says Drielli Peyerl, a professor at the University of São Paulo (USP). “What is being developed in other countries is a distant reality because we are a developing country. We still have a long way to go to reduce our dependence on fossil fuels.”
She points out that Brazil often resorts to fossil fuel energy when droughts affect the country’s hydroelectric power supply, and relies heavily on highly polluting lorries to transport goods. Meanwhile, regulatory barriers and a lack of political will hinder the search for solutions, she says.
Ildo Sauer, a USP professor and former Petrobras director, says the company was once a “pillar of action in the renewable field”, making significant investments in natural gas, biofuels and wind energy. In 2006, its performance earned it a place on the Dow Jones Sustainability Index, although it left in 2015 following the Car Wash scandal. Now, Prof Sauer warns, the company’s “wrong vision” could be disastrous in the long run.
Petrobras says, however, that its focus on oil does not mean it is ignoring climate change — hence its carbon pledge. “We are responsible from an environmental perspective,” says Mr Chaves, citing the company’s advances in carbon capture — where carbon dioxide is injected underground rather than released into the atmosphere — and in the production of renewable diesel and of biokerosene for airlines.
Macroplan’s Mr Porto acknowledges that there are profits to be made in the short term, particularly if the company focuses on lucrative “pre-salt” production — oil found offshore under a thick layer of salt. This increased 32 per cent in the first nine months of this year compared with the same period in 2019, and currently accounts for 70 per cent of Brazil’s oil output. But Mr Porto adds “the oil industry is at twilight and it is going to disappear”.
Mr Caetano echoes the sentiment, saying that now is the time for thecompany to move away from fossil fuels and make significant green investments. “But the management is not investing or giving signs that it will.”