Petrobras’s Transformational Journey

While Petrobras is undoubtedly under constant media and political scrutiny, this often overshadows its undeniable importance to Brazil's economic development. To understand its true impact, let's delve into three key milestones that impacted the country’s recent trajectory: the pre-salt oil boom, the Car Wash bribery scandal, and the ongoing energy transition efforts. Petrobras has played a central role in each of these pivotal moments.

Pre-salt Oil Boom

The Brazilian economy has defied expectations over the last two years, surprising investors with its resilience. This robustness can at least partially be attributed to a steadily expanding trade surplus. The burgeoning oil industry has been a key driver of this positive trade balance is, with the pre-salt oilfields emerging as a cornerstone.

Pioneering prospecting for pre-salt oil reserves in the Santos Basin in 2006, Petrobras embarked on a remarkable exploration journey. A progressive series of even larger discoveries in the pre-salt layer followed in the years to come, fueling an exponential surge in Brazilian oil production. As illustrated in the graph below, production reached record highs in 2023 and projections point to additional increases in the coming years.

Car Wash Bribery Scandal

Petrobras found itself at the center of public attention again in 2015, but this time under a dark cloud: the Car Wash Operation, a sprawling anti-corruption investigation, unveiled a web of corruption within the company that sent shockwaves throughout the country, including the financial market, as senior politicians, lobbyists, local and international contractors became implicated in this large-scale bribery, corruption, and money laundering scheme.

While the Car Wash Operation truly damaged Petrobras's reputation among investors and the Brazilian public, it also served as a catalyst for positive changes. The scandal triggered a significant overhaul of the company's governance structure and garnered crucial political support for the SOE Law, which now safeguards Brazilian state-owned enterprises from undue political interference

Petrobras has made significant reforms to its corporate structure and bylaws in recent years, aiming to mitigate potential governance risks. Notably, at least 40% of the Board of Directors must now be independent members, and board members and senior management are held personally liable for their actions and any resulting losses. Furthermore, the company’s Chief Governance and Compliance Officer, who is elected by the Board of Directors and can only be dismissed with the approval of a majority of Board members elected by minority shareholders, has veto powers over decisions made by the Executive Board that fail to comply with applicable legislation and internal rules.

Petrobras & Energy Transition

As the largest energy company in South America, Petrobras is under constant scrutiny for its contribution to global carbon emissions and its climate change mitigation strategy. In this sense, the company has been working toward decarbonizing its operations for almost a decade.

From an environmental perspective, pre-salt fields offer a crucial advantage when combined with carbon capture technologies: exceptionally low CO2 emissions. This has enabled Petrobras to reduce direct emissions by nearly 40% over the past seven years and the company forecasts maintaining or even decreasing emissions despite a projected 20% increase in production by 2030.

Petrobras has established itself as a global leaderin carbon capture technology in recent years, achieving the remarkable feat of reinjecting 10.6 million tons of CO2 equivalent (tCO2e) in 2022. According to the company, this impressive figure represents a staggering 25% of all CO2e captured globally.

Driven by this success, Petrobras has set ambitious goals for the future. The company aims to double its annual CO2 injection capacity within the next three years. In addition, it is actively involved in pilot projects that explore the potential of expanding the scope of this technology to other crucial industries in Brazil.

Throughout his campaign and early presidency, Lula has emphasized Petrobras's role in Brazil's energy transition by shifting its focus towards increased investment in renewables. This raised concerns among investors in early 2023, who worried about the potential impacts on cash generation and profitability, especially with regards to potential investments in unprofitable projects.

Petrobras's latest Strategic Investment Plan boosted investor confidence by showing a pragmatic approach. It allocates approximately 11% of the slightly over USD 100bn total capex to low-carbon initiatives, while most of the remaining investment will continue to focus on oil and gas exploration and production.

Petrobras remains a key player in Brazil's economic development, but its role is evolving. The bribery scandal acted as a catalyst for significant improvements in governance across state-owned companies. In the energy transition, Petrobras has emerged as a leader in carbon capture technology and is actively expanding its renewable energy investments to address climate concerns. At the same time, the company is allocating a significant portion of its budget to pre-salt oil fields, its established source of profitability, in a strategy that aims to ensure stable cash generation overthe next years.

Latam Equity Team

LarrainVial Asset Management