The CEO of Brazil’s beleaguered state oil producer Petrobras, Pedro Parente, talks to Silvia Pavoni about the scandal-riven company's five-year plan to reduce its debts, how it is handling mounting environmental concerns, and what it is doing to cope in an era of low commodity prices. 

Pedro Parente

Brazil’s state-owned oil giant Petrobras has become the focal point of a corruption scandal that has engulfed the country’s economy for more than two years. Its ramifications continue to rock the business and political elites of Latin America’s largest country. Petrobras is also the most heavily indebted of the world’s major oil producers, something that CEO Pedro Parente is intent on fixing through a regimented five-year plan. The Banker spoke to Mr Parente a year after his appointment and six months into the debt reduction plan. He talked about the future of oil, climate change and Petrobras beyond Brazil.

Q: Petrobras was at the centre of Brazil’s corruption scandal, and, as with the rest of the industry, is contending with low oil prices. What does the future hold for the company?

A: We’re rebuilding trust in the company. The main issue for us remains this sizeable debt we have. It’s the highest debt in the whole industry, between $115bn and $120bn. In net terms [deducting cash and other liquid assets] it’s between $90bn and $95bn. It is an improvement compared with previous numbers, but it is still very high. We’re working very hard, and we will do so over the next five years, to reduce this in the fastest way we can. In relative terms our investments reached more than five times earnings before tax, depreciation and amortisation at end of 2016 and our plan is to halve this by the end of 2017. And we are on target. Oil prices is a very important parameter to consider when we discuss if we’re going to fulfil – or not – our targets.

Our plan to reduce debt has four main pillars. One is pricing: we follow international market pricing of oil products on a daily basis. This is very new for the company; it wasn’t a [daily] practice in the past. We started doing this on July 3.

Another one is to increase the productivity of our investments, meaning that we’re reducing the capital expenditure but keeping the projections for our production thanks to very important improvements in productivity, particularly in the pre-salt [activities which extract oil found beneath thick layers of underground salt in deep-sea areas, largely present off the coast of Brazil].

The third one is cost reduction and, last but not least, we have our partnership programme, for which we have $21bn in transactions [including with China National Petroleum Corporation, to share risk as well as financing needs of new projects] for 2017 and 2018, after transactions amounting to $13.5bn for the previous two years. We face a very difficult political moment in Brazil but we have a plan, we are focused on it, and are moving ahead.

Q: Because of mounting environmental concerns and advances in new technology, some are calling this the last age of oil, and forecast oil prices to fall to $15 per barrel as early as 2040. Will Petrobras and its peers become extinct?

A: This is one of the most challenging periods [in the history of] the whole industry. Since the end of 2014, the market is looking for a new equilibrium between supply and demand. At end of 2016, when the Organization of the Petroleum Exporting Countries [OPEC] cut [production] we could see a new equilibrium in the market: the price went from $44 per barrel in 2016 to $56 per barrel in January 2017. At that time there were some forecasts [pointing to] an average level of $57 per barrel in 2017 and then $59 per barrel in 2018.

[Under the Vienna Agreement of October 2016, OPEC countries agreed on production cuts. They were then joined by 11 non-OPEC producers and extended the agreement to a combined supply cut of 1.8 million barrels per day until March 2018. The US was not part of the larger group, and nor was Brazil. Mr Parente was unable to comment on the reasons for this as joining the agreement would be a decision for the government.] 

There are two main questions: would this agreement between OPEC and non-OPEC countries be kept in place, and – and this is really the issue – would US unconventional oil production [for example, shale] take into account the new conditions of the market. The production forecast made by the US Department of Energy for the end of 2017 was actually reached in June. The increase in production in the US was almost double the reduction made by Saudi Arabia. 

Q: What about the demand for greener sources of energy as well as global consensus over climate change? Will oil become the new coal?

A: There are uncertainties in supply due to unconventional oil production, as well as a lot of uncertainties in relation to the demand from the speed in which society changes [and demands more green energy]. In order to cope with these uncertainties, we use three different scenarios: one being a situation in which we’ll see the main world economies, the US, China, India and so on, maintaining strong demand [for oil] and not seeing too fast a change in society’s demand for a low-carbon economy. From the point of view of the oil price, this would be the more optimistic scenario. I’m not saying this would be the most optimistic scenario for the world, I’m talking here just about the price of oil. Another scenario sees society more concerned about environmental issues on a local basis but not in a globalised manner. In this scenario oil prices would be in the range we’ve seen in the past two years, below $60 per barrel.

But there’s another scenario, even if it’s unlikely now because of the US position [withdrawing from the Paris Agreement on the reduction of carbon dioxide emissions] where, assuming that the world progresses towards a global agreement about climate change, we’d see regulation for valuing or pricing carbon reduction having global coordination. In this scenario we could see, by 2040, prices go really below the $40 mark. It’s really challenging. We need to work considering this very broad range of possibilities. Companies such as ours need to take this time to prepare for a new environment, because it will come. The discussion is not ‘if’, the discussion is ‘when’. This could be after 2040 but it could be before, at the beginning of 2030. What we need to do is to work very hard to reduce the cost to produce. As the world will continue to need oil for years to come, we need to be among the winners; those that will produce at lower cost will survive, the others won’t. There will not be room for everyone who is producing today.

Q: Petrobras announced its exit from biofuels production at the end of 2016. Will you go back to alternative energy sources once the current debt problems are fixed?

A: What we did was due to the size of our debt. We decided to concentrate the operations of the company in oil and gas. However, in terms of technology development and research and co-operation with other companies, universities and institutions, we’re keeping our agreements. We’re investing in these areas: not in the operations but in the research, in new technology, alternative sources of energy, electric cars and so on. We’re using this five-year period to be prepared and, at the end of this period, to go back to, say, second-generation biofuels or to focus on gas as a transition source [from oil to cleaner energy]. Now we need to concentrate on the oil side to keep a positive cashflow. We know that at some time in the future we’ll have to go back to discussions on new sources of energy and also on the geographic position of Petrobras, on where we’re going to be in the world after these five years, especially as Brazil is not a big gas producer. This is all for after the five-year period ending in 2021.

Q: Do you see a future in which Petrobras goes from being Brazil’s oil giant to a global leader in clean energy?

A: The world will continue needing oil for a long period. We don’t have a way, at least that we can see today, to fully substitute oil production in the next 20 or 25 years. After 2021, we can start a new trajectory in which we could have a bigger presence in terms of global participation in the energy market. It’s important that we stress that clean energy is a need of the world. We’re researching in biofuels, in low-carbon energy production, we’re working on technology and research – but, right now, not in operations, because we have a short-term concern which is our debt. 


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