Privatisation on the agenda as new Petrobras CEO is appointed

23 November 2018
20 November 2018, Week 46, Issue 740

Economist Roberto Castello Branco has been appointed as Petrobras’ new CEO and has previously argued that parts of the company could be sold off, writes Dom Phillips in Rio de Janeiro

WHAT: Petrobras’ downstream assets could be sold off. 

WHY: The new government wants to sell the BR Distribuidora unit and focus Petrobras on the upstream.

WHAT NEXT: Tackling the company’s debt, expanding E&P and advancing its divestment plan are its current core objectives. 

Just weeks after his commanding election victory, Brazilian President-elect Jair Bolsonaro allowed his Economy Minister Paulo Guedes to pick Petrobras’ next CEO.

On November 19 Guedes announced that Roberto Castello Branco, an economist at Rio’s respected Getulio Vargas Foundation, former executive at minerals giant Vale and previous Petrobras board member, would be the new head of Brazil’s state-run oil company. In a terse statement, Petrobras said outgoing CEO Ivan Monteiro would leave on January 1.

Like Guedes, Castello Branco has previously said Petrobras should be privatised. But privatising the company in the current climate, as it wrestles with reducing its US$73 billion debt and completing its US$21 billion divestment plan, would be a distraction.

“It is important for the government to take a position on this,” Edmar de Almeida, professor of energy economy at the Federal University of Rio de Janeiro, told NewsBase Intelligence (NBI). “Petrobras has many problems and it is important to focus on these.”

Castello Branco argued for privatising Petrobras and other state companies in a column for the Folha de S.Paulo newspaper published on June 2, the day after former Petrobras CEO Pedro Parente quit his job following a crippling strike by truck drivers over fuel prices. Castello Branco said at the time that Petrobras was an easy target because of its integrated position in Brazil and dominance of refining. Allocating billions of dollars to state companies for activities that could be performed by private enterprise was unacceptable, he argued, when resources for basic obligations like health, security and education were lacking.

“One of the lessons to be taken from this crisis is the urgent need to privatise not just Petrobras, but other state companies,” he wrote.

On November 19, Bolsonaro said Guedes was responsible for choosing the new Petrobras CEO. “It is Paulo Guedes’ indication, I am giving him a free hand,” he told reporters. The president-elect also intimated that parts of Petrobras could be sold off, rather than the whole company being taken to market. “You could privatise some of it, not all of it, it is a strategic company,” he said.

Safe hands

Petrobras is in much better shape today than it was when Parente took over in June 2016. The company had been left US$130 billion in debt following a government-enforced price policy that obliged it to sell fuel at a loss on the domestic market to curb inflation. This was compounded by an enormous corruption scandal and falling oil prices.

Parente cut debt by selling assets and focused on ramping up output from the company’s prolific pre-salt acreage. He also introduced a pricing policy that allowed Petrobras to set its own fuel prices. This made him an easy target when fuel prices soared on the back of surging crude prices, which in turn sparked the strike.

The government agreed to subside diesel prices but Parente quit in the political fallout, with his successor, former Petrobras CFO Monteiro, keeping the company moving in the same direction. However, the Estado de S.Paulo newspaper reported that he did not want to stay on even though Guedes and the incoming economic team would have liked him to.

“Petrobras under Parente and Monteiro made a big jump towards economic recovery,” said de Almeida. “The company’s strategic direction should not change with Castello Branco.”

Like Guedes, Castello Branco studied at the famously neo-liberal the University of Chicago where he did a post-doctorate. He told the Estado de S.Paulo that Petrobras would focus on what it is good at, suggesting that its distribution arm BR Distribuidora should be sold. Petrobras raised US$1.5 billion through the sale of a 29% stake in BR via an IPO last December. “BR is a chain of shops at the end of the day,” he said. “Petrobras’s competence is in the E&P of oil.”

Castello Branco reaffirmed that Petrobras could sell off some of its refining capacity, which was a Bolsonaro campaign pledge. “Petrobras could review its monopoly in this area,” he said. “Competition is favourable for everyone – Petrobras and Brazil.”

Consulting outfit Eurasia was upbeat about the appointment, predicting that Petrobras and the government would soon sign a deal on the Transfer of Rights pre-salt area that could pay Petrobras as much as US$8 billion and the government US$35 billion from a tender of excess reserves in the region. 

Market-friendly

“Castello Branco, a close Guedes aide during the campaign, will have autonomy to deliver a market-friendly agenda, with some freedom to set fuel prices and more leeway to accelerate divestments, including that of BR Distribuidora, a major subsidiary,” Eurasia said in a note. “Full privatisation of Petrobras remains very unlikely during Bolsonaro’s term; risks to the company stem mostly from fuel prices, although the risks seem smaller as oil prices have fallen.”

But the thorny subject of privatising Petrobras is unlikely to go away and it came up again when Castello Branco spoke to the Folha de S.Paulo later on November 19. “The privatisation of the company is not in question. I do not have a mandate to think about this,” he said.

Pavel Molchanov, senior vice-president and equity research analyst in the energy group at Raymond James, a financial services company in Houston, wondered how long that might be the case. “Bolsonaro has ruled it out, at least in the short term, but he has four years to change his mind,” he told NBI.

The bigger risks lie in the company’s fuel price policy and the government’s ethanol policy, he said.

“Will the administration protect, on a consistent basis, Petrobras’ fuel pricing autonomy?” Molchanov asked. “Let’s recall that Bolsonaro as candidate had backed the dramatic intervention in diesel pricing following the nationwide trucker strike in May. Will there be a boost to Brazil’s already world-leading level (27%) of ethanol blending? Bolsonaro has made strong pro-ethanol claims. Naturally, Petrobras would be less enthused about that.”

Edited by

Ryan Stevenson

Managing Editor

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