Rentism has lost space in Petrobras’ management – 05/18/2023 – André Roncaglia

The quest for self-sufficiency in oil motivated Getúlio Vargas to found Petróleo Brasileiro S/A in 1953. From its creation until 2016, Petrobras, under state control, induced the creation of a network of national suppliers (services, engineering, and industrial goods ) and built technological and geological capabilities in oil and gas exploration in deep waters.

The discovery of the Brazilian pre-salt in 2007 raised the country to self-sufficiency: 90% of the oil used in Brazilian refineries is extracted in the national territory and 77% of Petrobras’ total production comes from the pre-salt. Achieved thanks to investments in R&D and oil exploration and production, the high pre-salt productivity implied a strong expansion of the national supply with a drop in the cost of extraction.

Paradoxically, as of 2016, the Brazilian population no longer benefits from the low prices of gasoline and diesel. In the Temer government, Petrobras adopted the import parity price policy (PPI). The price of derivatives was defined as if all derivatives consumed internally were imported (including freight cost and import tax).

Between 2019 and 2022, the combination of PPI with reduced production costs led to huge profits (BRL 342 billion) and cash generation (BRL 708 billion) for Petrobras. The results did not stimulate investments; on the contrary, Petrobras invested less than the capital depreciation.

Instead of positioning itself to face the energy transition, the company systematically cut its investments in productive capacity, gave up fertilizer production (reinforcing the dollarization of food prices for internal consumption) and sold around 46 assets (oil fields, the BR Distribuidora, Landulpho Alves Refinery – RLAM), promoting the vertical disintegration of the company.

In contrast, the Norwegian oil company Equinor has been following a long-term strategy, increasing investments in renewable energy, even if, in the short term, these investments have lower rates of return.

The short-term rationale that guided Petrobras from 2016 led to the intertemporal disorganization of internal supply. In the short term, it exposed the internal price to the volatility of the exchange rate and the international oil price. In the long term, it gave up building relevant refining and distribution capacity (shortage of gas pipelines) and taking advantage of technological changes related to the reduction of renewable energy costs.

Research led by Isabella Weber (UMass) shows that post-pandemic inflation has been pressured by corporations in “systemically relevant sectors” (mainly energy), which raise prices to fatten their profit margins, amid calamities and wars.

The PPI institutionalized the increase in the profits of Petrobras and oil importing companies and automated the transfer of external inflation (pandemic and war in Ukraine). Between 2019 and 2022, Petrobras distributed BRL 332.5 billion in dividends (tax free) to the national and foreign private sector (more than 60% of the company’s shares). When it stopped at the government’s treasury, profits did not increase public investment; due to the spending ceiling, they paid interest on the public debt.

The extinction of the PPI reduces the interference of rent-seeking in Petrobras’ management and, therefore, broadens the horizon and diversifies the interests involved in Petrobras’ governance (here’s a hint to the Central Bank). In the short term, the change can make it easier to control inflation, especially with investments in fertilizer factories (FAFENs). Attention to clean energy sources (such as green hydrogen) can bring the company closer to energy transition efforts.

Posterity will thank you.

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