Given that more than 45% of Brazil’s total energy consumption will come from green energy by 2023, it may seem strange that Petrobras will have a limited role in this transition. The oil company, which is controlled by the Brazilian government but is also listed in the New York and Sao Paulo stock exchanges, is going against the conventional wisdom of this century as many oil companies seek to rebrand as ‘energy’ companies. Petrobras is set to increase its production of oil to 3.3 million barrels a day by 2025; a strategy that may prove more profitable in the long run than it seems. Yet, state intervention in the company may threaten to undermine this.
Initially, statements from Petrobras’ recent CEO Castello Branco suggesting that investments in renewable energy are highly unlikely over the next 5 years may be a cause of concern for investors. Economically, it may be a very profitable opportunity missed by Petrobas, with the share of renewable energy in global electricity production needing to increase from 27% currently to 49% by 2030 to meet the International Energy Agency’s ‘Sustainable Development’ scenario. The transition to renewable energy production has been acted upon by many other major oil companies with Beyond Petroleum (BP) acquiring a 43% stake in Lightsource – Europe’s largest solar power developer – in 2017 for 200 million USD. Equally, Total, the French oil company, is planning to invest 500 million USD a year into clean energy technologies. This may make Petrobras’ 70 million USD yearly investment in research and development for renewable energy look insufficient in comparison.
However, the structure of Petrobras’ organisation may provide good reason to stay away from higher renewable energy investment. Petrobras is a relatively indebted company, having one of the highest debt-to-equity ratios among energy companies at 1.81 compared to Exxon Mobil at 0.38 and Shell at 0.69. Therefore, Petrobras’ financial ability to invest in often costly and inefficient renewable energy technologies is limited. A study conducted by MIT found that of 400 companies with investments in renewable energy, only 20% of companies saw a return on investment of 15% or more. Petrobras’ investors should be more content with the company’s focus on the more lucrative pre-salt layer oil production, which enabled the company to record a profit of 10 billion USD and reduce debt to 63 billion USD in 2019. Petrobras’ profits have taken a dent as a result of the COVID-19 pandemic, but they are set to rebound as demand for oil increases throughout 2021. Equally, it should be noted that Petrobras has not disregarded renewable energies completely. In 2018, they signed a deal with Norwegian energy company, Equinor, to explore joint offshore wind projects. However, this has resulted in no projects as of yet.
More importantly, however, the location of demand for Petrobras’ oil is a great source of hope for investors. Outside of its domestic market, Petrobras sells the majority of its oil to China. In April 2020, Petrobras recorded record exports of oil to China totalling 870,00 barrels a day. Even though there is a general shift to reduce greenhouse gas emissions in most of the developed world, China continues to be the world’s largest emitter. The BBC predicts that China will only reach peak emissions by 2030 and only aims to reach carbon neutrality by 2060. Therefore, at least in the medium and arguably long term, Petrobras can be very profitable exporting oil to China and other countries in the developing world, which is set to be the case with the company expected to double its exports by 890,000 barrels a day by 2025.
Nonetheless, what could threaten Petrobras’ success the most is state intervention in the company. Recently, the replacement of respected CEO Branco with former army general Silva e Luna by Brazilian president Bolsonaro has caused major concern for investors, resulting in Petrobras’ shares falling by more than 20% in one day. Luna has indicated that the practice of setting the prices of fuel in line with international price levels could soon be suspended with the intention of restoring price limits. This would negatively affect cashflow, making it more difficult for Petrobras to meet its debt obligations.
Ultimately, Petrobras’ decision to solely focus on its oil production rather than expand into the renewable energy sector may have implications for the company’s longevity. Yet, as long as Petrobras keeps increasing its oil sales to their main exporting market China, the strategy could prove to be very profitable even in the long term. Equally, it should be noted that the company has not disregarded the renewable energy sector completely with agreements with Equinor to explore offshore wind farms. What has the ability to undermine Petrobras’ success will ultimately be state intervention in the company which could make a relatively indebted company even more burdened by debt.
By Ainle McGuinn
Sector Head: Jared Gibson