Petrobras broadens upstream expansion plans

Brazil's state-controlled Petrobras is moving away from the cost-cutting philosophy that shaped its investment outlook for the past five years, in a response to higher crude prices and lower debt levels.

Amid a barrage of attacks from Brazil's political class, the company has retained its composure while defending its market-based fuel-pricing policy and rolling out news of major upstream changes. Brazilian president Jair Bolsonaro's hunt for a convenient culprit for high fuel prices recently cost former mines and energy minister Bento Albuquerque his job but, so far, does not appear to have moved Petrobras away from its more realistic investment strategy.

The company's $8.6bn first-quarter profit, bolstered by higher Brent prices and improved operational efficiency, should have been a reason for applause from Petrobras' controlling shareholder, the federal government. It was instead likened to "rape" by Bolsonaro, who is facing voter backlash over high prices at the pump ahead of a presidential election in October. Petrobras insists that the profit was driven by demand for pre-salt crude and not meaty margins on fuel sales, and that the government reaps the benefits of its market-based fuel pricing in the form of taxes and dividends — an argument that has not assuaged Brasilia.

Petrobras' new chief executive Jose Mauro Ferreira Coelho has been clear on the company's intention to stick with the import price parity principle, considered essential to maintain imports and investments. But his predecessor Joaquim Silva e Luna was sacked in March for allowing domestic price rises under the same principle, and that stance may yet cost Ferreira Coelho his position too.

Petrobras flexed its independence with a 9pc diesel price increase on 10 May, the first adjustment in 60 days. Hours after that rise, Albuquerque was replaced by economist Adolfo Sachsida, who, along with finance minister Paulo Guedes, has already started studies on the privatisation of Petrobras and state-owned pre-salt marketing firm PPSA — Bolsonaro's go-to promise whenever the fuel price crisis flares. The sales have little chance of gaining approval during this election year, or likely any year, but the process has been set in motion.

Resistance is utile

The debate over fuel prices and what it may mean for Brazil's plan to open its downstream segment has eclipsed Petrobras' strong upstream position. Medium sweet pre-salt grades remain the centerpiece of the firm's growth plans, but Petrobras has also shown a renewed appetite in assets that until recently were considered prime candidates for divestment. In recent weeks, the company has announced plans to retain its controlling interest in deepwater fields in the frontier Sergipe-Alagoas basin, and has hinted that the Albacora field, originally listed with sister field Albacora Leste, may also stay in its upstream portfolio. And the firm this month detailed its plans to invest $16bn over the next five years to curb natural decline at post-salt fields in the ageing Campos basin.

Local oil executives say the wave of upstream divestments that helped Petrobras tame its heavy debt load appears to be breaking. The resumption of major upstream projects and the growth of associated job-creating industries will likely be trumpeted by politicians. The Santos basin's pre-salt giant fields yield lower-cost and lower-carbon-intensity production, so the question remains as to whether increasing development outside of this core region will interfere with Petrobras' modest upstream emission reduction targets. Viviana Coelho, Petrobras' executive manager of climate change, says it will not, as much of the firm's upstream emissions-reduction plan is already related to carbon capture technology that can also be deployed in post-salt reservoirs.

By Nathan Walters