Petrobras CEO says not keeping oil reserves up would be ‘fatal error’

The new boss of Petrobras said it would be a “fatal error” not to replenish its oil reserves, as the Brazilian state-controlled company tries to overcome opposition to plans for drilling off the mouth of the Amazon river.

Jean Paul Prates, who took the helm of Latin America’s largest oil and gas producer this year, argued securing more crude deposits was vital in parallel to preparing for the energy transition.

Petrobras is appealing against a decision by Brazil’s environment agency, which recently rejected its request to set up an exploratory well 175km from the country’s northern coastline.

The deepwater block is in an area of the Atlantic Ocean seen as one of the next frontiers for extraction, but campaigners say the site in question is ecologically rich and fragile.

“It’s a new horizon for us,” Prates told the Financial Times in an interview at the group’s Rio de Janeiro headquarters. “We have to worry about replenishing reserves. We can’t simply [say] no more oil and it’s over. For an oil company, this is not possible.

“You would be making the biggest mistake of your life. That would be a fatal error, which would decree the death of the company in 30 years.”

The former senator was chosen as chief executive by leftwing president Luiz Inácio Lula da Silva, who took office in January promising significant changes at the $87bn-valued business.

Lula has demanded Petrobras play a greater role in the shift to low-carbon energy with investments in activities such as renewables and biofuels. 

But he also wants the company to increase refining capacity to make Brazil self-sufficient in oil products. At the same time, Lula has criticised high dividends paid by Petrobras on the back of bumper profits, unnerving some minority shareholders.

Founded 70 years ago as Petróleo Brasileiro, the business is listed on the stock market but the government is its biggest shareholder.

Prates said it needed to be an “integrated energy company” to confront future challenges and that fossil fuel revenues would help fund clean energy investments. 

“In the energy transition this is important, because in an oil company the present pays for the future,” he added. “You have to reinvent [yourself] to be something else in 30 years. You probably won’t be selling oil and gas, or very little.”

With output from Petrobras’ existing “pre-salt” fields — rich offshore deposits under a 2km-thick layer of sodium chloride — forecast to peak by the end of the decade, there will be a pressing need for new sources of income.

However, diversification would reverse the strategy behind a successful turnround of recent years. The company has sold non-core assets such as petrol stations and refineries in order to focus on pumping deep-sea oil and reduce borrowings.

For some, the prospect of increased government influence has stirred memories of past mis-steps that caused considerable financial damage.

During the last period of leftwing rule in Brazil, Petrobras was at the centre of a massive political corruption scandal and racked up huge debts after investing heavily in offshore production and being forced to keep diesel artificially cheap under president Dilma Rousseff. Expensive refinery projects went over budget or unfinished.

Corporate governance has since been strengthened and Prates, a 54 year-old politician from Lula’s Workers’ Party with industry experience, insisted there would be no repeat of the mistakes.

“My message is very strong. It won’t happen,” he said. “This type of error — mismanaging the company — we will not commit.”

The new Petrobras management has increased the budget for decarbonisation initiatives from 6 per cent of its total $78bn capital expenditure over the next four years to a maximum 15 per cent.

Describing the group’s recent profits as “exorbitant”, Prates said overall capex would “probably” rise and confirmed the company was looking at cutting shareholder payouts: “It will be nothing scary or traumatic.”

Petrobras is examining potential projects in offshore wind and “green hydrogen” produced with low-carbon electricity.

Along with re-entering areas it previously exited, such as fertilisers and renewable power, the CEO said the company should also look “seriously” at petrochemicals, which are used in everything from plastics and soaps to paints and medicine.

“It could be one of the bridges to the transition,” he added. “Future gasoline demand is projected to be much lower. So you need to prepare for this volume of oil that you are producing to be used in a noble way.”

Local media have suggested Petrobras might make a bid for Braskem, Latin America’s biggest petrochemicals producer, in which it already owns a 36 per cent equity holding.

A controlling stake in the $5bn-valued company is up for sale by Braskem’s largest shareholder, the construction conglomerate Novonor. Offers have been tabled by Brazilian chemicals group Unipar Carbocloro and a consortium of US private equity group Apollo and the Abu Dhabi National Oil Company. 

Petrobras has the first right of refusal in the event of any buyout bid. Prates said no decision had yet been made, but added: “It is important that [Braskem] remains under Brazilian control, not necessarily for ideological reasons, but as an issue of national strategy.”

Marcelo de Assis from consultancy Wood Mackenzie questioned the logic of the state-controlled group returning to sectors it had left, as well as the government using it to advance a green agenda.

“Is Petrobras the best company to do this?” he added. “Why would you move from profitable [exploration and production] to a more diverse company with lower profitability?”

A more immediate concern for minority shareholders is how Petrobras charges for fuel — a politically sensitive topic in Brazil. Previous rightwing president Jair Bolsonaro fired three CEOs in less than a year and a half, following disputes over the issue.

To fulfil Lula’s promise to “Brazilianise” fuel prices, management has ditched a practice of moving diesel and gasoline in line with the dollarised rates importers pay.

Analysts have criticised the new pricing policy as unclear. “We still don’t know how it’s going to work when oil prices spike or the exchange rate depreciates,” said Luiz Carvalho at UBS BB. “Will they be able to increase fuel prices by the same amount?”

Prates insisted international crude benchmarks will remain a factor in the calculations, with no handouts. “Petrobras does not subsidise anything,” he said.