Petrobras CEO Accelerates Divestment

Petrobras stands at the center of the government’s efforts to liberalize the oil and gas value chain and attract foreign capital into the pre-salt oilfields. However, the company’s new leadership team faces significant obstacles that could thwart the divestment plan and send CEO Roberto Castello Branco out the door before success can be declared. In the coming months, Castello Branco will need to guard against direct presidential intervention in the NOC’s affairs, negotiate a collective bargaining agreement amid a campaign that threatens to unleash a new round of petro-populism, and contest constitutional challenges that threaten to slow down the company’s divestment efforts.

President Jair Bolsonaro and his Social Liberal Party (PSL) supported liberalization during the 2018 campaign. As a candidate, he said that he would leave economic policy to his main advisor on the subject, current Minister of Economy Paulo Guedes, and even suggested that if it were better to privatize Petrobras, he would do so. As president-elect, Bolsonaro selected Castello Branco to head the NOC and show foreign investors that Brazil would accelerate energy liberalization, including the internationalization of the oil and gas sector. Castello Branco was an ideal choice: his hallmark as an energy economist was his advocacy for liberalization, including the privatization of Petrobras.

Castello Branco moved quickly to oust former directors, replacing them with rising stars and technocrats loyal to the company and his leadership. He placed Petrobras career technocrat Anelise Lara at the head of refining and gas and then brought over corporate finance specialist Andrea Marques de Almeida from Vale. Lara and Almeida now oversee the two most important departments in Castello Branco’s strategy to divest downstream assets and focus on the core business of pre-salt E&P. Lara formerly directed the company’s merger, acquisition and divestment office. Almeida is responsible for driving the company toward sustained profitability, a lower debt-to-earnings ratio, and increased compliance to highlight the company’s turnaround following the Lava Jato corruption crisis.

The new Petrobras CEO and his team confronted their first challenge on 11 April when Bolsonaro called to request a suspension of a planned diesel price hike. The government warned that sudden diesel price increases could set off another truckers’ strike. The last one, in May 2018, caused significant damage to the national economy and led to then CEO Pedro Parente’s resignation. The Petrobras management team delayed the price hike but reports of the conversation between the president and Castello Branco rocked the markets and triggered speculation that the current CEO might step down. Both Castello Branco and Minister Guedes quickly dispelled reports of political intervention while announcing a plan to smooth out price adjustments. Castello Branco recognized the government’s concern over the threat of another truckers’ strike but insisted that liberalization of the refining sector would be the sensible, long-term solution to keeping fuel prices low.

Two weeks later, Petrobras finalized the sale of its 90% stake in gas pipeline subsidiary Transportadora Associada de Gas (TAG) for $8.6bn. The NOC then announced a plan to sell majority stakes in eight refineries (with a total of 1.1mn boe capacity) and BR Distribuidora during the next 18 months. This news quickly returned attention to the NOC’s campaign to liberalize the oil and gas sector, and downplayed the importance of the president’s short-lived influence over pricing. Castello Branco’s moves to finalize the sale of TAG and roll out a revised plan to sell the NOC’s refining business encouraged investors, but also alerted opponents to the increasing pace of divestment under his leadership.

In response, the Federation of Petroleum Workers (FUP) immediately challenged the constitutionality of the TAG divestment. The FUP participates in the National Committee in Defense of State-Owned Enterprises, and together these organizations pointed to Supreme Court Justice Ricardo Lewandowski’s June 2018 ruling that prior legislative consent is required before government-controlled companies can be sold. The FUP plans to fold this legal argument into its collective bargaining campaign to stop the privatization of the country’s refining sector. Both the FUP and the Petrobras Engineers Association (AEPET) are now working to foment a national mobilization against Castello Branco and his plans for the NOC.

The FUP’s challenge to Castello Branco’s leadership is aggravated by Petrobras’ recently announced plan to reduce its workforce by 4,300 employees by 2023. The FUP and AEPET believe that Castello Branco is threatening their survival and eroding the NOC’s strategic role in national development. Our contacts expect this mounting conflict to take center stage in the second half of 2019, challenging the Bolsonaro government’s dedication to liberalization.