(Robert Campbell is a Reuters market analyst. The views
expressed are his own)
By Robert Campbell
NEW YORK, June 25 For a long time, Brazil's
Petrobras was the state-run oil company that was supposed to
show other state-run oil companies how it was done.
But burdened with unrealistic government policy, Petrobras
is starting to look as broken as some of the
Years of missed production targets, ballooning costs and
investor suspicion that an activist central government will
short-change equity holders has turned the former stock market
darling into a dog.
So at the very least, the company's latest business plan
presentation on Monday is refreshing for its candor. Gone is all
the bluster about eclipsing the super majors that figured
Instead, slide four (of 89!) comes devastatingly clean on
nine years of "unrealistic" targets for production growth.
Slide six discloses an eye watering blowout in costs for its
new refinery in Pernambuco. The plant, which will now not
process any oil until late 2014, is expected to cost as much as
$20 billion, up from initial estimates of $2.3 billion.
But after those doses of brutal honesty, Petrobras retreats
into a defensive stance, hitting back at criticisms of other
elements of Brazil's oil policy.
For instance Brazil's insistence on higher local content in
new offshore drilling rigs and production facilities has been
blamed for previous delays and cost overruns, in part due to the
inexperience of Brazilian industry with these types of projects.
Petrobras tries to deflect these charges, noting it has
suffered significant delays in the delivery of rigs ordered from
overseas shipyards too.
Similarly, criticism that Petrobras loses too much money on
local fuel sales due to low prices are rebutted by a chart that
at times, such as in 2009-10, Petrobras has profited from this
scheme because its prices were above world levels.
As a result of its soul-searching, Petrobras has scaled back
its production goals. While a disappointment in terms of future
non-OPEC oil production, Brazil's inability to meet its own
targets had always called past forecasts into question.
The company now sees its oil and natural gas liquids output
in Brazil reaching only 2.5 million barrels per day in 2016,
down from a previous forecast of more than 3 million bpd by
This slower growth curve is probably more reflective of the
reality on the ground, given the huge challenges associated with
developing Brazil's massive, but remote "pre-salt" discoveries
in the deep waters of the Atlantic Ocean.
Yet despite the more pragmatic short term approach, the
long-term trajectory of production growth inexplicably
This acceleration is surely more the product of wishful
thinking despite all the happy talk about standardized projects
and streamlined costs.
After all, the presentation goes on to show progress reports
for 10 different offshore production facilities, all of which
are behind schedule.
As such, the new 4.2 million bpd production goal for 2020
should continue to be viewed with scepticism, even if it is more
than 700,000 bpd lower than last year's inflated target.
Similarly the financial disaster at the Pernambuco refinery
is promised to be a one-off, with future refining plans held
back for renewed study.
But here again, what investors are promised is simply better
management and better implementation. The actual plan, and the
means chosen to carry out the plan are never really questioned.
The root of the problem in Brazil's oil industry lies in the
state-directed model that has been adopted.
Petrobras has become, for lack of a better term, a national
development agency. The company has agreed to not only pursue
Brazil's national content demands, but is working to exceed them
regardless of cost or efficiency concerns.
Steps taken towards liberalizing the industry after 2000
were reversed once the massive pre-salt oil discoveries inflated
the egos of Brazilian politicians.
Petrobras was given a legally entrenched role as sole
operator of the most promising fields and allowed, or
encouraged, to extend its dominance in the domestic refining
The result is huge demands on Petrobras' management to
develop and supervise practically the entire industry. Much of
the finance for this development also has to come from the
At the same time its dominance of the domestic fuel sector
has left it vulnerable to politicians seeking to tamp down on
inflation through price controls.
None of this is meant to take anything away from Petrobras'
achievements. The company's engineering prowess is well known,
as are its accomplishments in offshore oil exploration and
Nor is this to say Brazil should abandon national content
rules or other regulations aimed at fostering local industry.
But Brazil's oil problem is greater than mere management
missteps at one company.
The government has to choose if it wants development at all
costs, including the risk of more boondoggles like Pernambuco,
or whether it wants an industry that is sustainable.
It has to decide whether it wants to go down the path of
other state oil companies, like Mexico's Pemex, whose revenues
subsidize all sorts of inefficient industries and interest
groups, or not.
For the broader oil market, Brazil's problems are the oil
market's problems. The country is still expected to be a major
source of oil production growth over the next two decades.
But until the existing model of development is overhauled,
delays and disappointment remain the likely outcome.
(Editing by Marguerita Choy)