Petrobras ignores energy transition and keeps renewables out of new investment plan

Despite growing pressures to reduce fossil fuel production in the world, Petrobras will maintain in its new strategic plan for the next five years the decision not to invest in renewable energy generation projects.

The strategy is questioned by specialists given the greater global resistance to oil and the financial recovery of the company, which is currently the fourth largest dividend payer among the oil companies traded in New York.

“COP26 gave a very clear signal to the industry”, says Roberto Kishinami, coordinator of the ICS (Instituto Clima e Sociedade). “For the first time, the final resolution of the conference brought an explicit reference to fossil fuels.”

The text talks about reducing inefficient subsidies for the production of these fuels. “Until the next COP, we will have several technical groups working to assess what the subsidies are and how they can be eliminated,” continues Kishinami. “It’s a screw that will only tighten more and more.”

Before the meeting in Glasgow, the International Energy Agency and the Intergovernmental Panel on Climate Change had already issued strong warnings about the need to reduce the production of fossil fuels.

In 2019, Petrobras abandoned the idea of ​​investing in renewable energy generation, contrary to some of its competitors, mainly European ones, claiming that the operations were not profitable and that it needed to focus on more profitable assets to reduce its debt.

Since then, the company has already sold stakes in wind farms and biofuel producers. Currently, it trades assets of hydroelectric generation and its arm for the production of biodiesel.

Without giving details of the plan, the executive manager for Strategy at Petrobras, Rafael Chaves, told the sheet that the plan should advance the company’s strategy in relation to climate change, but there is no forecast for a strategic shift.

“Certainly, we are going to bring evolution in this look at sustainability in this plan, but there will be no radical change”, stated the executive. “We cannot ignore: Brazil has the pre-salt, which is a wonderful asset, it generates jobs, income, taxes and returns to society.”

Chaves argues that the state-owned company’s strategy demonstrates responsibility for the energy transition and climate issues and cites as examples the creation of a specific management for the topic and the inclusion of sustainability metrics in the assessment of bonuses paid to its executives.

The previous strategic plan, says the executive, set aside US$ 1 billion (R$ 5.5 billion at the current price) to reduce carbon emissions in oil exploration and production operations. In September, the state-owned company joined an international initiative in the oil sector to bring net emissions to zero by 2050.

With regard to renewables, the focus will remain on green diesel, with the inclusion of research on the production of hydrogen. The solar or wind power generation segment remains seen as a research and development issue, with no near-term operations forecast.

The strategy is closer to the American oil companies than to the European ones, which have been announcing heavy investments in renewable energy to respond to pressure from investors and position themselves in the future carbon market, whose rules were approved at COP26.

“The investment [ambiental] Petrobras is very shy, especially compared to what its peers have been doing,” says Ilan Arbetman, an analyst who follows the state-owned company at Ativa Corretora. “And there is no doubt that there is a price for that.”

He believes that with increased pressure from investors and lenders, the market tends to penalize companies that do not make progress on climate issues, either by withdrawing shares from investment portfolios or by making credit more expensive.

With increasing pressures against fossil fuels, the oil sector is already traded on the stock exchange at a discount compared to less polluting activities.

Petrobras has a greater discount than its competitors — today, its market value is equivalent to 2.5 times its Ebitda, an indicator that measures cash generation, well below the 9.6 times of the global giant ExxonMobil, for example.

For analysts, this scenario mainly reflects the risks inherent to a state-owned company, as the company has shown in recent quarters that the financial restructuring strategy and focus on more profitable operations had an effect.

A comparison made by the consulting firm Economática between the largest oil companies with shares traded in New York shows that Petrobras is today the company with the highest profitability in the sector and one of those that pays the most dividends.

Its return on capital employed indicator, known as ROE, reached 43.4%, more than ten percentage points above that of Marathon Petroleum, which ranked second. Net margin was 34.6%, also nearly ten points above second-place Canadian Natural Resources.

In addition to benefiting from more expensive oil, like its competitors, the state-owned company owes the result to the high productivity and low cost of pre-salt production, to the improvement of the portfolio with the sale of less profitable assets, to cost reduction processes and the fact that part of their revenues are in reais.

With the good performance, the company reduced its debt to below the target stipulated for the end of 2022 and decided to return a good part of the free cash to shareholders, in the form of dividends. In 2021, it has already announced the distribution of BRL 63.4 billion for the accumulated profit of BRL 75.1 billion.

For SFA Investimentos, the pressure for the energy transition itself should benefit the company’s finances in the short term by maintaining higher international oil prices, as it has been forcing large global oil companies to allocate part of their budget to renewable energy.

Eduardo Costa Pinto, a researcher at Ineep (National Institute for Strategic Studies in Oil, Natural Gas and Biofuels) and professor at IE/UFRJ, calls the strategy “short-term”. by privileging pre-salt profitability over sustainable investments.

“The tendency, given the current management, is to keep distributing profits and dividends, in increasing volumes”, he says. “Because to invest, you will have to make investments that are necessarily less productive than the pre-salt.”

Petrobras’ executive strategy manager says that the high dividends are the payment of a debt the state-owned company has had with its shareholders after years of not giving a return on its investments.

He also defends that the pre-salt produces oil with less emissions than other large producing basins in the world and, therefore, should maintain its market share even when global demand starts to feel the effect of the energy transition.

“We are going to produce more oil in the future than we have produced so far,” says Chaves, adding that the company wants to accelerate this production. “The ideal is to turn these resources into wealth, do it quickly and responsibly.”