Why investors fear Petrobas’s new CEO—despite his energy industry pedigree

Lula was sworn in as President of Brazil for the third time in his life on Jan. 1. The following day, Petrobras shares fell over 9% in New York trading.

Investors in the Brazilian oil giant—the largest oil major in South America—are concerned by Lula’s track record on managing Petrobras. According to Bloomberg, Petrobras became the world’s most indebted oil company when Lula was last in power, from 2003 to 2011, after the government’s interventionist policies forced the company to spend $40 billion subsidizing motor fuel.

But investors are also spooked by the returning president’s appointment of Jean Paul Prates, a former senator and energy executive, to take over as CEO of the state-run company. He’ll become the oil giant’s fourth chief executive in under two years.

Prates, a 54-year old born in Rio de Janeiro and holding a master’s degree in energy planning from the University of Pennsylvania, previously worked in the legal department of Petrobras’s international division during the 1980s, before leaving to become an oil and energy consultant. 

Despite Prates’s pedigree in the energy industry, investors fear the incoming Petrobras CEO, whose appointment is still awaiting confirmation from the board, will increase costs at the firm while reducing dividends payments. (Dividends payments at Petrobras have ballooned an annualized 145% over the past five years.) 

Prates has lambasted the company’s former executives for steering the company “off a cliff.” He’s argued that leaders who slashed costs by shutting down subsidiaries in oil refining focued too narrowly on shareholder returns and increasing oil exploration and ignored investments in green energy.

“I see Petrobras as a company that needs to look to the future and invest in the energy transition to meet the needs of the country, the planet and the society, as well as the long-term interests of its shareholders,” Prates told reporters last week.

“All oil companies are turning into energy companies, and it isn’t just talk…None of this is happening at the right scale at Petrobras,” Prates said.

Petrobras did not immediately respond to request for comment on Prates’s nomination and stated policies.

Under Lula’s instruction, Prates is also set to reform Petrobras’s pricing strategy, which is currently based on international oil prices, in favor of the government setting a domestic guideline for oil prices. Critics of the change fear a return to Lula’s previous crippling subsidies scheme. 

However, Prates has said that changes to Petrobras’s pricing will be done slowly to ensure there are no “shocks,” and the government recently extended a tax break afforded to Petrobras, which Prates says will give the company enough cushion to adjust its pricing strategy.

I suspect investors are right to exit Petrobras in the short term, as Prates’s plans will certainly increase costs and decrease dividends. But the companies plunging shares are just another example of how short-term investor sentiment fails to align with long-term development goals. 

Prates is right. All oil companies need to transition into energy companies, cutting down fossil fuels and boosting renewables. The cost of making the transition is almost always less than the cost of not. 

Eamon Barrett
greeninc.news@gmail.com
@eamonbarrett88

CARBON COPY

The mild terror of Europe’s heatwave

A heatwave has shattered thousands of temperature records across Europe, delivering unseasonal highs of up to 20ºC (68ºF) in normally frosty countries like Switzerland. As I’ve commented before, people rarely care about extreme heat events—even when temperatures boil to deadly highs—so I expect public consternation over the relatively mild  current European heatwave to be low. But warm winters mean weaker snow packs in the mountains, resulting in less snow melt in the spring, which reduces river flow throughout the summer, causing severe water shortages that affect all levels of industry and, of course, human life. BBC

Tesla tanks

Tesla lost 65% of its market cap in 2022, owing to missed sales expectations and, of course, CEO Elon Musk’s ridiculous takeover of Twitter. Tesla’s market value has declined about $400 billion since Musk secured funding for his $44 billion Twitter takeover. Reduced demand for Tesla vehicles and increased competition from rivals spell more long-term obstacles for Tesla’s stock. On Tuesday, after Tesla announced missed sales targets for the fourth quarter, the company was the worst performing stock on the S&P 500, sliding 14%. Guardian 

U.K. uranium

The U.K. has opened a $90 million nuclear fuel fund for applications as the country aims to wean itself off of its reliance on Russia for uranium. Russia currently occupies 20% of global uranium conversion capacity—a refining process that purifies uranium ore so that it can be enriched and used in a reactor. The U.K. plans to increase the amount of nuclear power in the national energy mix from 15% to 25% in 2050, reducing demand for natural gas. Reuters

Exxon wants its windfall

Exxon is suing the European Union over the bloc’s decision to impose a windfall tax on profits earned by oil majors last year when prices were inflated by the war in Ukraine. Exxon is challenging the tax, which demands oil companies hand over a third or more of what the EU considers excess profits, as an unlawful direct income tax. Exxon previously warned that the windfall tax could cost the company up to $2 billion through the end of 2023. WSJ

IN CASE YOU MISSED IT

An offshore wind project being built with union labor could be exactly what energy workers need by Jeremy Gantz

ESG investing faces challenges from all sides. Can it survive? by Laurie Clarke

How living off the grid as a child helped me find success–and understand the importance of paying it forward by Lance Doiron

San Francisco is about to be hit with a ‘brutal’ storm so severe that a meteorologist says is ‘one of the most impactful’ he’s ever seen by Chris Morris

We asked 1,261 voters about the crackdown on ESG investing. You’ll never guess which party’s voters are most opposed to it by Lindsay Singleton

CLOSING NUMBER

1%

Water levels at the Kariba reservoir, the world’s largest hydropower source by volume of stored water, which provides power to Zambia and Zimbabwe, have plunged to less than 1% of a usable level, hitting their lowest volume since a previous record was set 30 years ago. Just last year, water in the Kariba reservoir was at 20% of its usable water level—the volume of water needed to drive the massive turbines inside the Kariba dam. Citizens in the two countries are enduring 19-hour blackouts per day as the governments ration energy usage.