Petrobras: Change or More of the Same?

Will new top management restore confidence in Petrobras?

BY ENERGY ADVISOR
Inter-American Dialogue 

Brazilian state oil company Petrobras named Banco do Brasil head Aldemir Bendine as its new CEO following the resignation of Maria das Graças Foster and five other senior company executives amid an ongoing corruption scandal. What does Bendine bring to the position? Will new top management be able turn things around and rebuild confidence in the oil giant? What should the new management team need to achieve in order to be considered successful?

Edmar Luiz Fagundes de Almeida, professor and member of the Energy Economy Group at the Universidade Federal do Rio de Janeiro:  Aldemir Bendine built his career as an executive at Banco do Brasil, the largest public bank in Brazil. Bendine's selection is attributable to his close links with President Dilma Rousseff and his good performance as CEO of Banco do Brasil. Being an outsider in the oil industry also contributed. The political turmoil related to the corruption scandals contaminated the former management and contributed to decision-making paralysis at Petrobras. Therefore, President Rousseff was looking for somebody with a lower risk of contamination from the political debates regarding the corruption allegations. Bendine can contribute to Petrobras his experience with corporate governance at Banco do Brasil. Recently, he had an important role in the implementation of a stricter compliance

policy at the bank. Bendine's experience with the financial markets in Brazil and abroad is also an important skill for Petrobras at this moment. Petrobras' debt covenants call for 2014 results to be reported before the end of April, but the company is struggling to find a viable accounting methodology to estimate the impacts of the corruption. Therefore, Petrobras is facing important financial challenges due to the risk of acceleration in its debt payments. Bendine and the government still need to choose the company's new directors, as the current ones are interim. The ability of the new management to rebuild confidence will depend on the degree of its political independence. If Bendine and his directors show strong political association with the government, it will be difficult to shield the directors from the political battle associated with Petrobras. This fight will continue for a long time and could deepen the current paralysis in the company's decision-making process. However, it is still early to evaluate this risk.

Mauricio Canêdo Pinheiro, researcher at the Brazilian Institute of Economics at the Fundação Getulio Vargas: Many of the current problems facing Petrobras are the result of excessively political management of the company. Inappropriate investment decisions, subsidies for fuel prices and corruption episodes are some examples. The decline of international oil prices only made the scenario even worse. Obviously, no one expected a new CEO completely disconnected from the government. However, it would be desirable to have someone with more independence. In addition, given the huge challenges the company will face in the coming years, the new CEO should have more experience in managing multinational companies such as Petrobras. In this regard, the first major challenge of the new management team is to restore market confidence in the company. This means investigating corruption allegations, calculating and properly recording corruption losses on the company balance sheet and improving corporate governance mechanisms to prevent such events from happening again. The second major challenge is to carry out an ambitious investment plan in a high indebtedness (and lower oil prices) scenario. Finally, it is clear that, if Petrobras' problems are, in part, the result of politically-motivated decisions, the same can be said about their solution. Thus, a positive outcome not only depends on the new management team, but also on the government that, ultimately, makes the important strategic decisions at Petrobras.

Paulo Valois Pires, partner at L.O. Baptista, Schmidt, Valois, Miranda, Ferreira & Agel in Rio de Janeiro: Despite the fact that Mr. Bendine has built a solid career in the financial sector, the market speculated that another professional with a different skill set and background would be appointed as the CEO of Petrobras. In principle, it seems that expectations were for someone to be appointed who had no

previous relation or ties with the government. The new team should conduct the decision-making process of the company solely based on the economics and reality of the market where the company operates instead of trying to accommodate a governmental and political agenda. The most important thing today is to balance the excessive interference of the state in the company's management. Petrobras is still a company with a strong portfolio of proven reserves and contingent resources. Despite current oil prices, the company has large opportunities in the pre-salt carried out by highly-qualified operational staff. To be successful, the new team should guide the company to improve the financial return to its shareholders and regain the trust of the investors in Brazil and elsewhere.

Francisco Ebeling Barros, independent Rio de Janeiro- based energy consultant:  Mr. Bendine took office with a mission that is entirely different than the one Joaquim Levy, Dilma Rousseff 's current finance minister, was charged with. Bendine's task is to measure the amount of money that was stolen from Petrobras in the ongoing corruption scandal, to design new governance procedures and to put Petrobras back on track, according to the latest business plans, which were designed in order to steer the government's more general development strategy. The market got frustrated with his nomination, as it was expecting that the nomination of a new CEO would also point to the equivalent of fiscal austerity in Brazil's oil and gas energy policy, with accompanying measures such as: less harsh conditions for local content policies, the sale of an even larger amount of Petrobras stock to the market, Petrobras' retreat from the next bidding rounds and the abandonment of production-sharing agreements, among other measures. Nevertheless, David Harvey once wrote that capitalism faces the imperative of perpetual accumulation at compound growth rates. It seems unlikely, thus, that the market will not be satisfied should Mr. Bendine's intervention enable Petrobras to concretize its original plan of producing between 4 and 5 million barrels of oil equivalent per day in the next decade. Oddly enough, George Soros recently doubled the amount of Petrobras stock that he holds in his investment portfolio.

Alex Agostini, chief economist at Austin Rating in São Paulo: Petrobras is in an almost unparalleled situation in the history of the Brazilian economy, with the need to recover its moral and financial credibility at the international level. Investors were hoping that the Brazilian government, the company's main shareholder, would recommend someone with a technical background and who would be in good standing with his management team. Unfortunately, the government chose to appoint someone with a greater political alignment, hence arose the name of Aldemir Bendine, who had reached a deal with securities regulator CVM in January to end an administrative sanction process. On the other hand, it is also difficult for the government to find a private-sector executive that would accept the position, as its largest and main act will be to sign the company's balance sheet with a financial loss of huge proportions (preliminary figures indicate something around 88 billion reais). Given the above, with the tarnished image, it rests on Bendine, and his management team, to elaborate a credible financial restructuring plan for the company that aims to balance its accounts in the medium term as well as re-establish its moral credibility by applying the highest degree of corporate governance, with transparency of financial information on the balance sheet and clear disclosure of procurement procedures.