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Case 2: Petrobrascase (5%)

1. Identify at least five key conflicts between stakeholders' interests and expectations at Petrobras. In your opinion, whose expectations should be satisfied first and why?

Case example Petrobras and the Lizards Petrobras seeks to contribute positively to Brazilian also diversified into energy distribution, gas and power, society, but it is an oil-company operating in a challenging fertilisers and bio fuels. Employment at Petrobras peaked at environment. 86,000 in 2013, more than 90 per cent within Brazil, though Brazil's largest company is unusual in having a Cretaceous the numbers had declined to just over 60,000 by 2018. period dinosaur named after it - the Petrobrasaurus, In 1997, Petrobras' monopoly in Brazilian oil produc- combining the company's name Petrobras with the Latin for tion was formally ended and foreign companies soon lizard, 'saurus'. It could be said that this giant oil company entered off-shore oil production in particular. That same has been associated with plenty of lizards more recently too. year, the company was partly privatised, with shares The company was established by the Brazilian govern- eventually floated on the New York Stock Exchange. Two ment in 1953. Petrobras was given a monopoly of oil American investment companies, Capital World Investors production in the country, inspired by the slogan'O petroleo and Fisher Asset Management, are the largest private e nosso' ('The oil is ours'). At the time, Brazil produced investors, each holding about 1 per cent of the shares. only 2,700 barrels of oil per day. By 2019, Petrobras was However, the Brazilian government still directly or indir- producing 2.6 million barrels of oil per day, mostly within ectly owns 64 per cent of the voting shares. Brazil but also abroad. The company has been an inter- Petrobras itself identifies 13 sets of stakeholders: national leader in developing techniques for both shale the workforce, civil society organisations, communities, oil production and off-shore production. The company has competitors, consumers, customers, investors, partners, Civil society organizations Workforce Communities O Suppliers Competitors Scientific and academic community Consumers Resellers Customers Public authorities Investors Press Partners Petrobras Stakeholders Map Source: www.petrobras.com.br/en/about-us/profile/stakeholders/ 153press, public authorities, resellers, the scientific and academic community, and suppliers. The company's annual report comments: 'We undertake activities with great capillarity [network connectedness] that put us in daily contact with a wide variety of audiences. . . We are in constant dialog [sic] with these groups.' Petrobras is a major sponsor of the arts in Brazil, with its own symphony orchestra among many other activities. The company also sponsors various sports, not only motor sport but also Olympians and Paralympians. Petrobras has tradition ally spent 1 per cent of turnover on supporting research, both internally and in collaboration with leading Brazilian universities. The company's research and development centre is the largest group of oil industry researchers in the southern hemisphere. The oil industry is of course prone to damaging environ mental impacts: Petrobras has been involved in repeated oil spills, particularly in relation to its offshore drilling facilities. However, the company is active with regard to sustainability issues: its projects have helped the Brazilian humpbacked whale population recover from about 2,000 to 9,000, and the company has also funded an important seaturtle haven in the Brazilian state of Bahia. Petrobras publishes an annual sustainability report with detailed data on oil spiliages, energy consumption, emissions, water use, and employee fatalities and injuries. The report records spending of about $65m a year on environmental, social, sports and cultural activities. The lizards Not all of Petrobras' behaviours have been so benevolent. It may be unfair to the species, but some Petrobras prac tices have appeared rather lizardlike. As a major part of the Brazilian economy, Petrobras has very large contracts to give out, in construction and many other industries. In 2014, a judicial investiga tion known as Lava Jato (Operation Carwash) was initi ated into corruption associated with these contracts. Jobs for Petrobras would be overcharged, and part of the profit would be paid back to the company's execu tives at Petrobras and to politicians from various polit icai parties. By the end of 2017, 300 people had been convicted for their parts in the corruption. Among the many highprofile convictions were the former President of Brazil, Lula da Silva, who was sentenced to 12 years in jail; the Chief Executive of Odebrecht, the biggest engin eering and contracting company in Latin America, who was sentenced to 19 years in jail; and the former Chief Executive of Petrobras itself, Aldemir Bendine, who was sentenced in 2016 to 11 years in jail. 154 The downfall of Aidemir Bendine was also a setback for Petrobras' strategy at the time. On his appointment as Chief Executive in 2015, Bendine had committed the company to a new focus on 'sharehoider value' and the reduction of debts that had reached $106bn. Petrobras had become overstretched as the government had pressed it to invest in major new production projects; its cost base had been inflated by political insistence that it should favour Brazilian suppliers; and government pres sure had forced it to keep domestic petrol prices below international market rates. Bendine had set out to pursue a more marketorientated strategy, raising prices, selling assets and cutting the investment budget by more than a quarter. But it would have to be another Chief Executive, Pedro Parente, who would take this strategy forwards. Pedro Parente took on the Petrobras leadership in 2016 on three conditions: in future, the company's managers would be hired on merit rather than political connections; economic rationality would dictate strategy, not politic; and the company would manage petrol pricing, inde pendent of politic. A new Brazilian law banning political appointments in state enterprises provided support for his independent approach. Parente sold for $2.35bn a major stake in one of Petrobras' key oilfields to the Norwegian oil company Statoil. He also prepared for the sale of shares in the company's vast petrol station network. By early 2018, Parente was able to declare a turnaround from losses to profits before extraordinary expenses (these include a $3bn settlement on a shareholder lawsuit in the USA]. Debt was cut by 12 per cent. However, Parente then ran into trouble. The Brazilian economy was only recovering slowly from an economic crisis, estimated to be its worst ever, between 2014 and 2016. The Financial Times described the economy as moving 'from zombie to walking dead'. Unemployment was still high and inflation was running ahead of wage growth. In 2018, energy prices were rising internationally. Brazil still imports much of its petrol, so a strong dollar exacerbated the pricing pressure. Petrobras responded by increasing its diesel prices by 10 per cent. For Brazilians, fuel prices had reached their second highest level ever, higher than those in the USA. The 600,000 members of the Brazilian Truckers Asso ciation went on strike in protest. Truckers blocked roads with their trucks and burning tires. Petrobras' workers joined the strike as well. There was ten days of chaos and sporadic violence. Airports ran out of fuel, factories shut down, hospitals ran short of medicines and supermarkets could not be supplied. Strike actions only died down after Brazil's then President declared a suspension of the price rise for 60 days and the judiciary started levying heavy fines on the trade unions. Discouraged by the reversal of Executive, Branco declared: 'The company's core compe- pricing policy, Petrobras' Chief Executive Pedro Parente tency is in oil exploration and production in large fields in resigned in June 2018. The company's share price fell by ultra-deep waters. The focus should be on the assets of 15 per cent. which Petrobras is the natural owner, those from which it can get the maximum possible return'. He indicated that New regimes earlier plans to sell the petrol station network would be One prominent politician who had declared qualified continued support for the truckers was Jair Bolsonaro. A former By early 2019, Petrobras' stock price was two thirds army officer, Bolsonaro was a strong Brazilian nationalist higher than it had been at the time of Pedro Parente's and he had generally been a supporter of state-owned resignation in the summer of the previous year. Some enterprises. In the presidential elections of October 2018, things didn't seem to change though. Three non- Bolsonaro emerged triumphant. President Bolsonaro executive board members associated with the previous pledged to promote Christian family values, national pride ruling party in Brazil were replaced by new directors: one and economic liberalism. Bolsonaro's new Economics of them, John Forman, had been recently fined by Brazil's Minister would be the former investment banker and securities regulator for insider trading. Regina de Luca, University of Chicago economist Paulo Guedes, an enthu who had been close to the previous governing party, siast for privatisation and free markets. was dismissed as Director for Security and Corporate At the beginning of 2019, Petrobras got a new Chief Intelligence at Petrobras. In one of Castello Branco's first Executive, Castello Branco. Many had expected President appointments, de Luca was replaced in January 2019 by Bolsonaro to appoint a military officer with a nationalist Carlos Victor Nagem. Although an employee of Petro- commitment to state enterprise. However, Branco was bras, Nagem had been active in conservative politics and another University of Chicago economist, a personal was a personal friend of the country's new President, friend of Paulo Guedes and a believer in privatisation. Jair Bolsonaro. Even before taking up formal office, Branco got involved in Main sources: www.petrobras.com.br/en/society-and-environment/ developing Petrobras' 2019-2023 Business and Manage- sustainability-report/; www.petrobras.com.br/en/about-us/strategic- plan/; Financial Times, 5 March 2018; Nava, 9 January 2019; Reuters, ment Plan. The Plan declared five company values: respect 15 January, 2019. for life, people and environment; ethics and transpar- ency; overcoming (sic) and confidence; market driven; and results oriented. It committed to the divestment of non-core businesses and to partnership with foreign Questions companies where their resources could help in local devel- 1 Identify at least five key conflicts between stake- opments. At the same time, the Plan set ambitious targets holders' interests and expectations at Petrobras (refer for further debt reduction and profitability improvements. to Table 5.1 as a starting point). Which are the most Investment would be cut by roughly a third. The company powerful stakeholders (refer to Table 5.2)? declared its intent to achieve a 'cultural transformation', 2 Identify at least five ways in which ownership has with a strong emphasis on efficacy, merit, flexibility, and influenced the strategy of Petrobras. value to the business. In his inaugural speech as Chief