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Petrobras Company’s Incidents and Investment Potential Research Paper

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Updated: Jun 2nd, 2021

Introduction

Petrobras is the largest Brazilian state-controlled oil and gas company, and its headquarters are placed in Rio de Janeiro. The company’s main fossil fuel reserves are located in two deep-sea basins, where the Campus has been developed since 1971, and Santos has been established since 2009 (De Oliveira & Pinto, 2016). On average, the company produces more than 2 million barrels of oil per day (Fortunato, Teixeira, & de Mello, 2017).

The company was founded on October 3, 1953, at the initiative of Brazilian President Getulio Vargas and received monopoly rights for the exploration, production, and refining of oil in the country. In 1968, large reserves of oil were discovered in the Atlantic Ocean off the south-eastern coast of Brazil, which is the Campus Basin, developed by Petrobras in 1971 (Menezes et al., 2014). This company overcame its challenges; thus, it is recommended to invest in the given organization due to its potential for substantial growth.

Organizational Analysis

In 1993, Petrobras entered the Argentine market by creating a subsidiary Petrobras Argentina S.A., which was engaged in the exploration, production, transportation, processing, and sale of oil and petroleum products (Dalmonte, 2014). In 2001, the Argentine oil company Eg3 S.A. was bought with a network of 700 gas stations (Araújo & Ribeiro, 2016). In 2002, Argentina’s second largest oil producing company, Perez Companc Energía, was acquired, in addition to oil, which also dealt with gas and electricity and was part of a large conglomerate of the Perez Kompan family (Price, 2016).

In 2004, all of the assets of Petrobras in Argentina were merged into Petrobras Energia S.A. In 1997, by amending Brazil’s constitution, Petrobras was deprived of a monopoly on oil and gas production in Brazil (Viglio, Marko Synésio, & Lúcia da, 2018). However, in 2015, the company’s operations were that it controlled more than 90% of the country’s oil production (De Almeida & Zagaris, 2015).

Until 1997, the regulatory environment was that 100% of Petrobras’ shares belonged to the Brazilian state. By the law of August 6, 1997, the federal authorities retain control of the company by owning 50% of the voting shares plus one share (Lyra, Gomes, & Pinto, 2017). Later, Petrobras’ financial department has issued 1.415 billion ordinary or voting shares and 1.333 billion preferred shares (Pereira, Lüdke, & Amorim, 2017).

A controlling stake in ordinary shares, which is 50.26%, is owned by the Brazilian federal government (Lyra et al., 2017). In addition, significant shareholders are the Brazilian Development Bank, which owns 9.87% of ordinary shares and 2.88% of preferred shares (Pereira et al., 2017). In 2010, Petrobras’s performance improved by placement of 2.4 billion ordinary shares and 1.87 billion preferred shares in the amount of $ 69.9 billion, which is the largest amount raised for one investment in the entire history of the stock market (Pereira et al., 2017). Luis Nelson Guédes de Carvalho is Chairman of the Board since September 14, 2015 (Lyra et al., 2017).

Critical Incidents

There was a major controversy surrounding the given company, but an outstanding justice system resolved the issue. The investigation, which began in 2014, revealed that after Brazilian President Lula da Silva came to power, a corruption scheme was organized. Construction companies received contracts for large projects for Petrobras, paying kickbacks to its top managers, and transferring money to the ruling Party workers to finance its campaigns and politicians personally.

In a police statement, Lula da Silva is named one of the main beneficiaries of this corruption scheme (Menezes et al., 2014). The scandal has affected the current president of Brazil, Dilma Rousseff, who held the post of chairman of the board of directors of Petrobras in 2003-2010 (De Almeida & Zagaris, 2015). The investigation led to the dock of many managers of construction companies, top managers of Petrobras and a number of politicians, some of whom received long prison sentences.

The facts of corruption revealed by the prosecutors did not allow the company to publish reports from Q3 2014 until April 2015, because the auditor of PricewaterhouseCoopers refused to certify it (Dalmonte, 2014). According to the first audited statement for eight months, published in April 2015, the company wrote off $ 2.1 billion in connection with the revealed facts of corruption and $ 14.8 billion as a result of the revaluation of overvalued assets, including refineries (De Almeida & Zagaris, 2015). However, the given issue was resolved by severely punishing the involved individuals, thus, completely replacing the current management and representatives.

Investment Potential

The given company is an organization that fully eliminated corruption, which was the main hindrance of the performance. However, it is important to note that Petrobras is expected to expand substantially due to the fact that Brazil is among the fastest growing economies. In addition, it possesses a number of advantages compared to other energy companies, such as better product quality, improved refining process, and large reserves (Menezes et al., 2014). The current issue of Petrobras is that it is heavily focused on a single market section, which is oil and gas. However, it outlined the plans that involve investing large sums into the clean energy sector, where the company will no longer solely rely on fossil fuels.

Recommendation

It is important to note that Petrobras’s main problem is that it lacks an outside investment, which is critical in developing a company as a multinational one. The given organization possesses outstanding qualities for future potential growth. The main reason is that it was mostly state-owned, but currently, it can expand globally and acquire its market share. Therefore, the key recommendation is that Petrobras should be viewed as a long-term investment, which can easily double its size and profitability.

References

Araújo, G. S., & Ribeiro, R. A. C. (2016). Is Petrobras options market efficient? A study using the delta-gamma neutral strategy. Latin American Business Review, 17(4), 315-331.

Dalmonte, E. F. (2014). Petrobras’s blog and journalism: What ethical issues are we talking about? Brazilian Journalism Research, 6(2), 58-68.

De Almeida, M. A., & Zagaris, B. (2015). Political capture in the Petrobras corruption scandal: The sad tale of an oil giant. The Fletcher Forum of World Affairs, 39(2), 87-99.

De Oliveira, F. N., & Pinto, R. F. (2016). Determinants of bond spread and credit default swap: Why are they different? The case of Petrobras. Revista Contabilidade & Finanças USP, 27(71), 185-201.

Fortunato, G., Teixeira, A., & de Mello, C. B. (2017). Effects of pre-salt regulation on the market value of Petrobras. Latin American Business Review, 18(1), 47-67.

Lyra, M. G., Gomes, R. C., & Pinto, M. M. (2017). Knowledge sharing relevance in social responsibility partnerships. The Journal of Management Development, 36(1), 129-138.

Menezes, F., Porto, O., Reis, M. L., Moreno, L., Poggi De Aragão, M., Uchoa, E., … Carvalho Do Nascimento, N. (2014). Optimizing helicopter transport of oil rig crews at Petrobras. Interfaces, 40(5), 408-416.

Pereira, E. G., Lüdke, F. G., & Amorim, L. (2017). The Brazilian pre-salt case: Governmental interference and challenges for potential joint ventures. Journal of Energy & Natural Resources Law, 35(4), 451-461.

Price, E. (2016). DEAL: Petrobras’ $5.2 billion pipeline sale. International Financial Law Review, 1(1), 2-7.

Viglio, J. E., Marko Synésio, A. M., & Lúcia da, C. F. (2018). Science and decision making: The influence of the experts in the environmental assessment of an oil & gas project on the Sao Paulo coast. Revista Brasileira De Ciências Sociais, 33(98), 2-39.

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IvyPanda. 2021. "Petrobras Company's Incidents and Investment Potential." June 2, 2021. https://ivypanda.com/essays/petrobras-companys-incidents-and-investment-potential/.

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IvyPanda. (2021) 'Petrobras Company's Incidents and Investment Potential'. 2 June.

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