The Lesson of Petrobras
By Susan Kaufman Purcell
Recently, The Wall Street Journal published a front-page story about Petrobras, Brazil’s state-controlled oil company. The article described how “a sleepy oil giant” had become “a world player.” Until the 1990s, Petrobras performed so poorly that its nickname was “Petrosaurus.” Its workers were 25% less productive than the average for the industry and Brazil needed to import nearly half the oil that the country needed. Today, Petrobras’ crude reserves exceed those of Chevron and its costs of finding oil are lower than those of ExxonMobil. It currently operates in 27 countries- more than double the number of ten years ago, and has a market capitalization of about $130 billion.
The key reason for Petrobras’s remarkable turnaround was its adoption of a number of reforms that tend to characterize private sector companies rather than state-owned ones. Essentially, they involved changes in the company’s corporate structure to make Petrobras more transparent and accountable. These included the creation of an independent board of directors that included leading Brazilian corporate executives and the opening of the company to foreign competition. Specifically, the government abolished Petrobras’s monopoly on drilling for oil in Brazil and floated shares of the company in New York. Both these reforms increased the pressure on the company to become more competitive. The listing on the New York Stock Exchange also required the company to become more open and accountable to its shareholders about its activities. To prepare Petrobras for competition, the government chose an investment banker as its president. He quickly cleaned up the company’s books, introduced performance-based incentives for managers and cracked down on corruption.
The interesting question is why the Brazilian government was able to reform a state-owned company. Like other unreformed state companies, the old Petrobras had to confront a union that opposed the reforms. Cozy relationships had developed between the company and those who did business with it, as well as with a variety of politicians, government bureaucrats and other vested interests.
Part of the answer lies with the commitment of Presidents Fernando Henrique Cardoso and Luiz Inácio Lula da Silva to increase the productivity and efficiency of Petrobras. And part of the answer lies with Brazilian public opinion, which turned against the status quo at Petrobras after a union walkout caused serious shortages of cooking gas and long lines at gas stations.
The other interesting question is whether the Petrobras example will be followed by other state-owned oil companies in Latin America, particularly those of Venezuela and Mexico. In both countries, oil production is declining, despite the incentive of high international oil prices. And in both countries, there are strong vested interests opposed to the kinds of changes implemented in Brazil.
Nevertheless, the prospects for creating a more productive and efficient state-owned oil company are better in Mexico than in Venezuela. Mexico has at least one of the important ingredients that contributed to Brazil’s success—a president who is committed to improving the performance of PEMEX and willing to consider ways of introducing greater competition and openness in order to do so. He is also seeking ways of making the government less dependent on the high level of taxes that PEMEX is forced to pay to balance the government’s budget. What is still missing is for the Mexican public to break with the status quo and demand a more productive and efficient PEMEX that would better serve its interests. But with greater access to information and more democratic political processes, combined with a growing threat of insufficient oil production to serve the country’s needs, there is some hope that the latter will develop.
In Venezuela, in contrast, there are no signs that making PDVSA more productive and efficient is a presidential priority. Nor are there signs of the ideological flexibility that enabled Presidents Cardoso and Lula to borrow ideas from private companies that enhanced Petrobras’s productivity and efficiency. The fact that Venezuela has much more oil than Mexico also means that Venezuela’s day of reckoning can be postponed.
Finally, given the variations among Latin America’s state-owned oil companies, the Petrobras turnaround shows that the ongoing debate in the region between supporters of state-owned vs. privately-owned companies is unnecessarily polarizing as well as unhelpful. Stated differently, it shows that who owns a company is ultimately less important than the way it is managed.
Susan Kaufman Purcell Director, Center for Hemispheric Policy, University of Miami.
Recently, The Wall Street Journal published a front-page story about Petrobras, Brazil’s state-controlled oil company. The article described how “a sleepy oil giant” had become “a world player.” Until the 1990s, Petrobras performed so poorly that its nickname was “Petrosaurus.” Its workers were 25% less productive than the average for the industry and Brazil needed to import nearly half the oil that the country needed. Today, Petrobras’ crude reserves exceed those of Chevron and its costs of finding oil are lower than those of ExxonMobil. It currently operates in 27 countries- more than double the number of ten years ago, and has a market capitalization of about $130 billion.
The key reason for Petrobras’s remarkable turnaround was its adoption of a number of reforms that tend to characterize private sector companies rather than state-owned ones. Essentially, they involved changes in the company’s corporate structure to make Petrobras more transparent and accountable. These included the creation of an independent board of directors that included leading Brazilian corporate executives and the opening of the company to foreign competition. Specifically, the government abolished Petrobras’s monopoly on drilling for oil in Brazil and floated shares of the company in New York. Both these reforms increased the pressure on the company to become more competitive. The listing on the New York Stock Exchange also required the company to become more open and accountable to its shareholders about its activities. To prepare Petrobras for competition, the government chose an investment banker as its president. He quickly cleaned up the company’s books, introduced performance-based incentives for managers and cracked down on corruption.
The interesting question is why the Brazilian government was able to reform a state-owned company. Like other unreformed state companies, the old Petrobras had to confront a union that opposed the reforms. Cozy relationships had developed between the company and those who did business with it, as well as with a variety of politicians, government bureaucrats and other vested interests.
Part of the answer lies with the commitment of Presidents Fernando Henrique Cardoso and Luiz Inácio Lula da Silva to increase the productivity and efficiency of Petrobras. And part of the answer lies with Brazilian public opinion, which turned against the status quo at Petrobras after a union walkout caused serious shortages of cooking gas and long lines at gas stations.
The other interesting question is whether the Petrobras example will be followed by other state-owned oil companies in Latin America, particularly those of Venezuela and Mexico. In both countries, oil production is declining, despite the incentive of high international oil prices. And in both countries, there are strong vested interests opposed to the kinds of changes implemented in Brazil.
Nevertheless, the prospects for creating a more productive and efficient state-owned oil company are better in Mexico than in Venezuela. Mexico has at least one of the important ingredients that contributed to Brazil’s success—a president who is committed to improving the performance of PEMEX and willing to consider ways of introducing greater competition and openness in order to do so. He is also seeking ways of making the government less dependent on the high level of taxes that PEMEX is forced to pay to balance the government’s budget. What is still missing is for the Mexican public to break with the status quo and demand a more productive and efficient PEMEX that would better serve its interests. But with greater access to information and more democratic political processes, combined with a growing threat of insufficient oil production to serve the country’s needs, there is some hope that the latter will develop.
In Venezuela, in contrast, there are no signs that making PDVSA more productive and efficient is a presidential priority. Nor are there signs of the ideological flexibility that enabled Presidents Cardoso and Lula to borrow ideas from private companies that enhanced Petrobras’s productivity and efficiency. The fact that Venezuela has much more oil than Mexico also means that Venezuela’s day of reckoning can be postponed.
Finally, given the variations among Latin America’s state-owned oil companies, the Petrobras turnaround shows that the ongoing debate in the region between supporters of state-owned vs. privately-owned companies is unnecessarily polarizing as well as unhelpful. Stated differently, it shows that who owns a company is ultimately less important than the way it is managed.
Susan Kaufman Purcell Director, Center for Hemispheric Policy, University of Miami.