Petrobras to join Oil and Gas Climate Initiative after selling off biofuel assets

In Brazil, Petróleo Brasileiro S.A. (Petrobras) is joining the Switzerland-based Oil and Gas Climate Initiative, whose member companies represent more than a quarter of the world’s oil and gas production. OGCI aims to speed and scale up initiatives taken by member companies to reduce the greenhouse gas footprint of their core oil and gas business and to explore new businesses and technologies.

But Petrobras has been selling off biofuel assets, like its biodiesel plants in Brazil and its eight sugar and ethanol assets in Brazil and Mozambique. And it has been lowering gas prices in Brazil putting pressure on ethanol demand. Is it contradictory to get rid of assets that would help GHG emissions and environmental impact while joining an initiative that aims to improve GHG emissions and environmental impact?

OGCI details

Petrobras’ membership is pending approval of the OGCI Climate Investments Members’ Agreement by the Petrobras Board of Directors. The OGCI is the CEO-led grouping of oil and gas companies that intends to lead the industry’s response to climate change, pooling knowledge and collaborating on action to reduce greenhouse emissions. The OGCI’s existing members are BP, CNPC, Eni, Pemex, Repsol, Saudi Aramco, Shell, Statoil and Total.

Petrobras CEO Pedro Parente said, “By joining OGCI, one of the industry’s leading initiatives on climate change response, Petrobras renews its commitment to reducing emissions and to a more efficient energy matrix and reinforces its strategic command to be fully prepared for a low carbon world. We are excited to join other OGCI member companies in their efforts to deliver the organisation’s ambitious goals.”

With a presence in 19 countries and about 70,000 employees, Petrobras is a large company that is pretty diverse in what it does. From exploration and production to refining and marketing, it works all along the supply chain. It also goes beyond petrochemicals and oil and into natural gas and until recently, biofuel segments.

Welcoming Petrobras to the initiative, Bob Dudley, chair of the OGCI’s CEO Steering Committee and group chief executive of BP, said, “International and national oil companies have come together in the OGCI to work to reduce greenhouse gas emissions, a key challenge for our industry and the world. Petrobras’s participation will increase the critical mass and momentum of our work and extends our coverage into an important new geography – South America.”

So why is this important?

Petrobras’ involvement with OGCI signals that they are taking GHG issues seriously and taking action to lower their environmental impact. By joining other big oil companies and sharing knowledge and collaborate on action to reduce greenhouse gas emissions, they are trying to improve.

OGCI, launched in 2014, aims to increase the ambition, speed and scale of the initiatives they undertake as individual companies to reduce the greenhouse gas footprint of their core oil and gas business, and to explore new businesses and technologies. Its billion-dollar investment arm, OGCI Climate Investments, supports the development, deployment and scale-up of low emissions technology.

This is good news for Petrobras after several weeks of not-so-great news regarding the latest securities class action lawsuit filed in the United States District Court for the Southern District of New York. Under the proposed settlement, Petrobras agreed to pay $2.95 billion to resolve claims in two installments of $983 million and a last installment of $984 million – making it one of the largest securities class action settlements in U.S. history.

According to Reuters, “With the settlement, it will pay out more than six times what it has received so far under a Brazilian probe into bribery schemes that involved company executives and government officials. The settlement…was an important milestone for the oil firm as it tries to emerge from the scandal that has entangled two former Brazilian presidents and dozens of the country’s corporate executives.”

Petrobras is quick to say in their press release, “The agreement does not constitute any admission of wrongdoing or misconduct by Petrobras. In the agreement, Petrobras expressly denies liability. This reflects its status as a victim of the acts uncovered by Operation Car Wash, as recognized by Brazilian authorities including the Brazilian Supreme Court. As a victim of the scheme, Petrobras has already recovered R$1.475 billion in restitution in Brazil and will continue to pursue all available legal remedies from culpable companies and individuals.”

The agreement is in the SDNY district court pending review, and if granted, the court will notify the members of the class of the terms of the proposed settlement.

This is a smart move by Petrobras – by dealing with the litigation in a settlement, it avoids trial and a jury, and the risks associated with the uncertainties and costs of long litigation.

Is Petrobras divesting from biofuels?

To much dismay, yes, even as Petrobras is trying to improve environmental impact by joining OGCI and figuring out ways to lower GHG emissions, Petrobras is continuing with its divestiture plans by getting rid of its 50% stake in BSBios that owns two biodiesel plants in Rio Grande do Sul and Paraná with a total installed production capacity of 288,000 cubic meters. As reported in the Digest in December, the company’s other 50% is held by R.P. Biocombustiveis Holding who has first right to buy out the 50% or divest completely as well. Last year BSBios had gross revenues of $681 million following the sale of 413,000 cubic meters of biodiesel at auction.

Back in February 2017, as reported in The Digest, Tereos purchased Petrobras’ 45.9% Guarani stake for $202 million in cash. This made France-based Tereos the 100% sole owner of Guarani’s eight sugar and ethanol assets in Brazil and Mozambique. The deal was agreed in December as Petrobras’ final divestiture from the ethanol industry.

As reported in the Digest in June 2017, Petrobras lowered gas prices for a second time that month, causing further pressures on ethanol demand. Despite hydrous ethanol prices being 68% of gasoline prices during the week ending June 10, the lowest since September last year, falling gas prices see drivers still choosing fossil fuels over ethanol. Hydrous prices have fallen 6% since the sugarcane crush started in April and by 3% during the past month.

Interesting timing, we think, as this is just months after divesting from ethanol.

Bottom Line

Petrobras’ biofuel webpage states, “We will terminate our biofuel production activities aiming to optimize our business portfolio.”

So what is Petrobras really trying to do by joining OGCI, an initiative for oil and gas companies to lower GHG emissions, just months after selling off its biodiesel plants and almost a year after selling off ethanol and sugar assets in Brazil and Mozambique? Wouldn’t biodiesel and ethanol investments and assets improve their GHG impact?

It remains to be seen how exactly Petrobras will improve its environmental impact and how it will use the OGCI initiative after selling off the assets that seem most likely to improve GHG emissions over the last year. Maybe they will re-evaluate or reconsider biofuels in the future? Maybe they will continue R&D in the biofuel segment? We’ll be keeping an eye on this.