Porter’s Five Forces Analysis of Petrobras
|Name||Petróleo Brasileiro S.A.|
|Industry||Oil & Gas Operations|
|Founded||October 3, 1953|
|Headquarters||Rio de Janeiro, Brazil|
|CEOs||José Mauro Ferreira|
|Revenues||USD 83.97 bn (CY21)|
|Profit||USD 19.99 bn (CY21)|
|Competitors||TotalEnergies SE ADR, Exxon Mobil Corp., Marathon Oil Corp., Chevron Corp., Shell PLC ADR|
Petrobras is a Brazilian state-owned Oil giant that produces roughly 2.07 million oil barrels per day (bpd). Petrobras controls major oil and gas reserves in 16 countries ranging from Africa, Asia , North and South Americas, and Europe.
Petrobras has around 45,532 employees and the company prides itself as it creates best value in oil and gas with a focus on sustainable and renewable energy resources. The company respects safety for the environment claims to be one of the largest oil producers in the world. The company has a large oil and gas reserve across the globe with a decade of experience in ultra-deepwater exploration since the first subsea well in Campos Basin in 1971.
Petrobras was ranked as 181 on the current Fortune Global 500 list (2020) along with Forbes Global (2000). Petrobras was also ranked as the 65thlargest public company in the world
The company has a diversified portfolio of activities ranging from energy upstream to downstream.
- Oil Exploration and Production (E&P) – exploration activities to gather crude oil, Liquified Natural Gas (LNG) in many countries but primarily Brazil.
- Refinery – Once oil is explored and produced, it is sent to the refineries to be converted as energy (MOGAS and High-Speed Diesel – HSD) as per the international Euro standards along with removal of bi-products (Furnace Oil – FO).
- Transportation and Distribution (T&D) –Once product is refined it is transported to a vide range of gas stations across the Brazil for retail consumption. The main products include but not limited to are ethanol, wholesalers, and biodiesel.
- Power Generation – transportation and selling of gas for electricity generation mainly in Fertilizer sector.
- International – upstream, middle-stream and downstream operations of oil and gas outside Brazil.
- Biofuels – production of biofuels by ethanol, sugarcane bagasse for electricity generation.
From purely a financial standpoint, the company reported revenues of USD 83.97 billion, up 56% YoY in CY21 on account of increased production activity post Covid-19 pandemic resulting from high base effect. Moreover, the net profit soared to USD 19.99 billion from USD 948 million, increasing 20x as the commodity prices specially oil (Crude and Brent) rose exponentially as the disruptions caused by Russia-Ukraine conflict emerged. The gross margin improved by 300bps from 46% to 49% despite overall increase in costs due to better off takes and inventory management.
Source: Company Presentation 3QCY22
Porter’s Five Forces Analysis
Petrobras Rivalry among Existing Competitors
- Perfect Competition
The company engages in exploration, production, refining and selling of oil, gas and related products. The nature of the business involves many large players in North American region conducing similar kind of activities with heavy emphasis on building reserves. Furthermore, products are highly identical used for the same purpose by everyone which classifies it as a Perfect competition landscape. No participant has significant pricing power over another due to homogeneity in product line.
- TotalEnergies SE
TotalEnergies is one of the seven super major oil giants and a European Company that also engages in a wide range of activities from Oil exploration and production to final retailing consumers. The company reported revenues of USD 184.68 billion and a Profit of USD 15.5 billion in CY21. The company owns brands like Bostik, Elf Aquitaine and SunPower. The company has scored first carbon capture storage project in Norway.
- ExxonMobil Corporation
ExxonMobil is a non-government American Oil giant and one of the largest public limited companies in the world. The company ranked 6th on Fortune 500 and 12th on Fortune Global 500. ExxonMobil reported revenues of USD 276.69 billion and profits of USD 23.04 billion in CY21.
- Marathon Oil Corporation
Marathon Oil is another American Oil company engaged in exploration and production activity. The company produces roughly 383k bpd and reported revenues and income of USD 5.60 billion and USD 946 million in CY21. The company has 50/50 weight of Oil and gas mix and has a diverse portfolio across America.
- Key differentiating factors
The nature of the industry is highly similar. However, Petrobras’s consistent focus on safe and fair transition of electricity and expertise in ultra-deep sea energy exploration with highly efficient carbon. Petrobras also ventures into biodiesel and creates a new segment of bio-refinery along with investing in research and development for low carbon and environment friendly solutions.
Petrobras Threat of New Entrants
- Extraordinary Investment in Fixed Capital
The Oil business is requires immense Fixed Capital expenditures with leverage and sometimes even requires government financing. According to Spencer (2021), the investment in oil sector was down 23% YoY in CY21 which led to soaring commodity prices and demand shortages as winters approached energy deprived Europe.
- Insanely Regulated
Oil business is highly regulated not just in US or Brazil but across the globe. The companies also have to comply with international laws. Petrobras can face a lot of risk of penalties due to environmental damages, political litigations or arbitrations. The company is currently subject to various civil, administrative, tax, environmental and corporate legal proceedings. These claims involve substantial amounts of money and other remedies, and the aggregate cost of unfavorable decisions could have a material adverse effect on our results and financial condition.
- High Research and Development Costs
As per the financial books, Petrobras invested USD 563 million in research and development of which 25% is channeled towards digital technologies such as big data, high performance computing and artificial intelligence. Additionally, during the last 3 years, 327 Brazilian patents and 83 overseas patents were acquired. Currently there are more than 996 patent applications within more than 40 countries. The company intends to innovate via disruptive technologies and digital transformation.
- Additional barriers to entry in Oil and Gas Sector
There are a certain number of global oil suppliers that produces and sells to a large population due to high barriers to entry. According to Smith (2022), the start-up cost for an oil business is insane with setting up exploration units, refineries, transportation, and drilling and distribution network. These activities require billions of dollars and special licenses from not just the local government but also international agencies due to climate regulatory violations. This sector has one of the least new entrants among all businesses.
Petrobras Bargaining Power of Suppliers
- Global Demand Supply Mechanics
The overall oil industry is dominated with a few major countries like US, KSA, Russia and Canada controlling large percentage of global output. The overall demand and supply is highly sensitive to interest rates as with the rise interest rates to counter soaring inflationary pressures in the wake of Russia-Ukraine conflict, demand is expected to drastically drop which decreased the future expected price for crude energy. Currently, FED is expected to hike the rate by another 25bps after 50bps hike by Bank of England and European Central Bank which led to decline in international energy prices.
Source: Statista (2021)
- Supply Chain Excellence
Oil giants like Petrobras have their own criteria of approving a supplier due to sensitive nature of product and abundance of international and local regulations. Many of these laws applies to suppliers as well and the vendor is tasked to ensure compliance. As the business with suppliers poses a threat to environmental laws, contactors must present evidence and certifications related to compliance with HSE standards and conform that that they comply with the best Environmental, Social and Governmental (ESG) best practices of 2021.
- Supplier Awards
Petrobras promotes supplier commitment each year by awarding “Prêmio Melhores Fornecedores da Petrobras” (“Award for Best Petrobras Suppliers”). There is a prime focus on supplier ethics and working environment for suppliers. Furthermore, in order to ensure that the best practices are also adopted by suppliers, Petrobras monitor the practices and measures related to the prevention of Covid-19 in charted units, ships and contracted teams to ensure legal compliance with their protocols.
- Fines imposed on Suppliers
Petrobras imposed fines worth USD 163 million, 95 million, and 260 million in CY21, CY20, and CY19, respectively. In order to control supplier activities, the company audits suppliers at regular intervals and penalizes in case of any breach in laws and regulations.
Petrobras Bargaining Power of Buyers
- Complex Pricing Mechanism
Fuel and Energy is the most easy to pass on to end users as the prices fluctuate on daily basis with international commodity prices (Crude, Brent and Arab lite). However, the prices charged by Petrobras and other oil players are a factor of exchange rate fluctuations, global aggregate demand (bpd), Brazilian political and economic scenario, regulatory restriction on prices, and inventory management (inventory gains and losses).
- Ability to pass on Cost-push inflation
Petrobras has the ability to control prices of its product due to giant reserves and large global presence. In this respect, the company can manage its inventories with respect to demand and supply factors of global oil considering the geological situation at hand. Recently, Petrobras announced 7.5% rate hike in Brazil on account of exchange rate fluctuations and commodity price revisions. According to Araujo, Petrobras currently pegs local fuel prices to international rates, including foreign exchange and global crude prices.
- Global Presence
Petrobras has presence in more than 40 countries where they charge different prices due to homogeneity of oil products. In 3QCY22, the export shares of China increased from 15% to 29% while Europe’s share declined to 29% from 39%. USA share increased from 8% to 10%. Having such large presence, gives better inventory management to sell at higher margins keeping in line with international regulations.
- Perks of Vertical Integration
Most global oil players benefit from vertical integration from exploration to refining to final transportation and distribution of oil. The end user has zero control over the prices as it is mostly government regulated. Upstream business gives significant control over pricing due to exploratory activities while downstream are price takers and have little to no pricing power.
Petrobras Threat of Substitute Products or Services
- Low Switching Cost
Since the product is absolutely identical, there is little to no switching cost. Also, there is extremely low perception in the mind of customers when it comes to loyalty with a single brand of fuel. As fuel is a necessity good for daily consumption, people don’t bother much about from where they get their fuel needs. Also, most employers these days provide for employees fuel costs which further decrease the need for product differentiation.
- A thrust for better alternatives
There is growing focus towards environmental protection and compliance with health and safety standards. Large oil giants are responsible for deterioration of environment on a large scale and the world is shifting its focus on reduced carbon emissions and renewable energy resources. Some better and environment friendly alternatives are hydro, nuclear (to some extent), and fossil fuels.
Source: IEA (2019)
- Moving toward Electric cars
Most modern countries are moving towards electric cars to become eco-friendly. Many governments are introducing new laws to incentivize shift towards sustainable mobility. According to Cornet, the European Union presented “Fit for 55” program, which aims to reduce greenhouse gas emissions by 55% till 2030. Governments are also introducing reduced taxes on EVs and installing energy stations to achieve global compliance.
- Climate change disruptions
Climate change has been the prime focus of today’s energy investing. As the human life harms all other life on earth and destabilize the core, people have reshaped their focus towards other means of energy. A large portion of these investment are bank financed. As per Disterhoft’s (2022) market watch, banks have to stop investing in coal expansion, oil explorations and direct them towards healthier renewable energy sources.
Source: IEA (2000-2040)
- Annual Financial Statements, Reports and Presentations (CY21 and 9MCY22), Company Website [Online], Available at: Petrobras
- Fortune, (2023), Topic: Petrobras [Online], Available at: Fortune
- Forbes, (2022), Petrobras [online], Available at: Forbes
- The Wall Street Journal, Topic: Petrobras [online], Available at: Wall Street Journal
- Starr Spencer, (2021), Need for investment is critical for oil, gas industry: World Petroleum Congress panelists [Online], Available at: SP Global
- Andy Smith, (2022), how strong are the barriers to entry in the oil and gas sector? [Online], Available at: Investopedia
- Eamon Barrett, (2023), Why investors fear Petrobas’s new CEO—despite his energy industry pedigree [Online], Available at: Forbes
- Sönnichsen, (2022), Distribution of crude oil export value worldwide in 2021, by country [Online], Available at: Statista
- Gabriel Araujo, (2023), Brazil’s Petrobras hikes gasoline prices ahead of board vote on Lula’s CEO pick [Online], Available at: Reuters
- Andreas Cornet, (2021), Why the automotive future is electric [Online], Available at: Mckinsey
- Tristan Bove, (2022), Fossil fuel companies like Shell and BP are raking in massive profits, and this could be just the beginning [Online], Available at: Fortune
- Jason Disterhoft, (2022), Banks have to stop financing oil expansion. If they don’t, their net-zero commitments are greenwash [Online], Available at: MarketWatch
- Dan DeLorenzo, (2023), Russia’s War on Ukraine Changed Global Oil Trade. Here Is What It Looks Like Now [Online], Available at: The Wall Street Journal
- Reuters, (2023), Oil falls as rate hikes loom, Russian flows stay strong [Online], Available at: Energy World – Economic Times
- International Energy Agency (2023), World total final consumption by source [Online], Available at: IEA
- International Energy Agency (2023), Total energy supply outlook by fuel and scenario, 2000-2040 [Online], Available at: IEA