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Emerging Markets

Petrobras doubles down on fossil fuels



One of the most notable developments in the oil and gas industry in recent years has been its rebranding: what were once oil majors are now striving to be known as energy groups.

For Petrobras — for years Brazil’s largest company by revenue — such marketing ploys can wait. It says its focus is still on expanding oil production and exploration.

“We are not facing an identity crisis. We are an oil company,” says Rafael Chaves Santos, chief strategy officer of the state-controlled, Rio de Janeiro-based company.

“The demand will not disappear, and we don’t see other technology able to replace fossil fuels on a large scale [soon].”

It is a stance that puts Petrobras at odds with many of its global competitors, which are striving to diversify their production base amid predictions of an end to the dominance of oil as well growing environmental pressures.

Petrobras thinks that demand for oil will not decrease in the short and medium term, giving the company plenty of time to profit from its existing knowhow. While it has pledged to cut carbon emissions in its operations by 25 per cent by 2030, chief executive Roberto Castello Branco recently made clear that big investments in renewables are highly unlikely over the next five years.

Profit motives

But analysts believe that Petrobras’ approach owes a lot to domestic political and economic factors, and may ultimately work against it.

“There is a strategic myopia,” says Claudio Porto, founder of energy advisers Macroplan Consultancy. “The company seeks short-term profit but lacks medium- and long-term vision.”

Sharpening Petrobras’ profit motive is a large debt pile, racked up during years of subsidised oil prices under Brazil’s former leftwing Workers’ party administrations, together with heavy capital investments. It has one of the highest debt-to-equity ratios among energy companies — 1.81, compared with 0.38 for ExxonMobil and 0.69 for Shell.

Since 2016, the company’s focus has been on tackling its debt by cutting expenses and selling assets. It is in the process of ending its effective monopoly over refining in Brazil by selling half of its operations in the sector — a move that analysts say will increase competition.

However, the group has been hit hard this year by the coronavirus pandemic and the resulting drop in demand for oil. In the third quarter, its debt decreased less than expected, from US$91.2bn in the previous quarter to $79.5bn.

Debt is not the only problem that has preoccupied Petrobras’ management in recent years. Luiz Francisco Caetano, an analyst at investment firm Planner, points to the existential threat posed in the mid-2010s by Brazil’s Car Wash scandal, which implicated scores of politicians and businessmen — including Petrobras executives — in a contracts-for-kickbacks scheme. “Above all, it needed to survive,” Mr Caetano says.

Green champion — or laggard?

While the company has been battling these difficulties, political pressure to move towards green energy has abated.

Latin America’s largest country has one of the world’s greenest energy mixes, with renewables generating more than 80 per cent of electricity. In 2023, more than 45 per cent of Brazil’s total energy consumption, including fuel for transportation and domestic use, will come from green energy, according to the International Energy Agency — a significant contrast with the 12 per cent it forecasts for the US.

But though Brazil made great strides towards developing more low-carbon energy sources in the late 20th century, interest has ebbed lately, with few politicians actively championing it.

“We have serious concerns about Brazil’s energy transition,” says Drielli Peyerl, a professor at the University of São Paulo (USP). “What is being developed in other countries is a distant reality because we are a developing country. We still have a long way to go to reduce our dependence on fossil fuels.”

She points out that Brazil often resorts to fossil fuel energy when droughts affect the country’s hydroelectric power supply, and relies heavily on highly polluting lorries to transport goods. Meanwhile, regulatory barriers and a lack of political will hinder the search for solutions, she says.

Ildo Sauer, a USP professor and former Petrobras director, says the company was once a “pillar of action in the renewable field”, making significant investments in natural gas, biofuels and wind energy. In 2006, its performance earned it a place on the Dow Jones Sustainability Index, although it left in 2015 following the Car Wash scandal. Now, Prof Sauer warns, the company’s “wrong vision” could be disastrous in the long run.

Petrobras says, however, that its focus on oil does not mean it is ignoring climate change — hence its carbon pledge. “We are responsible from an environmental perspective,” says Mr Chaves, citing the company’s advances in carbon capture — where carbon dioxide is injected underground rather than released into the atmosphere — and in the production of renewable diesel and of biokerosene for airlines.

Macroplan’s Mr Porto acknowledges that there are profits to be made in the short term, particularly if the company focuses on lucrative “pre-salt” production — oil found offshore under a thick layer of salt. This increased 32 per cent in the first nine months of this year compared with the same period in 2019, and currently accounts for 70 per cent of Brazil’s oil output. But Mr Porto adds “the oil industry is at twilight and it is going to disappear”.

Mr Caetano echoes the sentiment, saying that now is the time for the
company to move away from fossil fuels and make significant green investments. “But the management is not investing or giving signs that it will.”

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Emerging Markets

Technology will save emerging markets from sluggish growth




The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Emerging economies struggled to grow through the 2010s and pessimism shrouds them now. People wonder how they will pay debts rung up during the pandemic and how they can grow rapidly as they did in the past — by exporting their way to prosperity — in an era of deglobalisation.

The freshest of many answers to this riddle is the fast-spreading digital revolution. Emerging nations are adopting cutting-edge technology at a lower and lower cost, which is allowing them to fuel domestic demand and overcome traditional obstacles to growth. Over the past decade, the number of smartphone owners has skyrocketed from 150m to 4bn worldwide. More than half the world’s population now carry the power of a supercomputer in their pockets.

The world’s largest emerging market has already demonstrated the transformative effects of digital technology. As China’s old rustbelt industries slowed sharply over the past decade, and ran up debts that threatened to explode in crisis only a few years ago, the booming tech sector saved the economy.

Now, often by adopting rather than innovating, China’s emerging market peers are getting a push from the same digital engines. Since 2014, more than 10,000 tech firms have been launched in emerging markets — nearly half of them outside China. From Bangladesh to Egypt, it is easy to find entrepreneurs who worked for Google, Facebook or other US giants before coming home to start their own companies.

As well as the so-called Amazon of China, there are Amazons of Russia, Poland, Latin America and south-east Asia. Local firms dominate the market for search in Russia, ride-hailing in Indonesia and digital payments in Kenya. 

By one key metric, the digital revolution is already as advanced in emerging economies as developed ones. Among the top 30 nations by revenue from digital services as a share of gross domestic product, 16 are in the emerging world. Indonesia, for example, is further advanced by this measure than France or Canada. And since 2017, digital revenue has been growing in emerging countries at an average annual pace of 26 per cent, compared with 11 per cent in the developed ones.

How can it be that poorer nations are adopting common digital technologies faster than the rich? One explanation is habit and its absence. In societies saturated with bricks-and-mortar stores and services, customers are often comfortable with and slow to abandon the providers they have. In countries where people have difficulty even finding a bank or a doctor, they will jump at the first digital option that comes along. 

Outsiders have a hard time grasping the impact digital services can have on underserved populations. Nations lacking in schools, hospitals and banks can quickly if not completely redress these gaps by establishing online services. Though only 5 per cent of Kenyans carry credit cards, more than 70 per cent have access to digital banking. 

The “digital divide” is narrowing in many places. Most of the big countries where internet bandwidth and mobile broadband subscriptions are growing fastest are in the emerging world. Last decade, the number of internet users doubled in the G20 nations, but the biggest gains came in emerging nations such as Brazil and India.

The digital impact on productivity, the key to sustained economic growth, is visible on the ground. Many governments are moving services online to make them more transparent and less vulnerable to corruption, perhaps the most feared obstacle to doing business in the emerging world.

Since 2010, the cost of starting a business has held steady in developed countries while falling sharply in emerging countries, from 66 per cent to just 27 per cent of the average annual income. Entrepreneurs can now launch businesses affordably, organising much of what they need on a smartphone. Lagos and Nairobi are rising as local fintech hubs, where leading executives vow to raise Africa’s “digital GDP” by widening access to internet financing.

It’s early days, too. As economist Carlota Perez has shown, tech revolutions last a long time. Innovations like the car and the steam engine were still transforming economies half a century later. Now, the fading era of globalisation will limit the number of emerging economies that can prosper on exports alone, but the era of rapid digitisation has only just begun. This offers many developing economies a revolutionary new path to catching up with the living standards of the developed world. 

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Emerging Markets

China’s wolf warriors refuse to back down




Late last month the EU, acting in concert with the US, UK and Canada, imposed sanctions on four obscure Chinese officials for alleged human rights violations in Xinjiang, where hundreds of thousands of Muslims have been systematically detained over recent years.

China retaliated immediately, imposing counter-sanctions on 10 European individuals, including five EU parliamentarians from five different political parties.

In doing so President Xi Jinping’s administration threatened a contentious trade deal provisionally agreed on last year between the EU and China, despite US opposition. The sanctioned parliamentarians’ parties are now reluctant to start reviewing the deal unless Xi’s counter-sanctions are lifted.

Before Beijing imposed sanctions on the EU MPs, it was expected that the European parliament would eventually ratify Xi’s geopolitical coup, which had strong backing from France’s Emmanuel Macron and Angela Merkel, the German chancellor.

But when Merkel and Xi spoke on Wednesday, China’s official account of the call did not mention the trade deal or Xinjiang.

“We had seven years of negotiations for the deal,” said Joerg Wuttke, head of the European Chamber of Commerce in China. “Now it looks like it will take another seven years.”

The Xinjiang sanctions exchange is just the latest diplomatic dispute that Xi’s pugnacious “wolf warrior” foreign ministry officials are embroiled in. Chinese diplomats are sparring with countries and organisations that Beijing enjoyed relatively good relations with during Donald Trump’s one-term presidency. But they are expressing no regrets.

Chinese vessels anchored at Whitsun Reef off the Philippines’ Palawan Island © Philippine Communications Operat/AFP

Yang Jiechi, China’s top diplomat, set the tone for Beijing’s clashes with a long lecture to his US counterpart on March 18 in Alaska, where he told Antony Blinken that no country would ever again “speak to China from a position of strength”.

Victor Gao, a former Chinese diplomat who worked for Yang, said his former boss’s diatribe was “groundbreaking”. “Chinese leaders believe they have momentum and time is on their side,” he added. “Nothing can stop their rise.”

Chinese state media contrasted Yang’s comments with paintings of foreign colonial powers lording it over late Qing dynasty officials, who were repeatedly humbled in a series of conflicts with European, Japanese and American enemies.

The country’s “century of humiliation”, according to the Chinese Communist party, ended only after its revolutionary victory in 1949.

“China today is not the China of 1840,” Xu Guixiang, a senior party official in Xinjiang, said last week. “The days of Chinese people being bullied by the west have passed. We are not an easy target any more . . . We will fight tooth for tooth until the end.”

Many Chinese officials viewed Trump’s years in office as an unprecedented “strategic opportunity” to build bridges with Washington’s frustrated allies. But analysts said that, like Trump, those officials also believed that the Chinese Communist party could benefit domestically from diplomatic confrontations.

“Heated nationalism is good for strengthening the legitimacy and authority of the central government and [Xi],” said Yun Sun, a Chinese foreign policy expert at the Stimson Center in Washington.

“It all comes back to [Xi’s] mentality and the course he has charted,” she added, especially as the CCP prepares to celebrate the centennial of its founding in July. “The party needs to demonstrate its strength and achievements. A soft approach is not going to work.”

Last week Beijing challenged comments by Tedros Adhanom Ghebreyesus, the World Health Organization director-general who had previously been criticised for his reluctance to confront Beijing. Tedros said that Chinese officials had withheld information from WHO experts investigating the origins of coronavirus.

“After coming under pressure from the Europeans, Canadians and Americans, Tedros didn’t want to give China a pass because that would have provoked a crisis with the west,” said a diplomat involved in the WHO’s deliberations.

“Meanwhile the Chinese had to stick to their rhetoric that ‘[Covid] is a bigger problem, we had it and we dealt with it, but now we have to look elsewhere [for its origin]. They have bats in Myanmar and Laos, too’,” the diplomat added.

“It also has to be seen in the context of what had just happened in Alaska where they said don’t lecture us and don’t talk down to us.”

Chinese diplomats have recently clashed with Manila, too, over an alleged incursion of Chinese fishing vessels in Philippine territorial waters, as well as Tokyo over Japan’s concerns about the Xi administration’s policies in Xinjiang and Hong Kong.

Wang Yi, China’s foreign minister, warned his Japanese counterpart on Monday not to join US efforts targeting China.

“A certain superpower’s will does not represent the international community,” Wang said. “As a neighbour Japan needs to show at least a modicum of respect towards China’s internal affairs.”

Steve Tsang, director of the Soas China Institute in London, sees no end to such disputes. “Xi has said multiple times that Chinese officials and diplomats must unsheathe swords to defend the dignity of China,” he said. “The wolf warriors are just acting on Xi’s call to arms.”

Additional reporting by Xinning Liu in Beijing

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Saudi Aramco raises $12.4bn from oil pipeline deal




Saudi Aramco said on Friday it had raised $12.4bn from the sale of a minority stake in a newly formed oil pipeline venture to a consortium of investors. 

Saudi Arabia’s state energy giant said it had sold 49 per cent of Aramco Oil Pipelines to investors led by Washington-based EIG Global Energy Partners. 

The move comes as Saudi Aramco, which listed on Riyadh’s Tadawul stock exchange in 2019, seeks to monetise assets to generate cash for the government, its main shareholder. 

Saudi Aramco will lease the usage rights of its pipelines to the new venture, which is valued at $25.3bn and has rights to 25 years of tariff payments for oil transported through the kingdom’s crude network. 

The state company will hold a 51 per cent stake in the oil pipeline business while retaining full ownership and operational control of the network. 

Saudi Aramco did not say which other groups were part of the consortium.

It is understood that EIG is still in talks with Mubadala, the UAE sovereign wealth fund, about joining the investor group, while BlackRock and Brookfield Asset Management pulled out after initial discussions. Mubadala, BlackRock and Brookfield declined to comment.

Under Crown Prince Mohammed bin Salman, Saudi Arabia has leaned on its biggest revenue earner to raise funds to plough into non-oil sectors — from technology to tourism — as it seeks to diversify its economy. 

Amin Nasser, chief executive of Saudi Aramco, said the transaction “will help maximise returns for our shareholders”. 

Saudi Arabia, which is the world’s largest oil exporter, has taken a massive financial hit in the past year as the coronavirus pandemic battered the global economy and drastically cut demand for energy. 

Saudi Aramco, which has pledged to pay the bulk of $75bn in annual dividends promised to the state, alongside taxes and royalties, is also expected to lead a new domestic investment plan to modernise Saudi Arabia. 

The latest move is similar to infrastructure deals undertaken by the Abu Dhabi National Oil Company, which has raised billions of dollars through selling and leasing back oil and gas pipeline assets.

Yasir al-Rumayyan, chair of Saudi Aramco and head of the kingdom’s Public Investment Fund, which is Prince Mohammed’s chosen vehicle for his reforms, said the kingdom would try to monetise additional assets. 

“Historically speaking, [Saudi Aramco] used to do everything themselves . . . they had their own airports, their own fleets, their own pipelines,” he told the Financial Times earlier this year. “Now, if it makes sense for us to divest some of these assets, we’re definitely going to do it. It could include anything except the main operations.”

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