Aepet's proposals to the 2018 candidates.

O sectoral program This document presents a diagnosis and proposals for the oil, natural gas, and energy sector aimed at ensuring sovereignty and promoting national development. Our Association considers it opportune to present these analyses to society and to the candidates in the 2018 General Elections. This is not a dogmatic revelation or inflexible viewpoints; it represents the consolidation of our experience and perspectives, which we present for frank and open debate with Brazilians.

We propose: 1) reversing the privatization of Petrobras' strategic and revenue-generating assets, 2) altering Petrobras' pricing policy, 3) developing a local content policy, 4) directly contracting Petrobras for the production of the surplus oil from the Transfer of Rights Agreement, 5) ensuring Petrobras' right as the sole operator of the pre-salt fields, 6) reviewing Petrobras' strategic planning and dividend distribution policy, 7) controlling and limiting oil exports, 8) reviewing subsidies granted to oil companies and legislation impacting Brazilian state-owned enterprises, 9) establishing public policies for the distribution of oil revenue, and 10) repurchasing Petrobras shares traded on the New York Stock Exchange.

In the program, we present a diagnosis of the sector and, for each proposal, the justifications that, in our view, demonstrate why they are aligned with sovereign national development. We are willing to debate each item, as well as others that may be suggested by the candidates' teams. Below, I present the proposals in summary.

Reversal of the privatization of Petrobras' strategic and revenue-generating assets.

The government and Petrobras are selling businesses, or parts of them, without due selectivity. They plan to privatize US$35 billion between 2015 and 2018. These are revenue-generating businesses that keep the company integrated and are being offered to the market to pay off debts, raise cash, or pay dividends. In reality, they are merely anticipating revenue, at a high financial cost, without considering the losses that such mutilations bring to the company and the country.

We propose that debt be managed without privatizing profitable and strategic assets. Since 2016, we have argued that the magnitude of these privatizations is unnecessary for managing and reducing the company's debt. For example, here, here e hereIt is necessary to review the Strategic Plan to ensure the integration and diversification of the company. Revise the financial leverage targets and subordinate the sale of assets to strategic adjustments and not to the private and anti-national interests of the market. Cancel deals that have not been completed, remove others from the list of assets for sale, and recover privatized strategic and profitable assets.

Change in Petrobras' pricing policy

The policy that aligns, and increases, fuel prices in the domestic market in relation to international prices makes the importation of fuels by foreign private agents profitable and viable, reduces Petrobras' market and revenues, and significantly increases the remittance of dollars abroad. In 2017, more than 20% of the Brazilian market was supplied by imported products, while the national refining park operated with idle capacity, on the order of 25%. Petrobras loses, consumers lose, and Brazil loses.

This fuel pricing policy must be modified to reduce the detrimental importation of gasoline and diesel and increase the utilization rate of the national refining capacity. Petrobras should adopt prices compatible with its costs and recover the market share lost to the import chain. The price reduction can be offset by an increase in the market. Prices should be sought that compensate the state-owned company, considering its operational costs, investment needs, and debt management, but also the purchasing power of Brazilians, who should not be penalized by prices higher than international prices when the oil, refining capacity, technological expertise, and state-owned company to supply the country are available.

Development of local content policy

The local content policy, implemented by the government to develop national industry, has been severely impacted by the substantial cut in local content requirements for oil exploration and production activities, and worse, by the implication that this is good for Brazil. In practice, this decision signals the end of local content requirements.

We propose the establishment of a national content policy that receives incentives commensurate with the levels of employment and income created locally. Brazil has had up to 90% national content in oil sector projects promoted by Petrobras and is on track to lose this qualification. The pre-salt reserves offer an excellent opportunity for the development of national technology, engineering, and industry, as has occurred in other countries.

Direct contracting by Petrobras for the production of surplus oil from the Transfer of Rights Agreement.

The Production Sharing Law foresees the possibility of directly contracting Petrobras in cases of national strategic interest. Based on this provision, the CNPE (National Energy Policy Council) approved, on June 24, 2014, the contracting of Petrobras for the production, under a production sharing regime, of the volume of oil exceeding the volume contracted under the Transfer of Rights regime. This decision has been questioned by the government, interested in the resources that can be obtained from the privatization auction of that surplus, to the benefit of multinational oil companies.

Petrobras has been successful in exploring and producing the 5 billion barrels of oil it acquired from the government under the Transfer of Rights agreement. Based on the state-owned company's discoveries, it is estimated that up to 20 billion barrels remain in those areas. It is only logical, fair, and appropriate for the company and the country that Petrobras unify these areas for production and share the oil produced with the government. The original decision of the CNPE (National Energy Policy Council) should be upheld, as it will allow for the replacement of accumulated production, ensure a potential volume with low exploratory risk, and save on discovery costs.

To ensure Petrobras' right as the sole operator of the pre-salt fields.

After a long, unfair, and misguided media campaign against Petrobras, falsely portraying it as a "bankrupt company incapable of investing in the pre-salt reserves," the government revoked the company's right to be the sole operator of the pre-salt fields and to have at least a 30% stake in each project tendered. We have demonstrated that the debt can be easily managed without the planned privatizations, since Petrobras has cash reserves exceeding US$22 billion, growing cash generation exceeding US$27 billion per year, and a high current liquidity ratio (1,9 in 2017). Without recognizing the operational and strategic benefits that sole operation by the state-owned company can bring to the country, the government preferred to heed the demands of the market and foreign multinational oil companies.

We propose re-establishing Petrobras as the sole operator of the pre-salt fields, in order to modulate production for the benefit of the country, stimulate industrial development with the use of more locally produced goods, guarantee national technological progress, prevent fraud, replenish extracted reserves, reduce the state-owned company's production costs, and guarantee jobs for Brazilians. This also recognizes Petrobras' pioneering effort in exploring the depths of the earth and sea, discovering and enabling production in the pre-salt area in record time before any other company ventured there.

Review of Petrobras' strategic planning and dividend distribution policy.

The main goal of the 2018-2022 Business Plan is not suitable for the company, an integrated oil and energy company. We believe that both the Net Debt/EBITDA ratio and its target (2,5) and timeframe (2018) are inadequate for a company like Petrobras, which has the potential to grow in terms of production and cash generation. The existing debt is perfectly manageable and, in our understanding, adopting this indicator and timeframe only serves to justify the privatization of strategic and profitable assets, to the detriment of future cash generation, assuming unnecessary business risks and disintegrating Petrobras. As demonstrated in our votes at shareholder meetings, articles and letters sent by AEPET to Petrobras' management. For example, here e here.

The current plan foresees the sale of assets in producing fields, logistics, refining, and the abandonment of petrochemical, fertilizer, and biofuel areas. The perspective is solely financial and does not value the strategic positioning built by Petrobras. The minimum dividend distribution is 25% of adjusted net profit, with no upper limit, with quarterly advance payments.

We propose reviewing the plan to invest in integrating the company's activities, adding value to oil and gas, and recovering the domestic market. It is necessary to value the synergies of the whole and its magnitude. We must review the dividend distribution policy and the bylaws to reduce the minimum distribution and establish a maximum limit, as well as eliminate the quarterly advance payment, so that Petrobras is not subject to speculative and short-term interests.

Control and limitation of oil exports

The current government lacks a policy for controlling oil production and exports. It is unaware of the full potential of pre-salt reserves, yet it rushes auctions of areas that may contain tens of billions of barrels of oil, simply to cover fiscal deficits. This policy could lead to the premature depletion of national reserves.

We propose investing in the delimitation of oil fields and the definition of pre-salt reserves as a condition for determining the extent of concessions. The oil produced should be primarily directed towards domestic use and the production of refined products by the national refining sector. Exports should be minimal. The objective of production planning should be national energy security and supply at the lowest possible cost.

Review of subsidies granted to oil companies and legislation impacting Brazilian state-owned enterprises.

The Temer government took over the agenda of foreign multinationals whose priority is the appropriation of oil and operation in consortia for the pre-salt layer. The agenda demands high subsidies and facilitating legislation, to the detriment of the country.

We propose a rigorous analysis of all subsidies granted, revoking laws such as 13.586/2017 and revising the facilitating legislation that has been approved. The pre-salt reserves do not require incentives, as the investment risks are low. Companies would come, as they always have, to be partners with Petrobras, which should lead the operation.

Establishing public policies for the distribution of oil revenue.

Current legislation establishes the payment of bonuses by bidding companies and fees, royalties, taxes, and contributions by oil and gas producers. These revenues are transferred to the Federal Government, States, and Municipalities for specific purposes, but a large portion is diverted or wasted.

We propose reviewing the legislation and establishing stricter obligations for the use of these funds, directing them towards supporting social programs, the development of science and technology, and the production of biofuels and renewable energies. This includes requirements for eliminating waste to increase the efficiency of resource use.

Repurchase of Petrobras shares traded on the New York Stock Exchange.

Petrobras shares are traded on North American, European, and Argentinian stock exchanges. This condition subjects the company to regulation by foreign laws and oversight bodies. This is an unnecessary vulnerability, aggravated by the transfer of foreign currency abroad via dividend remittances. Listing its shares on a foreign stock exchange subjects it to purposes other than its creation and activities, diminishing the company's objectives.

The potential harm of losing Brazilian sovereignty by selling a significant portion of Petrobras' shares on the US stock exchange was recently highlighted in the agreement for the early payment of US$2,95 billion in compensation to foreign shareholders. Read the AEPET statement..

This decision also reveals a blatant case of legal extraterritoriality, since Petrobras, as well as its workforce, finds itself subject to the US Sarbanes-Oxley Act. This is yet another unequivocal manifestation that our sovereignty is being violated.

We propose that Petrobras shares be removed from foreign stock exchanges, with a request to suspend trading and negotiations for their purchase.

Conclusion

Fossil fuels – oil, natural gas, and coal – account for approximately 90% of the world's energy mix. Despite the increasing relative importance of renewables, they still represent a small percentage of the total energy share (5%). The higher costs of producing unconventional oil and renewables, in addition to the intermittent nature of wind and solar energy production, severely constrain global productivity growth and economic growth.

Oil is a public and strategic good. Oil and natural gas are primary sources of more than 50% of the energy consumed on the planet; their availability is essential for social and economic development and the sovereignty of nations.

Oil is special in that it has no substitutes of equivalent quality and quantity. Its high energy density and the richness of its composition, with organic compounds rarely found in nature, confer an economic and military advantage to those who possess it. The society we know, its complexity, its concentrated spatial organization, its industrial and agricultural productivity, the size of its financial superstructure in relation to the industrial and commercial spheres, was built upon and depends on oil.

The depletion of conventional and inexpensive-to-produce oil, coupled with the reduction of the oil industry's energy and economic surplus, is rapidly transforming society. It is necessary to guarantee ownership of the oil and retain its use value. This involves meeting the needs of Brazilians and building renewable energy infrastructure for a new social organization.

Given these characteristics, industrialized countries do not hesitate to use all necessary means to secure their supply. Wars, induced revolutions, armed interventions, sponsorship of coups d'état, co-optation of the media, and corruption of public officials and local executives have historically been instruments used to guarantee access to oil and natural gas reserves.

Until the beginning of this century, Brazil was a net importer of oil and suffered severely from the impacts of successive crises in the international market. To guarantee the supply of fuels to the domestic market and reduce the outflow of foreign currency, Petrobras opted, from its creation, for the implementation of a refining complex in the country, designed to process both domestic and imported oil. In the wake of the construction of this complex, a national industry flourished which, in just two decades, became capable of supplying 80% of the goods and services required by Petrobras' investments.

Over the past 20 years, the company has invested in the natural gas and biofuel sectors and diversified its energy business with thermoelectric, wind, and small hydroelectric power plants (SHPs). With the discovery of the pre-salt layer, Petrobras achieved a strategic position that is the envy of multinational corporations, shaken by the fall in oil prices and the difficulty of recovering reserves depleted by production.

Nature and the work of generations of Brazilians have given us the great opportunity that is the pre-salt oil reserves. We need to be able to undertake a sovereign project to, this time, use Brazil's natural resources for the benefit of the majority of the population. For this, it is essential that Petrobras' business model be different from... failed model adopted by the largest privately held multinational corporations and that the candidates for the 2018 general elections become familiar with and discuss alternatives for the sector.

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