The Greening of Petrobras

How can Petrobras, a huge multinational whose main expertise is offshore drilling, evangelize about protecting the environment? I know it might seem preposterous—particularly since Petrobras was making headlines not too long ago for a string of environmental disasters. Idea in Brief Stunned by a series of catastrophic oil spills and other accidents, Brazilian energy giant Petrobras realized it had to change fundamentally to protect its business and its reputation. Aiming to become an industry benchmark for environmental performance, the company launched the biggest environmental and operational safety program in Brazil’s history, overhauled its operations, and pushed cultural change from the top down. CEO José Sergio Gabrielli de Azevedo has made environmental and social performance central to the firm’s strategy. Petrobras now is a global leader in sustainability and a champion of renewable energy. It is also using its clout to compel thousands of suppliers to improve their environmental performance. In January 2000, a leak in a corroded pipeline spilled 350,000 gallons of crude oil into Guanabara Bay, a tourist destination, fishing community, and wildlife habitat near Rio de Janeiro, which had already suffered a Petrobras spill in 1997. Because the pipe didn’t have modern sensors, oil poured out for two hours before the leak was detected. We were fined more than $25 million. Environmental groups were furious. Local fishermen protested outside our headquarters here in Rio and Greenpeace activists chained themselves to railings outside the building and left oil-soaked dead birds at its entrance. Then, just six months later we had an even bigger leak at a refinery near Curitiba—a million gallons of oil poured into two rivers. We were criticized again for outdated leak-detection technology, as well as for inadequate staffing and emergency plans, and were fined $115 million. Those accidents, along with others that year, generated a flood of bad press, including the BBC’s derisive comment that Petrobras showed “an embarrassing level of incompetence.” The incidents were environmentally devastating, alarming to our investors, harmful to our bottom line, bad for the company’s image, and demoralizing for employees and all Brazilians. We thought we’d seen the worst of it, but that disastrous period was capped by the sinking of our P-36 oil platform in March 2001. The $350 million rig was the world’s largest floating production platform, and it stood as a symbol of our—and Brazil’s—ambitions and technical prowess. Two explosions on the platform killed 11 of our employees, and after several days it sank, leaking more than 300,000 gallons of oil. That was then. We haven’t had a major accident in eight years, and today we’re acknowledged as a global leader in sustainability practices. We’re a member of the World Business Council for Sustainable Development and the United Nations Global Compact, a social and environmental policy program, where I sit on the board. We’re listed on the Dow Jones Sustainability Index, our social and environmental report recently received the Global Reporting Initiative’s highest rating for transparency, and this year the research and rating firm Management & Excellence ranked us number one among the world’s oil and gas companies for sustainability. There’s a metaphor in business about turning the tanker around. We did it with an entire oil company. Setting the Goal Since its founding as a state-owned firm in 1953, Petrobras has been deeply connected to Brazil’s development, and our company culture has been intertwined with our national values. Generally speaking, the culture of Brazil is less individualistic and more social in its outlook than the cultures of many Western countries. Brazilians’ sense of being part of a greater whole infuses the company and has been strengthened by our efforts to overcome enormous challenges. I didn’t create this spirit, but as CEO, I’m its steward. When I took the reins as CEO in 2005, we were coming out of a tumultuous transitional period. In the late 1990s the company began its transformation from a state firm with a national monopoly on oil exploration and production to a quasi-governmental entity with 60% of its equity capital traded on the Bovespa and the New York Stock Exchange and a market fully open to outside competitors. Petrobras was facing new competitive pressures, new stakeholders, and a new emphasis on profits and growth. During the past 10 years, we’ve doubled oil production, increased reserves by more than 75%, and expanded operations into 27 countries. It was when we were revving up growth that the spills and platform disaster rocked the company. In response to the Guanabara Bay and Curitiba spills, Philippe Reichstul, who was CEO from 1999 until 2001, created a new director-level position for health, safety, and environment and launched the Program for Excellence in Environmental and Operational Safety Management. PEGASO, as we called it, was a $4 billion initiative encompassing more than 4,000 separate projects designed to prevent accidents. It was the biggest environmental and operational safety program ever launched in Brazil. But PEGASO wasn’t just a risk management program. It was central to a new strategy to turn our reputation around and become an industry benchmark for environmental performance. That was a pretty audacious goal, given our recent history. I joined Petrobras as director of finance and investor relations in 2003, when the company’s social and environmental initiatives were aggressively expanding under the direction of my predecessor, José Eduardo Dutra. I was keenly attuned to their importance. From a purely financial perspective, environmental mismanagement was just bad business. From an investor relations perspective, ignoring the growing demand for transparency and sustainability was also clearly bad business. And, from a personal perspective, the company’s new sustainability strategies mirrored my own beliefs, rooted in my political and academic past. In the late 1960s, I’d been a prominent activist in the student movement that was challenging Brazil’s dictatorship—prominent enough that the army threw me in jail in 1970. After I was released, I gravitated toward a group of intellectuals, academics, and union leaders, including Luiz Inácio Lula da Silva (now Brazil’s president), and in 1980 I helped found the Workers’ Party. My progressive, leftist political orientation certainly colors how I think about Petrobras’s role in Brazil and the world and, more broadly, how I view the legitimacy of business—its social license to operate. My academic work also has reflected this social orientation. I’m actually a professor on leave from the Federal University of Bahia. I received my PhD in economics from Boston University in 1987 and went on to become the director of the faculty of economics at my university. My research, writing, and teaching, which have always focused on macroeconomics, labor markets, and regional development, crystallized my views about the responsibility and the power of business to drive social improvement. Private enterprise, of course, is responsible to shareholders, but supporting sustainability goals is not at odds with that. It’s complementary—and necessary. Improving Performance Inside As CEO, I approach environmental performance issues in three broad ways: improving our own culture and operations, influencing—indeed, pressuring—the companies that do business with us, and championing renewable-energy development. At the center of our internal strategy is our health, safety, and environment program. It’s a huge operation—we invested $2.5 billion in HSE this year. The program is built on a set of guidelines for required performance in 15 areas, such as leadership, regulatory compliance, risk evaluation and management, training, and accident analysis—guidelines that would be familiar to most big companies. Among them are the requirements that Petrobras’s managers lead by example, assess the environmental impact of new projects, monitor and reduce the impact of ongoing company activities, and implement programs promoting environmental behavior inside and outside the company. One of our goals, which we’ve almost met, is to certify the compliance of all our units with international health, safety, and environmental standards, including the best-practice standard for environmental management, ISO 14001. Having this certification sends a message about our seriousness and competence, which is crucial as we try to influence our partners. HSE compliance may sound dry and technical and perhaps only of concern to middle managers. And, yes, managers are the ones who execute much of this. But the HSE policy is an explicit component of our strategic plan. I bring consideration of this policy right into the boardroom, and, with my six colleagues on the executive board, review and approve the guidelines. My top managers and I are visibly committed to this policy. For instance, we have joined the auditing teams that check the HSE compliance of our business and service units and new projects. Senior, executive, and general managers have participated in more than 1,000 audits, going on field trips to refineries, offshore platforms, and pipelines. I myself or one of the Petrobras directors joined 28 of these site visits. When I step off the helicopter at an offshore platform, it’s sort of like the general showing up at the barracks for the morning bed check. But employees know that I’m there because I care about what they’re doing, not to catch some indiscretion. This is part of an important formal and informal trickling-down process that drives the cultural change into day-to-day operations. As every chief executive knows, striking the right balance between formality and informality can be tricky. By nature I’m an informal person. I prefer simple, inexpensive restaurants where the locals go. I dress in jeans on casual Fridays and often wear my photo ID tag, like any other employee. I think that style helps me communicate with employees at all levels. It’s authentic, and they know it. But being informal on occasion doesn’t mean I’m soft on people. I have high expectations, and I’m clear about them. In meetings with my senior staff members, I ask a lot of questions, and they know they’d better be well prepared on their subject, because I will be. If someone’s presenting a problem, I want to hear his or her solutions—and succinctly. I keep my PowerPoint presentations to 20 minutes and expect others to be just as efficient. I believe people would say I’m a collegial leader—I work with my senior executives rather than direct them. But when I think a command-and-control approach is expedient, I’ll take it. For example, we recently needed to send a representative from Petrobras management to a potentially hostile oil-industry union meeting. We could have sent our HR director or another manager, but I thought the union needed to hear directly from me. So off I went. Raising the Bar Outside Companies compete aggressively for our contracts because we’re one of the biggest firms in the region. We give preference to the domestic market because, though we’re quasi-public, we still have a nationalistic zeal about Brazilian development. In 2007, 70% of the $40 billion we spent on goods and services went to approximately 4,000 domestic suppliers. Now, any company is going to ask that its suppliers and contractors meet legal, financial, and technical requirements. Yet, like companies anywhere, Brazilian suppliers often won’t go beyond minimum legal requirements unless they have clear incentives to do so. Given our size and clout, we realized that we could promote improved social and environmental performance in companies throughout Brazil by giving the highest performers our business. To that end, shortly after we joined the Global Compact in 2003, we launched Progefe, a program that encourages suppliers and other partners to adopt the Compact’s 10 principles. The program also obliges suppliers to strive to come up to our level of HSE and social responsibility performance. To motivate them, we devised a scoring system to measure and monitor their adherence to health, safety, and environmental standards and rank them according to the maturity of their HSE systems. Suppliers must register with our supplier database and complete a standardized self-assessment of environmental and social performance. Then they have to undergo our own assessment, which for critical service providers includes an on-site evaluation. We often deny low scorers contracts, but they can make changes to improve their scores and bid again. Because of the fierce rivalry for our business, our suppliers tend to engage in continual HSE improvement in order to outscore their competitors. And because of this pressure, the number of our suppliers with ISO environmental certification has grown from 30 to 600 in the past four years. That’s good progress, but I’d like to see all our suppliers reach that level. Leading the Shift Improving operations—our own and others’—goes only so far in reducing environmental impact. I’m well aware that even if we don’t have accidents and we minimize the impact of building and operating pipelines, platforms, and wells, our products put a lot of carbon into the atmosphere when people use them. Now, we’re not going to stop producing oil. Our long-term plan is to become one of the five largest integrated energy companies in the world. With the recent Tupi oil field discovery, which adds 5 billion to 8 billion barrels to our reserves, we expect to nearly double our production, to 3.5 million barrels a day by 2012, which will put us in the same league as Exxon. Yet oil is a finite resource. Renewable energy is not going to replace fossil fuels anytime soon, but it will make up a growing part of the world’s energy supply and will be critical in efforts to reduce carbon emissions. As the mix of fuels the world uses changes, I expect Petrobras to drive that shift rather than react to it. Becoming a world leader in biofuels is an explicit part of our strategy. Between now and 2012, we’ve earmarked $1.5 billion for biofuel development. It’s a principal focus of our CENPES research and development center, which, though it is already the largest technology R&D facility in South America, is undergoing a major expansion. The projects we’re leading include the development of second-generation biofuels, such as ethanol from agribusiness waste, in Brazil. In 2007 we launched the first pilot plant for producing ethanol from lignocellulose using enzyme technology. We’re also working on a variety of ways to make existing fuels burn cleaner. Becoming a world leader in biofuels is an explicit part of our strategy. As an academic, I have a personal fondness for the center because it strikes a great balance between basic and applied research, something I’ve always tried to do as an economist. CENPES is like the School of Sagres, which legend has it was founded by the fifteenth-century Portuguese explorer Prince Henry to teach the art of sailing and navigation. Sagres combined the operational expertise of sailors with the knowledge of academics and the dreams of cartographers, just as CENPES brings together practical and academic knowledge and innovative, exploratory thinking. Unlike Sagres, though, CENPES sits at the hub of a research network that stretches across Brazil and around the globe. I’m sure Prince Henry would have created such a network if he could have. We have contracts to do joint projects, research, and technology exchanges with 170 Brazilian universities and research centers and more than 70 international institutions. This is another way that Petrobras is an engine of change throughout Brazil, by pushing partners to develop their R&D capabilities in the same way we push them to improve their environmental and social performance. Investing Wisely I’ve focused on the story of our environmental initiatives here because the arc of the narrative is so clear, from the catastrophes at the start of the decade to our recovery and, now, leadership. But in actuality, we don’t compartmentalize environmental stewardship—and I think any company would be unwise to do so. It’s integrated into our broader CSR and sustainability strategy, which includes good corporate governance, transparency, and investments in social development, particularly in Brazil. The economic downturn will force us to reevaluate our allocation of capital, certainly for the near term. We may have to temporarily reduce some investment spending across our business lines, until capital markets and oil prices recover. But as we prioritize our capital investments, I will protect the budgets required to meet our environmental goals and will continue to champion our commitment to sustainable development, leading by example. Our shareholders, and society, should expect nothing less.

The Greening of Petrobras

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