{"id":5471,"date":"2015-12-09T18:39:07","date_gmt":"2015-12-09T23:39:07","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/petrobras-government-mandated-operation-model-is-a-misfit\/"},"modified":"2015-12-09T18:41:29","modified_gmt":"2015-12-09T23:41:29","slug":"petrobras-government-mandated-operation-model-is-a-misfit","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/petrobras-government-mandated-operation-model-is-a-misfit\/","title":{"rendered":"Petrobras: Government Mandated Operation Model is a Misfit"},"content":{"rendered":"

Petrobras is a Brazilian integrated oil and gas company.\u00a0 It is failing to accomplish its objectives because of a mismatch between the company\u2019s operational and business models. \u00a0The factors that drive this mismatch a\"Petrobras<\/a>re the company\u2019s history and ownership structure. Petrobras as it is shaped today\u00a0today\u00a0is largely the result of\u00a0the monopoly status it held in Brazil that lasted from the company\u2019s founding in 1953 to 1997 (Wikipedia, 2015). \u00a0Today, the Brazilian government owns 50.3% of shares in the company and controls the board\u00a0(Petrobras, 2015).\u00a0 Although these elements have provided the company with a dominant position in\u00a0the local petroleum sector, near-free access to rich petroleum reserves,\u00a0and the opportunity to achieve many technological firsts, the company has struggled to produce results that match those of its peers. As a result, since 2012 the company has underperformed the local IBOV market index by 30% in addition to the company hugely missing its own production targets.<\/p>\n

BUSINESS MODEL<\/strong><\/p>\n

A business model is defined by the relationship the organization has with its stakeholders.\u00a0 Petrobras has adopted a business model that is a hybrid between a national oil company and a private oil company in that it serves both the interests of the Brazilian government and its private shareholders. On one hand, the company explores, develops, refines, and markets petroleum and petroleum distillates for profit while on the other hand using profits to subsidize fuel costs to the Brazilian public, as part of a government program to combat inflation\u00a0(The Economist, 2012). \u00a0\u00a0Although sometimes in agreement, the mismatch between the interests of these two important stakeholders for Petrobras results in frequent misalignment between its business model and its operation model.\u00a0 As a result of this mismatch (mainly due to the subsidies and huge capital investments in pre-salt field development), Petrobras\u2019 net debt has soared since 2005 and currently stands at six times EBITDA and 0.63 of its total enterprise value\u00a0(CapitalIQ, 2015).\u00a0 In response, Petrobras\u2019 management announced plans in 2015 to cut capital investments by 37% and unlock about $60Bn of capital though asset divestments and businesses restructuring in the next two years (Petrobras, 2015).<\/p>\n

 <\/p>\n

OPERATION MODEL<\/strong><\/p>\n

An operation model is the offshoot of the business model that defines the processes a company puts in place to service the interests of its stakeholders. Given the size of Petrobras, in this post, I will focus on only one aspect of the operation model that is incongruent with Petrobras\u2019 business model described above.<\/p>\n