Presidential campaign rhetoric raises fears of return to failed policies
(U) Brazilian politicians have a long track record of meddling in the country’s oil and gas sector, particularly on the thorny topic of fuel prices. And with Brazil’s presidential elections just around the corner, there are fears that a change in government will bring a new energy agenda.
Brazilians are set to cast their ballots on 2 October, and recent polls have suggested that former president Luiz Inacio Lula da Silva — commonly known as Lula — is leading by a comfortable margin but capturing less than the 50% of the vote he would need for an outright win in the first round.
Incumbent Jair Bolsonaro is trailing in the highly polarised contest, and even though his polling numbers increased a bit in recent weeks to slightly over 30%, following the approval of a pack of measures that included massive fuel tax cuts, the chances are high that the charismatic left-wing populist Lula will return to power in 2023.
For the oil and gas sector, it is still unclear if a Lula comeback would mean any profound changes to the current regulatory framework, especially when it comes to local-content requirements.
Under the existing regime, little is left of the highly prescriptive requirements imposed by Lula and his impeached successor, Dilma Rousseff, apart from some preferential bidding rights for state-controlled Petrobras to secure access to exploration blocks offered in the pre-salt ‘polygon’.
Bid rounds are now subject to a system in which operators nominate the areas for which they intend to bid, eventually triggering a competitive process which can include both royalty-based concessions and, in the case of pre-salt areas, production sharing contracts.
Brazil’s continued success in attracting investment dollars for oil and gas — and the interest of both candidates in developing natural resources — suggest that this format will stay in place.
Environmentalists, on the other hand, are optimistic that a Lula victory would mean a more clean energy-friendly policy, as the Workers’ Party (PT), founded by Lula in 1980, has a history of supporting biofuels and other sustainable projects.
However, Lula and his team have a history of turning to the oil industry for economic development, and have talked relatively little about energy transition, focusing instead on broader social and economic topics to try and blunt Bolsonaro’s popularity with conservative voters.
Bolsonaro is banking on the fuel tax relief to close the gap with Lula and has been trumpeting recent economic improvements, including a drop in inflation and a recovery of the labour market, to try to capture undecided voters.
The fuel tax cut was part of a broader relief package that included a government-sponsored bill, backed by the Brazilian Congress, to set a cap of 17% on a state sales tax, known as ICMS, when the levy is applied not just to fuels, but to energy and telecommunications as well.
Bolsonaro also issued a presidential decree waiving federal taxes on diesel until the end of December in an effort to win support from truck drivers, whose protests over high fuel prices have sometimes brought Brazil to a halt.
“However, in a context where all polls still suggest voters are pessimistic about their economic conditions, the election still looks more favourable for the former president,” risk consultancy Eurasia Group says.
Even though the odds are in Lula’s favour right now, Bolsonaro cannot be counted out just yet. Over the past few weeks, Petrobras has reduced diesel and gasoline prices considerably, as Brent oil prices fell below $100 per barrel on fears of a global recession.
“Continued fuel price cuts will help Bolsonaro improve his numbers among middle and high-income voters,” Eurasia Group says, highlighting that this alone will probably not be enough for him to win.
Since 2017, Petrobras has relaxed its fuel price controls and now adjusts fuel prices at regular intervals in line with Brent crude prices and exchange-rate movements.
The policy unshackled Petrobras from years of political interference but it has resonated poorly with consumers, as gasoline and diesel prices have nearly doubled since, even considering the recent drops.
Bolsonaro has repeatedly questioned the Petrobras pricing strategy in an attempt to shield himself from consumer backlash ahead of the looming election, but Lula has also been a clear and consistent critic of the policy.
There is widespread expectation that a new Lula administration would make use of fuel subsidies to further push down pump prices for diesel and gasoline.
Apart from promising more control over fuel pricing, Lula also questioned why Petrobras would be willing to pay high dividends to shareholders instead of investing in building new refineries in the country.
Such comments can conjure memories of the massive losses Petrobras incurred because of price controls imposed by three consecutive PT administrations.
There is also reticence about a possible return to the overly ambitious local-content policies blamed for causing project bottlenecks — and for providing opportunities for bribery that came to light in the infamous Car Wash scandal.
Among other concerns was the recollection that when he was president, Lula was responsible for pushing Petrobras into the construction of refineries that ran massively over budget, due in no small part to the corruption scandal that later came to light.
Lula denied involvement in the Car Wash scheme but served 580 days of jail time for improprieties in his financial affairs before he was released in 2020.
The comments also stirred up fears of a reversal in a Petrobras debt-deleveraging strategy that includes well-advanced plans to greatly reduce its presence in the downstream sector to focus investments on more profitable deep-water developments.