What will happen to Brazil’s oil and gas sector in the next four years?

Southern Pulse
6 min readApr 13, 2023

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Fernando Frazão/Agência Brasil

Brazilian president Luiz Inácio Lula da Silva finished the first 100 days of his third presidential term this week. Based on statements by Lula and other officials, experts see the government embracing previous policies set by successive Workers’ Party (PT) governments between 2003 and 2016 as it develops a renewed vision for Brazil’s oil and gas sector. Its first priority appears to be lowering the price of fuel for consumers.

The vision of the left

Petrobras is the largest company in Brazil. Its largest shareholder is the Brazilian government, which holds 50.23% of the company’s voting rights.

Cibele Moura, director of Brazil’s largest oil and gas trade union (FUP), called for a departure from the policies Petrobras adopted between 2016 and 2022 in a recent interview with Southern Pulse. The state-controlled oil and gas company did not subsidize fuel during that period, which was marked by the conservative governments of former presidents Michel Temer and Jair Bolsonaro.

The federal government did grant subsidies to truck and taxi drivers during those years, but they did not originate from Petrobras’ cash flow. Instead, Petrobras focused on exploring oil reserves present in the so-called pre-salt layer near Brazil’s coast.

President Lula has publicly stated several times that Petrobras must lower fuel prices and that the company’s decisions cannot serve only private shareholders. Lula also criticized the dividends Petrobras paid last month to shareholders, saying they were too high.

To lower fuel prices, Petrobras would need to pay fewer dividends and change its practice of passing on the variation in international oil prices to the Brazilian consumer, Moura told Southern Pulse.

Lula’s leftist, pro-union government and its allies envision a bigger Petrobras active in more areas. It sees the company operating refineries, producing fertilizers and developing renewable energy sources.

Most of the FUP’s directors are members of Lula’s PT and other leftist parties in the governing coalition. Five of the 11 advisors to Petrobras CEO Jean Paul Prates are part of FUP, as well as members of the pro-union think tank Instituto de Estudos Estratégicos (IES).

Fuel prices continue to be an issue

Temer took office in 2016 with a market-friendly agenda, following former president Dilma Rousseff’s impeachment. Petrobras was the most indebted oil company in the world that year, oil and gas expert Bruno Epiro told Southern Pulse.

Facing this reality, Petrobras’ new management prioritized cutting costs and recovering revenues. A central part of the strategy was to cancel its fuel subsidy policy. So, the company started passing on variations in international oil prices to the Brazilian consumer. However, a lingering problem remains. Brazil is the eighth-largest oil producer in the world, but the country cannot refine all the oil it produces. So, it must import part of the fuel it uses.

The Lula government doesn’t seem to have a defined oil and gas strategy according to Edmar de Almeida, a professor at the Energy Institute of the Catholic University of Rio de Janeiro. While the government promises cheaper fuel, it is also discussing energy transition strategies and renewable energy investments.

Professor Almeida says each R$1 (USD0.20 cents) of fuel subsidy costs R$100 billion (USD19.7 million) per year. By comparison, Petrobras’ 2022 profit was R$188 billion (USD37 billion).

Leftists believe Brazil should increase its investment in refineries, but Epiro says this strategy poses several problems. First of all, a refinery takes at least six years to build. Secondly, refineries are very expensive — the US and China only refine because they have money to spare. And finally, refining more fuel in Brazil may not be the most strategic investment in light of the country’s planned energy transition.

Different views on what Petrobras should do

There are two competing views about the role that Petrobras should play. While the right-wing federal administrations from 2016 to 2022 opted for a smaller company, the left within the new government wants a bigger Petrobras.

In addition to ending fuel subsidies between 2016 and 2022, Petrobras focused on the more-profitable business of extracting oil from the pre-salt layer off the Brazilian coast. It also sold its less-profitable assets such as refineries, fuel distributors, and gas stations. Petrobras also decreased its investment in renewable energy.

This policy was successful for the company. In March 2023, Petrobras paid the second-highest amount of dividends to shareholders of any oil company in the world — second only to Saudi Aramco.

But sources close to federal government officials believe that these dividends were too large. Company directors connected to former president Bolsonaro allowed Petrobras to pay out large dividends as their terms were ending — a move designed to limit the cash available to the company’s incoming executives. Petrobras could have invested more dividends in research and development of new technologies in areas such as renewable energy, Epiro told Southern Pulse.

Lula’s recent statements suggest that the new government sees Petrobras playing a central role in re-industrializing Brazil. Past PT governments used Petrobras as the central axis of their economic strategies. Petrobras expanded its operations by building refineries and having an ethanol subsidiary, and many private-owned companies built shipyards as the government established an obligation of having a minimum number of parts built in Brazil.

The government thought Petrobras’ investments would help grow the Brazilian economy by creating a new investment cycle. However, the strategy was designed during the commodities supercycle from 2003 to 2013. When the international price of oil fell, Petrobras was exposed to billions in losses. Private investors left the company en masse, which diminished the value of its shares.

Petrobras was also affected by the Lava Jato criminal investigations that took place between 2014 and 2019. The probe showed that company funds were diverted by directors and managers for illicit enrichment and by political parties to finance campaigns. The US courts condemned Petrobras, as it is listed on the New York Stock Exchange.

Lula appoints CEO Jean Paul Prates

Lula appointed Petrobras CEO Jean Paul Prates, a name that was well received by investors and the left alike. Prates founded the country’s first consulting firm specializing in the oil market in the 1990s.

Prates’ political trajectory began in 2005 when he became energy secretary for the state of Rio Grande do Norte. He joined the PT in 2013 after running for federal Senate under the ticket of Fátima Bezerra, that state’s current governor. As state secretary, Prates put together a broad program aimed at investing in renewable energy.

Despite Prates’ qualifications, some investors worry that the PT and other parties in the governing coalition will once again nominate people without any technical background to run the company, and that politics will influence management decisions.

Our analysis

Considering the Brazilian government’s financial challenges and low economic growth, it will be difficult for Lula’s government to deliver all that it has promised. The promise of cheap gasoline risks scaring away Petrobras’ minority shareholders, which would deprive the company of private financing and put a heavy burden on the federal government.

An additional risk is that the governing coalition’s environmental groups will demand more resources for renewable energies than for oil subsidies. Furthermore, a conflict is brewing within the government over the possibility of Petrobras extracting oil in the Amazon rainforest.

One political risk associated with the third Lula administration is that the president and his party will deal with problems in 2023 in the same way they would have 20 years ago. In the oil and gas sector, this would look like trying to reinstate the same policies from the previous two decades without critically reviewing their costs and benefits.

Economist Silvia Mattos from think tank FGV-IBRE puts it this way: Lula’s government risks feeling “nostalgia for policies that went wrong in the past.”

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Southern Pulse

Southern Pulse provides strategic advisory services to help businesses operate successfully in Latin America.