Latin America’s largest economy Brazil has experienced a massive oil boom over the last decade and a half that saw the country become the top regional and leading global petroleum producer. For some time, analysts have asserted that Brazil has the potential to boost hydrocarbon production by as much as 70%, which would see it become the world’s fourth-largest oil producer, but there are several headwinds that can impede such significant growth. There are fears that leftist President Lula da Silva will implement unfavorable policies and ratchet-up government intervention in Brazil’s booming hydrocarbon sector. That, as it occurs, will deter foreign energy investment and impact national oil company Petrobras, the leading driver of production growth.
Already international energy companies are expressing concern over the direction taken by Lula’s administration with regard to Brazil’s energy patch. According to data from Brazil’s hydrocarbon regulator the National Agency for Petroleum, Natural Gas and Biofuels (ANP – Portuguese initials) April 2023 hydrocarbon output plunged sharply compared to a month prior. The agency’s data shows (Portuguese) total hydrocarbon output was 3.5 million barrels of oil equivalent a day for April 2023, which represents a worrying 12% decline month over month and is 9% lower than the comparable period a year earlier. That marked slump can be attributed to significantly lower oil production. ANP data indicates that in April 2023 petroleum output averaged 2.7 million barrels a day compared to 3.1 million barrels a month earlier and three million barrels daily compared to a year earlier.
That sharp decline in oil production occurred at a crucial time for Brazil’s oil boom. Foreign energy companies are increasingly leery of the policies being proposed and enacted by President Lula because they indicate that increased government intervention in the oil industry is the new norm. In the latest development, national oil company Petrobras, which is nearly 37% owned by Brazil’s government, announced a new fuel pricing policy that will significantly reduce costs for consumers. This saw the integrated energy major dump its market-friendly approach to fuel pricing that closely aligned fuel prices with oil prices and exchange rates for one that essentially subsidizes domestic consumers.
This marks a return to the government interventionist policies which hampered Petrobras’ performance and marred its operations for nearly a decade eventually causing the energy major to become the world’s most indebted energy company by 2015. According to Petrobras, as quoted by Reuters, the new policy will reduce gasoline and diesel prices at the pump by 13% while liquified petroleum gas will fall by 21%. President Lula had made controlling fuel prices a key election pledge. Indeed, it was spiraling fuel prices during the administration of hard-right President Jair Bolsonaro, triggered by rising international energy prices, which was responsible for sparking civil unrest and various protests.
There are concerns this new policy has the potential to impact Petrobras’ profitability to the detriment of private shareholders who were enjoying a monster 62% dividend yield. Petrobras’ 2022 dividend payments attracted the ire of Lula who criticized the state-controlled oil company for paying out a whopping $41.5 billion in dividends for 2022. Brazil’s leftist President went on to emphasize, according to Reuters, that the state-controlled energy giant should have invested at least half of that sum in the country’s economy by bolstering investment in shipping as well as oil and natural gas production. Those statements certainly indicate that Lula views Petrobras as a government policy tool rather than a company acting solely in the interests of its shareholders.
The new administration in Brasilia in early March 2023 implemented a surprise oil export tax. According to Reuters, Brasilia announced it will collect taxes on oil exports for four months to offset the financial losses created by keeping fuels partially tax-exempt. This, oil industry executives asserted, indicates that Brazil’s current government has departed from an established tradition of respecting existing oil contracts. This in conjunction with a lack of industry consultation sparked fears among energy industry participants that it foreboded a return to heavy-handed government intervention. There are very real dangers that under Lula the oil industry will be used as a source of funding for social policies as occurred during Dilma Rousseff’s tenure as president. It was her government’s constant intervention in Petrobras that left the energy company teetering on the brink of bankruptcy.
These events have the potential to derail Brasilia’s plans for Brazil to become the world’s fourth-largest oil producer. Earlier this year the Ministry of Mines and Energy announced a plan known as ‘Potencializa E&P programme’ which is designed to promote investment in exploration and development activities in Brazil’s hydrocarbon basins. The main tenets of the program are to promote investment in the exploration of frontier regions as well as in the development of marginally economic and mature oilfields. According to Brazil’s energy ministry, the plan will be responsible for driving oil production to over five million barrels per day by 2029, an ambitious target considering that the country is only pumping around three million barrels a day at this time.
For this to occur, Brazil must attract considerable energy investment both from foreign oil companies and Petrobras, which is the main company responsible for developing the country’s vast offshore pre-salt oilfields. Brasilia’s increasingly interventionist policies will deter investment from overseas energy companies. Shell, which is Brazil’s second-largest oil producer, declared at the time, as per Bloomberg, the controversial oil export tax being introduced will increase uncertainty about future investments in the country’s oil and gas resources. Furthermore, any policies enacted by Brasilia which materially impact Petrobras’ profitability will negatively affect the national oil company’s ability to muster the considerable capital required to develop Brazil’s ultra-deep-water offshore oilfields.
By Matthew Smith for Oilprice.com
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