Brazil fossil fuels plan under Lula may not transpire

Brazil’s president-elect Luiz Inácio Lula da Silva wants to reassert some form of state control over motor fuel prices and steer state-run Petrobras back into refining, but analysts say he will have limited political and economic scope for major near-term fossil fuels policy changes.

After squeaking past far-right incumbent Jair Bolsonaro in an October 30 run-off election, the 77-year-old Workers’ Party (PT) leader known as Lula will return to the Brazilian presidency in January after serving two consecutive terms in 2003-2010. He is now laying the groundwork for re-establishing a more muscular state role in the economy including in the fossil fuels sector in Brazil.

In the oil sector, the main instrument of his strategy is Petrobras. In recent years, the company has focused on developing prolific pre-salt oil deposits while working to divest half of its two million b/d of refining capacity to introduce more downstream market competition in line with a 2019 anti-trust agreement.

The most significant of these slow-moving divestments was last year’s $1.8 billion sale of the Mataripe refinery in Bahia state to Acelen, a unit of Abu Dhabi investment fund Mubadala. Among the assets the company is currently promoting is the Repar refinery and related installations in southern Brazil.

Lula wants Petrobras to hold on to more of its refining capacity to displace fuel imports, with the main goal of checking pump prices for the benefit of local consumers who have been clobbered by double-digit inflation this year.

“There is a consensus within the Lula camp that they want to close the gap between domestic (fuel) production and imports,” says Mark Langevin, a senior advisor to Horizon Access Consulting and former policy advisor to the president-elect. “They want to make sure that domestic prices reflect the cost of production and not the interests of large Petrobras shareholders — including the federal government — that want large dividends.”

During the 2011-2016 administration of Lula’s successor Dilma Rousseff, below-market fuel prices cost Petrobras tens of billions of dollars in losses. In 2016, the company introduced an import parity fuel pricing policy and began to set the stage for asset sales that helped to bring debt under control. But it has repeatedly back-slided on pricing in response to competition from private-sector importers and Bolsonaro’s meddling, particularly on politically sensitive diesel that is used by the country’s powerful trucking and agricultural sectors.

In its third quarter earnings webcast on November 4, Petrobras chief trading and logistics officer Cláudio Mastella said the company looks for “good alignment” with import parity prices for which “there are many estimates.” He pointed to the participation of importers as “proof that our prices are fair.”

On the campaign trail, Lula said he wanted to decouple Brazil’s fuel prices from the global market. If he were to succeed, imports would likely dry up, and Petrobras and new domestic competitors would be at odds to fill the supply gap. Cleveland Jones, a researcher at Brazil’s Intituto Nacional de Óleo e Gás, thinks Lula would hesitate to take such a risk.

“Since Brazil is not self-sufficient in fuels, independent importers are now a significant influence in helping to maintain the current Petrobras pricing policy, since if the pricing system is broken, there will be no incentive to import diesel, for example, which drives the Brazilian economy, and the consequence would be a quick meltdown of the Brazilian economy,” Jones wrote on the day of the country’s momentous run-off election.

Brazil fossil fuels consumption

Aside from the market dynamics, the move would draw scrutiny for encouraging Brazilian fossil fuels consumption and burdening the treasury. Subsidies “distort markets, send the wrong price signals to users, widen fiscal deficits in developing economies, and discourage the adoption of cleaner renewable energies,” the International Energy Agency says. “Their expansion is particularly worrying at a time when we should be redoubling efforts to cut wasteful consumption and accelerate clean energy transitions.”

“Fossil fuel subsidies are environmentally harmful and undermine global efforts to tackle climate change,” according to Canada’s International Institute for Sustainable Development. “Despite this, support for fossil fuels costs governments USD 300–600 billion every year—depending on fuel prices on the world markets—a huge sum that could otherwise be spent on global priorities such as health, education, social protection, and a just transition to a clean energy future,” it says.

Lula will face multiple domestic constraints on his policy plans as well, from an opposition-dominated legislature to budget limits. And Petrobras, which sustained repeated interference by Bolsonaro, is “more resilient” than it used to be, Jones says.

In the earnings call, the company’s chief governance and compliance officer Salvador Dahan highlighted checks and balances that were put in place after a kickback scheme was uncovered in the sweeping Car Wash investigation. In 2018, Lula was imprisoned for more than a year as a result of that probe, and was later released on procedural grounds. Many Brazilians still don’t trust him or the PT. This political polarization was borne out in last month’s divided election result. To try to unite the electorate and keep the economy on an even keel, Lula is expected to chart a moderate course in conjunction with his centrist vice president Geraldo Alckmin.

Among the signposts to watch for are Petrobras’ soon-to-be-released 2023-2027 business plan and Lula’s appointments to the company’s board. Another are international oil prices. If they fall back in response to weakening global demand, Lula may find that market forces, ironically, give him little cause to intervene at the pumps.

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