Brazil’s new far-right president might be a necessary evil for oil
New Brazilian president, the far-right Jair Bolsonaro, who takes office in January, has been labelled bad for the environment, human rights and democracy, but good for oil.
His surprise election is the culmination of failed policies and corruption that ensnared previous leftist governments. And whether he really does open up Brazil’s oil industry, his presidency will get a major boost from past petroleum investments.
Despite Mr Bolsanaro’s erratic and unpleasant pronouncements, state-run oil producer Petrobras does need cleaning up. Once the darling among national oil companies, a world-leader in deepwater production, it has been badly damaged under the rule of the Workers’ Party (PT) of former presidents Luiz Inacio “Lula” da Silva and Dilma Rousseff.
The discovery of giant “presalt” oilfields in deepwater (oil deposits trapped under a thick layer of salt deep in the Atlantic seabed) from 2006 onward promised a windfall for Brazil, alongside rising oil prices.
But resource nationalism saddled Petrobras with an impossible burden; the world’s largest upstream investment programme alongside other commitments such as a mega-refinery. Its discretion over bidding was removed, forcing Petrobras to take a stake in exploration blocks with foreign companies even if it considered them unattractive and to be sole operator of the pre-salt blocks. No company in the world could have executed such a plan.
The state firm’s missteps were compounded by the failure of private companies founded to exploit the boom, such as OGX, led by Brazil’s richest man, Eike Battista, which collapsed when most of its much-touted fields were found to be unviable. Disputes with states over the division of tax revenues and a new production sharing contract deterred foreign investment. Tough domestic content regulations drove up costs and led to delays of up to three years as local oil service providers had to build up capacity.
Oil production growth stalled, as advances in the pre-salt were undone by declines in Petrobras’ neglected legacy deepwater fields. In 2014, the country suffered its worst ever recession, including a commodity slump compounded by the effect of the oil price crash.
Petrobras also became the centre of a huge corruption scandal, “Lava Jato” or “CarWash”. This discredited the PT, landed Mr Lula in jail for 12 years, and led to the impeachment of Ms Rousseff.
Like his supposed prototype, the “Trump of the Tropics”, Mr Bolsonaro is a populist known for outrageous statements on women, race, environment and dictatorship, and not for his policy consistency. As a long-time member of congress, he promoted statism, and praised former leftist Venezuelan president Hugo Chavez. He has expressed fears that troubled electricity monopoly Eletrobras might fall into Chinese hands. Nationalist retired generals who back him also consider state oil giant Petrobras a strategic asset, and a general is a possible choice to run the company.
But a key adviser, Paulo Guedes, educated at the traditionally free-market University of Chicago, has been tipped as “super-minister” of finance, trade and planning. The new administration’s economic plan includes introducing competition in natural gas, reducing fuel subsidies, privatising Petrobras subsidiaries and removing the state company’s monopoly on offshore operatorship.
Brazil is a key country for the medium and long-term oil market. After the US and Russia, it is expected to contribute the most to production growth outside Opec, gaining 1.8 million to 4 million barrels per day to 2040, according to BP and the International Energy Agency.
The country has become central to the plans for oil output growth for global companies, exposing them to the upsides and possible turbulence of the radical new administration.
Despite Mr Bolsonaro’s cosiness with US President Donald Trump, his economic plans will depend on China as an investor and buyer of petroleum, iron ore, soya beans, sugar and other commodities. In these areas, Brazil is already benefiting from the retaliatory China-US tariffs.
Whatever policies are followed, the economy is going to get a belated boost from previous oilfield investment. Petrobras’ production is set to grow by 9 to 12 per cent next year, adding 200 to 240,000 bpd, and pre-salt fields should add a million bpd by 2025. If oil prices remain reasonably strong, the national oil companies’ profits, already the highest since 2011, will reduce the deficit and give the new government more money to play with. In fact, Mr Bolsanaro has been happy to steal policies from the left, saying he would expand the Bolsa Familia – which higher oil revenues would allow.
A fragmented congress may yet limit how much Mr Bolsonaro can change Brazil. But the Brazilian left must take much of the blame for his rise, in how it squandered a potential oil boom. A gush of petro-real will sustain his rule and give him a freer hand.
Whatever policies are followed, the economy is going to get a belated boost from previous oilfield investment