Sam Davis and John Auers
Last week, we highlighted some of the developments that have been taking place in the Brazilian downstream industry and how those have and will continue to impact Western Hemisphere product markets and trade flows. The petroleum industry as a whole is an important part of Brazil’s economy and energy issues, especially scandals associated with state-owned Petrobras which have played an important role in the political environment and in the nationwide election which concluded on Sunday with the run-off for the country’s Presidency. As had been widely expected, Jair Bolsonaro, the outspoken right wing candidate known for his controversial views on social issues was victorious on Sunday. Bolsanaro emerged from a crowded field of 13 centrist and left wing candidates as the leading vote-getter during the first round of voting back on October 7. In the run-off, he gathered about 55% of the vote to beat leftist candidate Fernando Haddad and earned the right to take the reins as Brazil’s chief executive on the first day of 2019. In today’s blog, we will discuss the election results; identify some of the major potential issues and impacts they might have on the petroleum industry in Latin America’s largest country and what this might mean for the industry at large.
Bolsonaro ran a campaign on three main issues: establishing a spending cap on government expenses, reduction in tax burden, and cutting back on excessive regulations. If some of this sounds familiar, it is. Bolsonaro has been compared to U.S. President, Donald Trump, and has been labelled the “Trump of the Tropics.” He is considered an outsider who has favored a nationalistic approach on economic issues.
In pre-election poll results, Brazilians pointed to unemployment, corruption, and lack of healthcare services as the country’s biggest challenges. To tackle these issues, Bolsonaro has vowed to implement a fiscal reform on spending, arising from fraud and loopholes, and reducing debt levels by 20% via the selling of government assets. He also campaigned to boost access to private capital markets as a way to achieve growth and to deregulate and cut red tape holding back private investments and economic development.
For the energy industry, Bolsonaro has also voiced “Trump-like” opinions, including a potential exit from the Paris climate agreement. He has also promised to implement an ambitious privatization program, including the noncore businesses of state-owned entity, Petrobras; however, his policies around energy and free markets remain unclear. For instance, while he has supported the allowance of domestic fuel prices to align with international markets, a policy in place since 2015, he recently supported a truckers’ strike against rising fuel prices which led to a reinstatement of temporary price controls. Referring to Petrobras’ fuel prices, he said, “You can’t have a state-owned monopoly imposing just any price it wants.” His chief economic advisor, Paulo Guedes, is strong on free markets and also advocates for the privatization of Petrobras so one would expect continued removal of price controls and a continuation of the divestment program. The challenge for the new President is likely going to be the team he assembles to carry out his campaign promises. Given his military background, he has vowed to bring back the efficiency of the military with the “right people.” Should he appoint generals to his administration, they could become influential and potentially derail or, at best, put the domestic divestment program at risk with their opposing views of Brazil’s energy resources being strategically vital and hence must be protected and remain under state control.
These uncertainties will present challenges for the investment community looking to create partnerships. As we discussed in last week’s blog post, Petrobras announced earlier this year they were considering the potential sale of a majority stake in four of its 13 refineries as part of a broader divestment and business realignment strategy, but that sale had been put on hold, which was likely influenced by uncertainties associated with the ongoing election. We also noted the recent letter of intent which Chinese government-owned giant CNPC signed with Petrobras to form a partnership with both upstream and downstream components. That is a good sign and may give others confidence to follow suit with other investments or partnerships, especially with the election now in the rear view mirror; however, despite the opportunities that present themselves through refinery sales and partnerships, navigating the political winds will be necessary for those who wish to do business in Brazil’s energy industry as several key questions still remain: Where will the new President Bolsonaro land in his efforts to privatize state-owned companies? Will the fuel subsidy removal policy resume and be fully realigned with international markets? Will debt reduction targets be achieved to invest in refining capacity to meet growing fuel demand? How should U.S. Gulf Coast exporters position themselves to capture opportunities in Brazil’s fuel market? Will the election impact the ongoing effort to sell the Petrobras-owned refinery in Pasadena, Texas?
At Turner, Mason & Company, we explore these topics and continue to monitor developments not just in Brazil and the Latin American region, but the refining industry on a global basis. Our team is working on updates to our Crude & Refined Products and World Refining Construction Outlooks and will be issuing our 2019 publications in February and August. If you would like more information on our products, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.