Oil policies become issue in Brazil's presidential election Sunday

Just days before a Brazilian presidential election that might see union leader Luiz Inácio Lula da Silva become president, oil policies have become an important issue in the campaign.

By an OGJ correspondent

Rio de Janeiro, Oct. 4 -- Just days before a Brazilian presidential election that might see union leader Luiz Inácio Lula da Silva, candidate of the left-wing Workers' Party (PT), become president, oil policies have become an important issue in the campaign.

After having heavily criticized a possible left-wing government headed by Lula, Francisco Gros, president and CEO of Petroleos Brasileiro SA (Petrobras), has denied reports that he would step down immediately after a Lula election victory Sunday. The new president takes office Jan. 1.
Gros, in an Oct. 2 interview with the Toronto newspaper Globe & Mail, raised the specter of a left-leaning government interfering in the operations of the state oil company—possibly severely hampering Petrobras's ability to raise capital and "poisoning the climate for foreign investment."

Gros also warned that a new government may seize control of Petrobras policy, forcing it to lower gasoline prices to appease consumers and to sink capital into politically popular—but money-losing—projects.

The issue of local content of oil projects also weighs heavily in the election campaign.

Lula, as he is widely known in Brazil, is leading all opinion polls by a wide margin.

He is close to winning the election this Sunday by garnering 50%, plus one, of valid votes, thus avoiding a runoff election on Oct. 27 between the two top vote-getters in Sunday's election. At presstime, Lula was leading the polls with 45%.

Analysts attribute Lula's leadership in the polls to his switching from a traditional socialist stance to a more market-friendly liberal philosophy.

An example is his having chosen as his vice-presidential candidate a highly successful textile entrepreneur.

Capital concerns
Concerns over capital availability for Brazil under a Lula presidency was evident in the Oct. 3 announcement by Fitch Ratings, New York, that it likely will take negative rating action on several Brazilian corporations "should the results of the election fail to return investor confidence to Brazil in the near term."

Fitch cited Petrobras as among those corporations under review with the highest liquidity.

The ratings agency noted that capital markets have reacted negatively to the possibility of Lula winning the election, with the value of the Brazilian real falling against the US dollar by a third since the end of March and with a severe tightening of international debt capital in that same time.

"Investors fear a Lula presidency could lead to higher government spending, which in turn could lead to a default on government debt obligations," Fitch said. "Despite efforts made by Lula in recent months to assuage investors' concerns, skepticism remains about his willingness to repay external debt obligations, given statements he has made in prior campaigns."

Workers' Party view
Luiz Pinguelli Rosa, a physicist and professor at the Federal University of Rio de Janeiro, who is one of the main coordinators for the PT's oil and gas program, strongly rebuffed Gros's statements to OGJ.
"An administration headed by Lula would continue investing in the march to transform Petrobras into an integrated energy company with a growing international presence," he said.
But, obviously, the new president has the right to change Petrobras's administration, Rosa added.

Rosa said he does not believe that Petrobras would have problems raising capital abroad, pointing out that Lula had formally committed himself to not cancel Brazil's foreign debt and to honor all contracts signed by President Fernando Henrique Cardoso's administration. Brazil has a foreign debt of $236 billion, about $100 billion owed by the government.
Lula also said he backed the terms of the International Monetary Fund's recent $30 billion loan package to Brazil.

Market rumors circulated that Gros was alleged to have told Cardoso that he was on on the verge of stepping down because of his discontent over government interference in Petrobras's oil products pricing policy.

Rosa told OGJ that the PT party has "nothing against hiking oil products' prices (to a level) linked with international petroleum prices," pointing out that it was President Cardoso who had intervened in oil product price increases, ordering them to be curbed "to help the candidacy of his candidate, Sen. Jose Serra" (OGJ Online, July 31, 2002).

Analysts say that Brazil's oil products prices are 30% below what they should be (compared with international prices) if Cardoso had not intervened. Because Petrobras produces 99% of the oil products consumed in Brazil, around 1.8 million b/d, some analysts estimate the company is losing $65 million/month because of the government intervention.
Those experts also say that, after the elections, if there is little change in international crude prices, the government may hike product prices by up to 20%. Luis Afonso Lima, an economist with BBV Bank, forecasts that Brazilian gasoline prices will spike by 24%.

Rosa added that the PT welcomes foreign investments in all sectors. However, in the case of Petrobras, he said he prefers that multinational companies investing in Brazil purchase a substantial part of equipment and services locally.

Rosa, who is being speculated as a possible mines and energy minister or president of Petrobras in case Lula wins, said that he is not a member of the party and is an example of how Lula is building bridges to more-moderate interests.

Former energy secretary's view
Former secretary of energy in Rio de Janeiro state, Wagner Victer, told OGJ that commitment by foreign companies to purchase equipment and services locally is a key factor for attracting international investments in the oil sector. Victer is a member of the Brazilian Socialist Party and the energy aide to presidential candidate and former Rio de Janeiro state Gov. Anthony Garotinho.

Some top PT officials told OGJ that Victer, who was also a Petrobras engineer, is also being considered for the position of Petrobras president in case of a runoff, which would probably result in Garotinho's party giving his support to the PT. Garotinho is trailing far behind Lula and the government's candidate, Jose Serra, in public opinion polls.

"I don't understand why Halliburton (Co.) purchased locally 50% of equipment and services for its exploration and production effort in Barracuda-Caratinga fields, in the Campos basin, while Petrobras contracts two platforms, the P-51 and the P-52, to be built abroad," Victer said. Such contracts for new rigs in Brazil would create about 25,000 jobs for 3, he noted.

The question of where oil and gas platforms are built has become a big campaign issue. Lula has repeatedly affirmed that if he is elected, all platforms would be built in Brazil.

More in General Interest