U.S. Markets closed

Could Brazil's Oil Sector Trigger An Economic Miracle?

Haley Zaremba

Brazil’s new far-right President elect Jair Bolsonaro, dubbed in some circles as the “Trump of the tropics”, has huge plans in store for Brazilian crude. His energy team is planning a massive push for the sale of Brazil’s enormous crude deposits to foreign investors. This is a move that would potentially open up a staggering quantity of oil, bigger than all of Mexico’s proven reserves, to Big Oil and other private interests.

Bolsonaro’s new pro-market strategies and political recruits represent a major shift in political ideology for the veteran politician. Before running for president, Bolsonaro was largely in favor of state control, and, as a retired military officer himself, the president elect continues to be close to extremely nationalist military leaders. Now, the long-time political figure has changed his tune, winning the Brazilian presidency on a free-market platform of and a promise to Brazil’s economic doors to foreign producers.

If all goes according to plan, Bolsonaro’s energy team would be taking bids as early as mid-2019 as part of an initiative to raise some of the billions of dollars needed to pull Brazil out of crushing debt and to address the massive and ever-expanding budget deficit. It is estimated that Brazilian crude sales could potentially raise up to 100 billion reais ($27 billion USD) if next year’s sale is approved by senate this week. The bill was introduced months ago but had previously been stalled in congress because of the contentious and volatile presidential race.

To be clear, this would by no means be the first sale of Brazilian crude open to foreign interests--it’s actually the country's 16th bid round and sixth subsalt production-sharing auction--but it is in many ways the first of its kind. Unlike previous auctions of Brazilian crude, which offered exploration rights to high risk areas with no guarantee of commercial reserves, the sale to take place in 2019 would be for an area that has already been home to major discoveries by Brazil’s state oil company Petroleo Brasileiro SA (Petrobras). In fact, the transfer-of-rights area is located within Brazil’s massive pre-salt reserves offshore in the Atlantic Ocean.

Related: Saudis Scramble To Stop Oil Price Slide

The Brazilian government transferred 5 billion barrels of the pre-salt area’s deposits to Petrobras in 2010, but the Brazilian oil regulator soon discovered that they held considerably more crude than originally thought. This surplus is what will be offered to oil majors in the coming year if Bolsonaro’s plan is met with success and could amount to as much as 15 billion barrels--a truly staggering figure.

The bill that would authorize the sale, currently waiting to be voted upon by the Brazilian senate, would also remove the obligation placed on Petrobras to develop the entire offshore pre-salt region on its own. This measure is a holdover from the leftist Workers’ Party that led Brazil for 13 years until 2016, during which time they maintained that Brazilian oil was a strategic resource that should be kept out of foreign investors hands and under domestic control.

In fact, after many years of pushing back against privatization, Brazil now has more state-owned enterprises (SOEs) than any other nation in the Americas, even prompting Forbes to label it “the China of Latin America”.

Now, as Brazil’s debt edges closer to a whopping 90 percent of its GDP, and the people have shown their desire for a new direction by electing a far-right President, it looks like the winds of change and big sales are about to sweep through the South American nation. Selling off SOEs to private investors is the much-preferred strategy, the undesirable alternative being extreme cuts on entitlement spending. Paulo Guedes, respected Brazilian economist and Bolsonaro's nominee for finance minister, confirmed late last month that under the president-elect the government will unquestionably lean into privatization of state-led industrial entities.

By Haley Zaremba for Safehaven.com

More Top Reads From Oilprice.com: