In the past, Brazil’s massive state-owned oil company Petroleo Brasileiro SA (Petrobras) has operated at the whim of Brazilian politics, a volatile model to say the least. After years of corruption scandals and rapid power shifts, Petrobras may finally find some stability with its new chief executive officer Roberto Castello Branco, an economist, a former Petrobras board member, and an avid advocate for privatization.
Economic analysts are already predicting that previously prohibitive downside risks of Petrobras stocks will be majorly diminished. Current CEO Ivan Monteiro isn’t scheduled to surrender his position until January 1st, but already, just in the time since the announced appointment of Castello Branco, Petrobras stock has already increased nearly 2 percent.
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Castello Branco was appointed on Monday by Brazil’s far-right president-elect Jair Bolsonaro, a fellow pro-market reformer. Before his tenure on the Petrobras board in 2015 and 2016, Castello Branco spent 15 years as the director of Brazilian mining company Vale, from 1999 to 2014. Now, and up until his inauguration as Petrobras’ CEO, the veteran businessman is a professor at university and business-focused think thank Fundacao Getulio Vargas.
The incoming Petrobras CEO has long advocated for privatizing the massive energy company from his seat on the board, and now he will have far more power and support to work toward making that dream a reality, with the backing of Bolsonaro as well as Paulo Guedes, a long-time friend and confederate of Castello Branco, who will soon be stepping up as Brazil’s incoming finance minister.
Despite the major administration change and a strong pro-privatization lineup, experts tend to agree that completely privatizing Petrobras is not going to be feasible, and Castello Branco has admitted as much (contradicting the staunchly pro-privatization stance he has publicly taken in the past). That being said, Castello Branco will be able to push a market-friendly agenda, set fuel prices, and get more aggressive with divestments. While it’s a far cry from wholesale privatization, all of these would be major changes compared Brazil’s previous leftist administrations. In fact, after so many years of anti-privatization government, Brazil now has more state-owned enterprises (SOEs) than any other nation in the Western Hemisphere, even prompting Forbes to label it “the China of Latin America”.
While there are plenty of strong arguments in favor of privatization, which would help Brazilian oil stay competitive and go a long way to combatting the country’s hefty debts, there is also considerable opposition to the new pro-market forces taking over Brazilian politics and industry. It’s highly unpopular among the Brazilian military, which sows considerable division among ex-military officer Bolsonaro's base. Privatization would likely also mean the end of hard-won subsidies for fuel prices (instated after a trucker’ strike that left the nation in gridlock earlier this year), another hugely unpopular proposition. After so many years of Brazil striving to keep their own rich resources under domestic control, many of its constituents also bristle to the idea of ceding that independence to foreign investors with deep pockets.
That being said, Bolsonaro has already announced his plans to begin a massive push to sell a huge quantity of Petrobras’ pre-salt crude deposits to foreign investors. If all goes according to plan, a staggering amount of oil, greater than all of Mexico’s proven reserves, would suddenly become available to Big Oil.
For his own part, Castellano Branco has said that he will be re-focusing Petrobras’ strategy toward selling off the massive company’s non-core assets and emphasizing oil exploration and production. Speaking to Brazilian newspaper Folha de S. Paulo, Castellano Branco said “The privatization of the company is not in question. I do not have a mandate to think about it,” but the fact remains that any pro-economic reform, sweeping overhaul or no, will be a big change (hopefully for the better) for long-struggling Brazil.
By Haley Zaremba for Oilprice.com
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