Petrobras facing strong political pressure with end of fuel tax exemptions

Petrobras is expected to be under strong political pressure now that Brazil decided to resume federal taxation on fuels, Bruno Komura, an analyst at Ouro Preto Investimentos, told BNamericas. 

A concrete sign was seen on Tuesday when the state-run oil firm said it would reduce the price of gasoline sold at its refineries to fuel distributors beginning Wednesday. 

The announcement came one day after Luiz Inácio Lula da Silva’s administration announced the end of PIS/Pasep and Cofins tax exemptions on gasoline, ethanol, aviation kerosene and vehicular natural gas as of March 1. 

The tax exemptions were approved through a bill in 2022, during Jair Bolsonaro’s government. At the beginning of his administration, in January, Lula extended the benefits until the end of February, except for diesel, biodiesel and liquid petroleum gas, which will be free of federal taxes until December 31. 

Lula's economic team had been pushing for a review of the tax relief to help rebuild government coffers, which are in a delicate situation.

In addition, there is the environmental issue. By exempting or discounting gasoline and diesel from taxes, Lula is seen as subsidizing fossil fuels, which goes against the environmental agenda that he has adopted since he became a presidential candidate.

Others within the government claim that the end of the exemption will affect the president's popularity as fuel prices will rise, with a direct impact on inflation.

In light of this, the expectation is that the government will opt for a strategy of a gradual application of fuel tax, while using a Petrobras price "cushion" resulting from positive differences in relation to the import parity price to dampen the rise.

According to Komura, the price reduction announced by Petrobras is not problematic, as it is within that cushion. But he believes that it sends a bad signal to the market.

"The one who pays the bill is Petrobras and this is what is likely to happen on the next few occasions. With this, investors revise profit expectations downwards for the coming years and the distribution of dividends is reduced," Komura said.

He added that the low valuation of Petrobras' stock reflects the mistrust of the market and that the government is likely to make interventions. 

"If the company is damaged, with a reduction beyond parity, the market may penalize the stock even more," Komura said. 

According to Brazil’s fuel importers association Abicom, Petrobras sold on Tuesday gasoline with an average positive difference of 6% compared to the import parity price, which takes into account the real/dollar exchange rate, international crude prices and freight costs. 

In the case of diesel, Petrobras’ average price was in line with the import parity price. 

In a statement, Petrobras, which also lowered the diesel price, said that the reductions are aimed at balancing the NOC's prices with the domestic and international markets.

The company also said that it seeks to avoid passing on the volatility of the exchange rate, while preserving a healthy competitive environment under the current legislation.