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What to expect of Lula’s administration in Brazil’s energy sector

Bnamericas Published: Thursday, November 03, 2022
What to expect of Lula’s administration in Brazil’s energy sector

Brazil’s president-elect, Luiz Inácio Lula da Silva, will promote changes in the country’s oil, gas and electric power sectors, possibly taking a more developmental bent, in line with the ideology of the Workers Party (PT) that he leads. 

However, Lula is not expected to make any radical moves, such as cancelling existing contracts or privatization processes. 

Based on a coalition of forces from multiple political parties – including some on the right – both in the executive and legislative arenas, his administration will have to be pragmatic above all.  

Luan Alves, an analyst at VG Research, believes that Lula is unlikely to make major changes to the status quo of the regulatory agencies, especially in the electric power sector. 

“Reversing the privatization process of Eletrobras, for example, would be of great political and financial cost to the government, not to mention the perception of institutional risk within the sector of greatest credibility among the regulatory agencies,” he told BNamericas. 

Alves added, “We also don't see a reversal in the agenda of opening the free [non-regulated] market. The point of doubt in the sector is the concession renewals in the power distribution sector.”

During the elections, Lula said he is against the sale of “public companies of excellence” such as Minas Gerais state electricity firm Cemig and federal oil giant Petrobras, which was included by President Jair Bolsonaro in the federal privatization studies program.  

Mário Braga, senior analyst for Brazil at Control Risks, suggests that Petrobras and other state-owned companies will again be perceived as instruments for the government to implement public policies. 

The focus on refinery expansions and measures to convert part of the company's profit into reinvestment or revenue, such as the imposition of a "windfall tax", are likely, he said. 

“In eventual price shock scenarios, the government should also adopt extraordinary measures to mitigate the impact on inflation,” Braga added. 

Braga does not rule out agreements with the national congress to revise some of the rules approved in the Eletrobras' privatization package, such as contracting natural gas plants in the interior of the country. 

Measures that impact the power prices, such as changes in tax rates or negotiations to influence the decisions of the regulator, will be among the most likely types of political interference, especially in a scenario of skyrocketing prices, he said.

Renewable energy will remain a priority amid efforts to diversify Brazil's energy mix and reinsert the country in the global arena as an important player in the discussion of issues such as climate change and energy transition. 

In this respect, tax incentives or subsidized credit lines for the construction of wind and solar parks or the production of green hydrogen are likely, according to Braga.  

“We don’t anticipate significant changes in the recently approved regulatory frameworks, such as for the construction of offshore wind farms, but there should be greater scrutiny in obtaining environmental permits as a result of the more stringent rhetoric in defense of the environment,” he said. 

PETROBRAS 

One of the foreseeable changes under the new federal government involves modifying the Petrobras fuel pricing policy, which follows the international oil price and the exchange rate.

The idea is to create regional benchmarks that take into account national and import prices. 

Under Lula, the sale processes of the Abreu e Lima (Rnest), Presidente Getúlio Vargas (Repar), Alberto Pasqualini (Refap) and Gabriel Passos (Regap) refineries could be halted if they are not completed before the end of Bolsonaro’s administration at the end of the year.

“There is indeed a scenario in which the company may stop advancing with the refinery disinvestment program and, in fact, this scenario is becoming more concrete as the Lula administration announces the new names that will be in charge of the company,” Alves said. 

Among these names is that of senator Jean Paul Prattes, who would probably rearrange Petrobras’ investments with the aim of creating a more diversified portfolio, including renewable energy and green hydrogen. 

It is unlikely that Lula would suspend the contracts signed for the sale of the shale industrialization unit (SIX) to Forbes & Manhattan Resources, Isaac Sabbá refinery (Reman) to Atem Distribuidora, and Lubrificantes e Derivados do Nordeste (Lubnor) to Grepar Participações, which are pending regulatory approvals. 

The newly elected president intends to expand domestic refining capacity in order to reduce Brazil’s exposure to fuel imports, but has not yet decided whether this will be done exclusively through Petrobras, a source with knowledge of the matter told BNamericas. 

Another possible initiative is to oblige the construction of new FPSOs in domestic shipyards through a national content policy, which was significantly weakened after the Lava Jato corruption probe and the impeachment of the PT’s former president, Dilma Rousseff.

While investors have concerns about Lula’s return to the presidency given his role in the Lava Jato scandal, Petrobras is now a fundamentally different company, according to a new Fitch Ratings report.

“There is little economic rationale to interfere with Petrobras. But there is considerable political benefit in doing so, such as job creation and influencing policies with political consequences,” Fitch’s senior director, Saverio Minervini, said in a public statement.

For the rating agency, changes in microeconomic policy are probable, but are likely to constitute a gradual shift, rather than an abrupt reversal of existing legislation and rules.

NATURAL GAS

Rivaldo Moreira Neto, CEO of Gas Energy, sees little room for reversing the shift that has been happening with the sale of Petrobras assets and the new regulatory framework for the natural gas sector. 

"The business environment has already evolved, and reversing this would have a very large political cost, certainly not trivial," he told BNamericas. 

However, the opening of the market, which still depends, for example, on more players having access to Petrobras' gas flow and processing infrastructure, may happen at a slower pace. 

"The workers party has a historical line of putting Petrobras at the center of the game, reinforcing its role as an inducer of development. So there may be a conflict with the agenda of the moment, which is to reduce concentration and increase competition," Moreira Neto said. 

BIOFUELS 

Today, the main front of the RenovaBio federal biofuels program is through the generation, acquisition and retirement of decarbonization credits (CBios), which are mandatory for local fuel distributors to purchase. 

The program's committee recently revised downward the CBio acquisition targets for 2023 from this year. 

"It could be that the new government presents more aggressive targets for the program exactly in the midst of the environmental agenda it brings with it," Bruno Cordeiro, market intelligence analyst at Stonex, told BNamericas. 

‘A STRONG TRANSFORMATION’

Jademir Santana, structured & financial risks manager at BMG Seguros, said that the oil, gas and electric power sectors will likely experience the beginning of a journey of marked transformation, where monitoring and price cycle management are no longer the only aspects to be considered. 

“Financial health, legal security and ESG play an increasingly significant role in investment transactions, followed by the commitment to reduce emissions. These assumptions already play an increasingly important role in business and investments in general,” he told BNamericas. 

In Santana’s view, a joint development between government and the private sector is needed in order to make the environment generally more favorable for investments in infrastructure in Brazil, which has repeatedly invested less than necessary to promote economic and sustainable growth.  

He claimed that the electric power sector’s agenda should address topics like renewable and intermittent sources of power generation with decreasing costs, systemic impacts of the expansion of distributed generation possibilities, more advanced metering technologies and the establishment of a new regulatory framework through the sector’s “modernization bill” (PL 414/2021), currently under analysis in the national congress. 

And, regarding the oil and gas sector, there should be deverticalization of the gas market, continuity of oil and gas licencing tenders and efficiency in refining, Santana added. 

OIL, GAS AND POWER TENDERS

Aline Penteado, manager of structured business at BMG Seguros, pointed out that the energy auction calendar for 2023 and 2024 has already been defined, with backup capacity auctions in March, power generation in August, service for the isolated system in October, backup capacity/generation in November and existing energy auctions in December. 

She believes that, under Lula, new projects for the production or use of green hydrogen will go ahead, encouraging the production and storage of the zero-carbon fuel obtained from renewable energy. 

Penteado added that ANP's open acreage concession and production-sharing rounds are in progress and are unlikely to be changed with the new government. 

"With regard to the oil and gas sector, there is the expectation that the privatization of Petrobras will not take place under the next government, thus not altering the format of current concession contracts," she told BNamericas.

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