Publish in Perspectives - Wednesday, June 8, 2022
Brazilian President Jair Bolsonaro fired Petrobras CEO José Mauro Ferreira Coelho (photo) on May 23 after just 40 days in the position. (Photo: Brazil Government)
President Bolsonaro’s constant CEO changes are hurting market cap, divestment program.
BY ENERGY ADVISOR
Brazilian President Jair Bolsonaro fired Petrobras CEO José Mauro Ferreira Coelho on May 23 after just 40 days in the position. The dismissal came amid a warning that Brazil is facing a severe diesel shortage. Ferreira Coelho was the third Petrobras CEO in a little over a year to be fired by Bolsonaro amid disagreements over fuel prices. All three of his predecessors were sacked after refusing to continue subsidizing fuel prices, a policy that Bolsonaro has pushed as he seeks re-election in October. Have the changes in leadership hurt Petrobras’ operations and strategic goals, and how have shareholders and markets reacted to the ouster of another CEO? Is Brazil at risk of running out of diesel, and how will the shortage affect transportation, exports and other sectors reliant on the fuel? How likely is Ferreira Coelho’s successor—Caio Mario Paes de Andrade—to bend to Bolsonaro’s will and subsidize fuel prices?
Anabel Teixeira, associate for Brazil and the Southern Cone at McLarty Associates: President Bolsonaro has taken several controversial measures over the past year to contain the rapid rise in fuel prices, aggravated by the war in Ukraine.
The backdrop to this is the upcoming election, in which the president trails his opponent, former President Lula, by a significant margin. Public pressure on Bolsonaro to contain rising prices, especially by truckers who comprise a significant component of his base, has been increasing.
Andrade is the fourth Petrobras CEO in the position during Bolsonaro’s tenure, and his appointment followed Bolsonaro’s replacement of the well-regarded minister of mines and energy, Bento Albuquerque. These personnel moves have damaged the relationship between the executive branch and Petrobras leadership, with shares of the company dropping in reaction to political intervention in its management. While Petrobras’ strategic goals remain on track, the issue at the top of mind now is the risk of a diesel shortage.
While Petrobras has formally alerted the government of this risk, Bolsonaro believes the state-owned company must abandon its pricing policy, which follows international prices. Petrobras executives have expressed concern that, amid the global fuel crisis, an alteration to its policy would severely disincentivize diesel imports and cause further shortage (especially since local supplies are at half capacity), negatively affecting Brazil’s agribusiness exports and, ultimately, GDP.
Andrade comes from an open market background, and considering the shortage risk, it is unlikely that he will change Petrobras’ pricing policy and refrain from increasing fuel prices.
Joel Korn, president of WKI Brasil and senior international partner at UPITE Consulting Services: Bolsonaro’s appointment of Caio Paes de Andrade as the new CEO of Petrobras was clearly driven by political considerations related primarily to highly sensitive fuel price hikes. It certainly raised concerns and the perception of investors and market analysts about undue government intervention in the company’s operations. The negative implications of price escalation for the president’s re-election bid are behind his populist and stubborn opposition to Petrobras’ policy for establishing domestic diesel and gasoline prices in line with international market conditions.
Past price subsidies by Petrobras have been disastrous to the company and, paradoxically, prompted its new management at the outset of Bolsonaro’s government to establish a policy of no price subsidies. Petrobras is by far the main corporate taxpayer and, along with royalties and dividends, it has been consistently contributing more than $15 billion per year to the federal government’s fiscal revenues. Just in 2021, the company paid close to $20 billion in royalties linked to offshore oil production and dividends, boosted by record earnings. The government could use these resources for temporary price subsidies without compromising the company’s results and stability. Another action, which Congress is likely to pass, is a cap on state taxes levied on fuels, notwithstanding the tight fiscal budget faced by most of the state governments. Unless there is an indication by the government that the solutions envisioned will not affect Petrobras’ existing policies, uncertainties will continue at least until the upcoming presidential election.
The naming of the new CEO comes right after the appointment of the new minister of energy, both formerly members of the economic team and aligned to Economy Minister Paulo Guedes. The first action of the energy minister was a request to study a potential privatization of Petrobras, again a political move considering that it entails a long process that will inevitably exceed the term of the current administration.
Adriano Pires, founding partner and director of the Brazilian Center of Infrastructure (CBIE): Changes in Petrobras’ leadership bring instability, with an immediate impact on the company’s market value. Any movement in the presidency of Petrobras, in addition to affecting the company, can affect the value of other Brazilian companies with government participation and shares traded on exchanges abroad, for fear of intervention. Petrobras is in the process of divestment, including in the refining sector, and with this movement potential stakeholders in the assets being offered are on alert due to regulatory and legal uncertainty that also creates difficulties for the sale of other assets in the company’s divestment plan. The mixed capital company model in Brazil does not work. The country must decide what it wants, whether it is fully state-owned or completely private. The mixed economy model is the worst of both worlds. Due to the war in Ukraine, there is a global race for fuel, and refineries around the world are switching from natural gas in their respective processes to diesel. This represents lower fuel availability and high prices. However, the news of the possible lack of diesel seems to be coated with alarmism and electoral discourse. I don’t believe in a lack of diesel. I believe in higher prices. I believe this for three reasons: the continuation of the war in Ukraine; hurricane season, which is now in the middle of the year in the United States; and the increase in consumption here in Brazil in the second half of the year due to agribusiness. Starting with the Temer government, the improvement of bylaws, governance and compliance gave Petrobras greater autonomy and ended up making it difficult for the government to interfere in the company, including in fuel price policy. According to the company’s statute, Petrobras must be compensated if the government forces it to hold prices, and the company suffers damage. Therefore, it is difficult for any nominee to enable some control over fuel prices.
Vinícius Teixeira and Victor Freitas, energy consultants at BMJ Consultores Associados: We must keep in mind that President Jair Bolsonaro is running for re-election this year, and he is to trying to balance two competing objectives. On the one hand, he wants to signal to the population that he’s acting to reduce fuel prices. On the other hand, he wants to show the market that he will not interfere in Petrobras. To this end, the three CEO changes at Petrobras follow the same strategy of meeting the president’s electoral rhetoric, as he can claim to have made changes in the company aiming to reduce costs but without adopting effective changes. Besides, President Bolsonaro is pressuring Petrobras not to promote any readjustment until the election in October, which the company’s shareholders reject.
However, regarding the security of diesel supply, this uncertainty about Petrobras’ performance poses a risk for private importers, who need the company’s signal that it will adhere to market prices. That is, if Petrobras holds its prices, the market becomes inaccessible to private investors. In other words, the attempt to maintain lower prices increases the risk of shortages due to challenges to private importers. The Ministry of Mines and Energy has said the country has enough diesel until the beginning of July. The supply shortage scenario is remote, considering the electoral context and what this would imply in a loss of popularity for Bolsonaro.
However, the solution to guarantee a supply scenario is through readjustments in the price of diesel. Thus, one of the measures that has been considered is the creation of direct subsidies for those most affected by price increases, especially truck drivers. The government and Congress have already discussed this proposal, but there are no signs of progress on this issue.