Brazil to resume upstream auctions as politics flare

Brazil is in the throes of another political crisis just as the government prepares to resume upstream auctions that will test investor sentiment ahead of October 2022 elections.

Nationwide protests over the weekend are reviving demands for far-right president Jair Bolsonaro's impeachment, this time for alleged kickbacks related to the government's procurement of the Covaxin Covid-19 vaccine from India.

Brazil's courts and congress are just starting to dig into the allegations, but popular reaction has been swift, driven in part by the heated pre-electoral climate. Bolsonaro's presumptive rival in next year's race is former president Luiz Inacio Lula da Silva, the Workers' Party leader who is vowing a comeback with a more responsible handling of the pandemic.

Brazil last underwent a presidential impeachment in 2016, when then-president Dilma Rousseff, a Lula protege, was removed for mishandling public funds.

Even before the jabs scandal erupted last month, Bolsonaro was veering off an economic reform course by overhauling the management of state-controlled Petrobras to try to keep rising fuel prices in check.

And while Brazil's upstream sector has generally weathered the pandemic and oil price volatility thanks to low-cost pre-salt production, a reform of contractual terms seems to have been shelved.

Up to now, Brazil's rocky politics have had little effect on the appetite of foreign investors, even though a pair of November 2019 auctions drew a sparse turnout. Brasilia is hoping higher crude prices will bring out more competition for a 7 October concession model covering more than 50 offshore exploration blocks, and the 17 December re-offer of excess reserves in the Sepia and Atapu pre-salt fields under production-sharing terms.

The latter auction is moving ahead in spite of a lack of progress on a bill that would replace the production-sharing model for the industry-preferred concession model.

Introducing discussion to change the production-sharing model at this point could have a chilling effect on the Sepia and Atapu offers — as talk of adjustments did in 2019 when the sixth production-sharing round flopped — but a congress already consumed with a formal inquiry into Bolsonaro's handling of the pandemic has also slowed the reform push.

Refinery sales pressure

Another industry segment vulnerable to political turmoil is downstream. Petrobras was already seen as hard-pressed to complete its planned sale of eight of its refineries, partly because of the fuel pricing and demand uncertainty.

Some progress has been made. Petrobras is close to finalizing the sale of the 333,000 b/d Landulpho Alves refinery (RLAM) to Abu Dhabi's state-owned investment fund Mubadala for $1.65bn. And sales agreements for the 208,000 b/d Alberto Pasqualini refinery (REFAP), 46,000 b/d Isaac Sabba refinery (REMAN), and the 8,000 b/d Lubnor refinery are expected to be signed by the end of this month, according to anti-trust watchdog Cade.

Intervention from the federal government, Petrobras' controlling shareholder, remains a major concern for would-be investors leery of an unannounced change in Petrobras' market-based pricing, something recently appointed chief executive Joaquim Silva e Luna has dismissed.

Fuel prices continue to rally truck drivers demanding visibility on diesel as well as low-income consumers who count on LPG for cooking.

Bolsonaro has relied on political horse-trading to tamp down previous scandals, but heightened scrutiny during the pandemic may accentuate populist tendencies. A key question now is whether pro-market economy minister Paulo Guedes can keep reform progress on track.

By Nathan Walters