Election puts Brazil’s oil overhaul on hold

Brazil’s plan to tap billions of barrels of offshore oil to spur economic development for the coming decade could be changed or even scrapped depending on the outcome of October’s presidential vote.

Government leaders in Congress announced last week they would delay voting on key oil-related legislation until after the election, a setback for President Luiz Inacio Lula da Silva and his plan to expand state control over the sector.

The unexpected delay reflects a broader, intensifying debate between Lula’s Workers Party and the opposition over how much control the state should have over Brazil’s booming economy. It also highlights how the closely-fought October vote is beginning to stall Lula’s legislative agenda and cause greater uncertainty for investors in months ahead.

The bill may still be approved if Lula’s chosen candidate, former chief of staff Dilma Rousseff, wins in October. But it could be overhauled or even shelved if opposition candidate Jose Serra prevails.

“If Serra wins, it’ll be difficult to get (the bill) approved as is,” said Andre Pereira Cesar, a political consultant in Brasilia.

Serra and Rousseff have been neck-and-neck in recent polls.

The delayed bill is one of four that constitute Lula’s plan to distribute wealth from massive undersea oil reserves discovered in 2007. Lula says developing them could transform Brazil. The reforms would create a production-sharing system under which the government would own the oil but pay oil companies with part of the proceeds.

Of the four bills, only one enabling a massive capitalization plan for state-run oil firm Petrobras has passed into law.

Eager not to be seen as unpatriotic by opposing more government control over oil, Serra has mostly avoided direct comment on the reform issue. However, most legislators in his coalition have opposed the proposal, warning it could crowd out needed private investment, reduce competition and erode Petrobras’ efficiency.

“All this extends uncertainty in Brazil’s oil industry,” said Adriano Pires, an oil expert in Rio de Janeiro.

CAPITALIZATION AT RISK?
 
The possibility of an opposition victory and resulting uncertainty over the industry’s legal framework could also force Petrobras to delay for a second time its capitalization plan worth as much as $85 billion.

“If it’s a neck-to-neck race and Serra looks strong, investors could become concerned. Petrobras may have to put off capitalization,” said Erasto Almeida with Eurasia Group, a New York-based political consultancy.

The share offering, potentially one of the world’s largest, is to help finance Petrobras’s aggressive $224 billion, 5-year investment plan.

Petrobras’s preferred share, its most traded class of stock, tumbled 34 percent from this year’s high on concerns over the size and timing of the planned offering. The stock has see-sawed in recent days.
 
   Because of the delay, Lula also won’t be able to auction new fields from the subsalt area, as he had hoped to do, before leaving office at the end of the year.

   “Brazil won’t offer any new areas this year,” said Walter de Vitto, an energy analyst at Tendencias consultancy in Sao Paulo.

The delay also signals continued disagreement among Brazil’s politicians over how to distribute the oil windfall among different regions. Lula’s party decided to hold the legislation after protests from officials in Rio de Janeiro state, which stands to lose billions of dollars because of an amendment shifting revenues to non-producing states.

Rio de Janeiro has Brazil’s third-biggest electorate, and is a key battleground for Serra and Rousseff.
 
Meanwhile, the delay could deprive Rousseff of a main talking point during her campaign. While inaugurating oil installations earlier this year, she boasted that the new oil reserves would  help eliminate poverty and ensure long-term economic growth.

Now, it will be more difficult for Rousseff to claim any credit for the issue.