Petrobras Shares Plummet as Lula Adopts a Populist Approach

Brazilian President Luiz Inacio Lula da Silva has pledged to steer the state-controlled oil giant Petrobras in a more populist direction, causing investors to express concern.

Petroleo Brasileiro SA (Petrobras) plans to protect consumers from sudden changes in fuel prices, and increase investments in refining projects to reduce fuel imports, according to initial comments from Brazilian President Lula and his economic team. Petrobras shares fell 9.8% in New York trading on 11:14 a.m. local time, as investors assess how much the policy shift will impact the company's profits and dividends.

Lula's first executive decision was to extend a fuel tax holiday, reversing a move by his finance minister to let the tax breaks expire. This gave Petrobras, Brazil's state-owned oil company, enough time to review its own pricing policy, according to the company's incoming CEO, Jean Paul Prates.

The new CEO of Petrobras says that Brazil will keep fuel costs down for now. This is good news for Brazilian consumers who have been struggling with high prices. The CEO did not say how long the prices would stay low, but it is hoped that this will help ease the burden on families and businesses.

The move raises the specter of a return to policies that previously drained the oil giant’s account balances. Petrobras spent an estimated $40 billion subsidizing motor fuels the last time Lula’s Workers’ Party was in power, causing it to become the world’s most indebted oil company. After the party was voted out, aggressive cost cuts and asset sales improved the company’s balance sheet.

Prates believes that it would be beneficial for Brazil's government to establish a national reference price for gasoline and other refined products. This price would act as a guide for the prices that Petrobras charges its customers. Although Petrobras would probably adjust its internal formula for determining prices, investors shouldn't be too concerned, he said to reporters in Brasilia on December 30th after he was nominated.

Investors are also concerned that Lula’s promise to revamp the refining sector could further drain the company’s coffers. They point to Mexico as a cautionary tale – Petroleos Mexicanos has gone billions of dollars over budget at a new facility that was supposed to improve the nation’s fuel making capacity.

Petrobras has said that it will focus on expanding existing facilities, but some investors believe that the company would be better off investing in producing oil from giant deepwater fields.

Brazil's energy ministry is expected to name Prates to Petrobras's board on Tuesday. Itau expects Petrobras to finish electing a new board by the end of February. This comes as the company is facing pressure to reform its governance structure in the wake of a corruption scandal.