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New Petrobras boss gets warm reception

Appointment of ‘Chicago Boy’ to head state-owned giant reinforces reform agenda optimism

The incoming Bolsonaro regime in Brazil will appoint Roberto Castello Branco as the new CEO of state-owned oil firm Petrobras, in a move that has bolstered confidence that the new administration will continue to pursue a reformist agenda.

Castello Branco is currently a director at the Brazilian FGV thinktank, having previously worked for the country's central bank, as IR director and chief economist for metals firm Vale and, for a year, served on Petrobras' board. In the late 1970s, he completed an economics post-doc at the University of Chicago, leading to conclusions that he is close to Bolsonaro's economics czar Paulo Guedes and that the reformist wing of the new administration is, at least as it pertains to Petrobras and the oil industry, in the ascendancy over more statist elements.

"It's not a political appointment, as in some expectations, but someone who knows how to run a business; a businessman whose key goal will be to maximise profit," says Muhammed Ghulam, a Houston-based senior associate at US investment bank Raymond James.

"He was previously a board member, he is familiar with how the company works," agrees Gabriel Fonseca, a Sao Paulo-based lead analyst at Brazilian investment firm XPI. Castello Branco has said previously he is against price controls on gasoline and has recently given interviews stating he is supportive of asset divestment and Petrobras exiting the fuels distribution business as it's non-core, as well as not wanting Petrobras to be the country's sole refiner. All this adds up to a "good mindset", says Fonseca-"[His appointment] has given the right message from a market friendliness standpoint. I do not believe the markets will see it as a bad thing."

Castello Branco is "clearly part of the liberal team that Paulo Guedes is putting in place", says Fonseca, although cautioning that, while sharing strong liberal instincts, there is no guarantee that the two men see eye-to-eye on all matters.

A key positive is the apparent message that Petrobras will not be overburdened by political interference. "It was in the spotlight under Dilma [Rousseff] and under Temer, [the Bolsonaro administration] does not want Petrobras to be in the spotlight, at least in a negative sense, under them," says Fonseca. "Appointing someone political to Petrobras would have had only downsides. The Brazilian public would not have tolerated it, it would have been horrible from a public relations aspect."

Bolsonaro's appetite to continue and build on the modest energy industry reform programme instituted by interim president Michel Temer—which included the return and establishment of a forward schedule for bid rounds in premium areas, the end of Petrobras as sole operator in pre-salt blocks and softening local content requirements for E&P projects—or adopt more statist positions held by some in his inner circle, and possibly even instinctively by the new president himself, has been a source of much post-election debate.

The stakes are high. The new regime could make substantial progress on removing legal barriers to a Petrobras divestment program. These could include non-core fields; speeding up the environmental licensing process; reducing even further domestic content requirements for E&P projects; opening the downstream market through selling off chunks of Petrobras' refining, distribution and transportation assets; establishing natural gas sector competition, ending Petrobras' monopoly through unbundling and guaranteeing non-discriminatory access to pipelines; and allowing fuel prices to float freely linked to international prices, only avoiding short term oscillations through hedge mechanisms.

"Appointing someone political to Petrobras would have had only downsides"—Fonseca, XPI

Another substantial opportunity is instituting a bid round for 9-15bn barrels of excess oil discovered by Petrobras in the so-called "transfer of rights" licensing. The firm was awarded the rights to produce up to 5 billion barrels in this area, but discovered resources are far in excess of that. Marcio Felix Bezerra, executive secretary at the ministry of mines and energy, believes Brazil can collect more than $25bn in 2019 alone in signature bonuses from bidding rounds.

One area where it seems that Guedes and the liberals will not get their way is the start of any process to privatise Petrobras, even partially. But both Ghulam and Fonseca agree that the firm's divestment programme should move forward, albeit the former is more cautious than the latter.

"The administration is not anti-divestments, which is definitely a positive. The executive is inclined to get out of the way; the impact and decision of the judiciary is more up for debate," says Ghulam, referring to a Supreme Court ruling blocking a proposed Petrobras sale of a pipeline and some refining and chemicals assets earlier this year.

"You would expect a right-wing party to be pro-competition and free markets," he continues, but the Social Liberal Party, Bolsonaro's political vehicle, is not a "straight-up" economically liberal party. "While Bolsonaro was still a candidate, he made comments in favour of government intervention in Petrobras' fuel policy. When he thought it would benefit him politically, he was prepared to cave in. There is always going to be that thought, if he was willing to say something like that, what if he came under pressure from, say, local companies about reducing local content. It's definitely a concern" says Ghulam.

But Fonseca insists such worries are receding, at least in relation to Petrobras and the oil and gas sector. "The divestment programme will come back; the government will strive to overcome opposition," he says. While divestments will not start the moment the injunction is lifted, Fonseca predicts a "blitzkreig" approach to getting the injunction itself lifted very quickly after the government takes office, "because it's key to its agenda".

State-owned power firm Electrobras is likely to be more vulnerable to statist leanings within the administration, with significantly less appetite to consider divesting what are deemed strategic assets in the power sector. "There is no genuine economic reason, but there is a rationale around public opinion [on keeping power assets fully in state hands]," says Fonseca. "There is no similar rationale for Petrobras."

No minister for mines and energy has been appointed, as yet. But the new incumbent will need to work closely with Castello Branco and Guedes, who will be finance minister in a new mega ministry that has also swallowed the planning and development, industry and foreign trade briefs.

Guedes' lack of previous party affiliations or political posts is considered an upside, both by the market in terms of acting independently and according to his own liberal views, but also by a Brazilian public deeply suspicious of its political elite. But his lack of experience in dealing with the Chamber of Deputies and the Senate, and with politicians in general, may be more of a hindrance, particularly when he will be dealing not just with the opposition but also potential hostile statists within his own administration.

"Congress is heavily fragmented and Bolsonaro's party is only the second largest in the lower house," says Fonseca. "It will require negotiation skills from the government, skills they have yet to display. But it's not impossible to get reforms done."

He is still focusing on the positives. "The relationship between the administration and Congress, Congress is not quite as smooth as it could be, there have already been some failures in communication. But what if it was the other way around and Haddad had won? We have someone with some liberal instincts in there, and the rest of the centre-right candidates were not viable options," says Fonseca.

"Execution will be key and difficult. A lack of know-how [from Guedes] is a concern, it definitely is, no-one is saying it's not. But it could be worse; it's a good debate to be having."

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