Soiled by Oil Scandal, Brazil's Model Is Primed for Makeover

(Bloomberg) -- Oil was to be the elixir of Brazil’s dreams to build a formidable economy, promote industrial development and fund a more generous welfare state even as it attracted billions in private global investment.

Instead, crisis and disappointment in the oil sector are beckoning Brazil’s leadership to move -- if grudgingly -- toward more deregulated industries and to temper the government’s hand in using state-run companies to forge broader economic policy.

Which helps explain why, as her second term takes shape, some of President Dilma Rousseff’s ministers have jettisoned the statist language of her first four years in office and those of her popular predecessor, Luiz Inacio Lula da Silva. Instead, they are floating some liberal notions more in keeping with the pre-Lula years.

Talk of deregulation or breaking with party economic rhetoric -- the kind of pronouncements that used to get a minister a public dressing down from the president, as has happened with issues like taxes and the minimum wage -- now occur with impunity even as Rousseff herself sticks to the nationalistic script. “I wouldn’t say the government is turning,” said John Forman, a former Brazilian oil regulator who now advises energy companies. “I’d say the government is being forced to take a different position.”

Forced, he said, by a confluence of circumstances beginning with the huge writedowns and losses hobbling state-run oil giant Petrobras, saddled with $125 billion in debt. With the government in no position to execute a bailout, the question now is how Brazil will finance the development of its vast offshore oil reserves, including the so-called pre-salt deposits in the Atlantic Ocean, about 150 miles east of Rio. These were discovered during the Lula era.

Ongoing Meltdown

The ongoing meltdown at Petroleo Brasileiro SA -- highlighted by a staggering $16 billion in writedowns in April related to corruption and mismanagement of refinery projects -- is just the tip of the iceberg. The government had also ordained Petrobras to provide fuel subsidies for the masses, a move designed to direct huge sums from its assumed pre-salt bonanza toward social policy it favored and as a hedge against inflation.

Model Broken

In September 2010, at the height of the pre-salt discovery frenzy, Petrobras raised $70 billion in cash and assets in the world’s largest share sale, making it then the fourth most valuable company after Exxon Mobil Corp., Apple Inc. and PetroChina Co., according to data compiled by Bloomberg. Its market capitalization was about $220 billion and it planned to invest $224 billion over five years to double oil production to 5.38 million barrels a day and vault past Venezuela, Mexico and Canada in the Americas. Rousseff had just stepped down as chairman to make a run for the presidency.


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