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25th of June 2018

Economy



The murky future of two Latin American oil giants

IT SEEMED like such a comeback. When Pedro Parente took over as boss of Petrobras in 2016, Brazil’s state oil firm was drowning in $130bn of debt. It had lost $200bn in shareholder value, and its executive board had been gutted by the massive Lava Jato corruption scandal. Mr Parente slashed subsidies, sold assets and adopted a market-friendly pricing policy. The company’s debt shrank and the share price reached a 3½-year high in May.

Then, on June 1st, Mr Parente resigned and Petrobras’s shares plunged by over 20%. The cause was a ten-day lorry drivers’ strike that crippled Brazil’s economy and forced Petrobras to freeze diesel prices for ten days and the government to subsidise them for two months. That revived a conversation about price controls and fuelled concerns about future state meddling.

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The same fears hang over Pemex, Mexico’s state-owned oil giant, ahead of a general election on July 1st. The populist front-runner in the polls, Andrés Manuel López Obrador, is promising to freeze fuel prices for three years. As significantly, he railed for years against reforms in 2013 that opened Mexico’s oilfields to foreign firms and sought to turn Pemex into a more efficient leviathan. The future of two of the biggest companies in Latin America, both symbols of national sovereignty with a history of cronyism and corruption, is about as clear as a barrel of oil.

Start with Petrobras. The appointment of its market-friendly former chief financial officer, Ivan Monteiro, to replace Mr Parente has restored some confidence. But the strike and an unpredictable presidential election are big challenges ahead.

The lorry drivers, who operate on razor-thin margins, demanded a return to the costly price subsidies of the past. Some 87% of Brazilians supported them, according to Datafolha, a pollster. So, the government’s short-term goal is to work out a fuel-pricing system that protects drivers from excessive volatility without tearing holes in Petrobras’s pockets. Fuel prices might be adjusted once a month or once every three months, rather than every day. Taxes could be tweaked in order to serve as a pressure valve: high when oil is cheap, low when it is expensive. Petrobras has been on a trajectory toward market-oriented policies, efficiency and privatisation, but the strike and debate about price controls has slowed that progress and revealed just how unpopular privatisation would be.

Pemex is also in a political predicament. Enrique Peña Nieto, Mexico’s outgoing president, repeatedly promised that the energy reforms he passed in 2013 would lower fuel prices for ordinary Mexicans. Alas, Mr Peña raised the price of fuel by around 20% in January last year. The gasolinazo, as Mexicans call it, triggered widespread protests and rioting.

But the gasolinazo was just one explosion in the minefield that is oil politics in Mexico. Since Lázaro Cárdenas, a former president, expropriated the oil sector in 1938, state control over oil reserves has become knitted into Mexican notions of national sovereignty. The energy reforms of 2013 began to unstitch this by allowing foreign firms to bid for oil contracts in transparent auctions broadcast online. The reforms also aimed to reduce Pemex’s bloated workforce by around half.

Mr López Obrador opposed all this, and pledged to reverse the reforms via referendum. But though the reforms are unpopular with voters, investors view them as vital. Mr López Obrador, whose pragmatic streak is increasingly visible as election day nears, now promises only to review the contracts already awarded, to check for corruption. But even without repealing the reforms, he could stall them through bureaucratic gridlock. The consequences of that for Pemex would be bleak.

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