Army General Running Petrobras Will Learn About Oil on the Job

(Bloomberg) -- Neither the incoming nor the outgoing CEO of state-controlled oil giant Petroleo Brasileiro SA is an oil man. Neither in fact had ever worked a day in the industry before being nominated to the job.

But that’s where the similarities between Joaquim Silva e Luna and Roberto Castello Branco end.

Whereas Branco is a University of Chicago-trained economist who’s spent his career pushing for free-market reforms inside and outside the Brazilian government, Luna is a career military man who cut his teeth building highways in the Amazon and whose greatest qualification for the job, as critics see it, is his respect for hierarchy and discipline -- important traits in the administration of Jair Bolsonaro, a former Army officer himself.

Branco, a close ally of the embattled economy minister, Paulo Guedes, had pushed hard to prevent a return to the kinds of domestic fuel subsidies that saddled Petrobras with billions of dollars of losses in the past -- and was fired for it. Luna, meanwhile, has made comments since his appointment several days ago indicating that he shares Bolsonaro’s concerns that Brazilians need to be protected from rising prices. In an interview, he said Bolsonaro has agreed not to interfere.

This is the most immediate concern that unnerved investors, who dumped Petrobras shares along with almost everything else in Brazil on Monday. The 22% rout was the stock’s second-worst day ever.

Petrobras Craters, Real Falls in Brazil’s Worst Rout in Months

The broader concern is that a Luna-led Petrobras could come to resemble a branch of the government, subject to political meddling that could erode its finances. This is an age-old concern that waxes and wanes in Brazil, but it’s one that feels particularly acute to investors today, given how Bolsonaro’s administration has taken a markedly populist approach to policy of late in a bid to appease the millions of Brazilians who have been hit hard by the pandemic.

“My relationship with the president will be as it always has, of respect, consideration and care,” Luna said in the interview Wednesday. “Petrobras is the most strategic and emblematic company in Brazil. Bolsonaro is the president of Brazil. There is nothing more legitimate than for him to watch and cheer for its victories.”

Even more unsettling to some Brazil experts is that Luna’s military background could make him inclined to undertake the kind of nation-building initiatives that Branco was moving away from -- money-losing refineries in underpopulated regions, fertilizer factories, power plants.

“Priorities will be set in consensus with the other directors and the board, but always thinking in what’s good for the company,” Luna said. “Without forgetting about investors, consumers and the Brazilian population.”

Luna, an engineer by training who rose to the rank of four-star general, managed several national projects, including the construction of a mega-highway through the Amazon that began in the 1980s and took two decades to complete. And at Itaipu, a hydroelectric dam that he’s run for the government since 2019, he oversaw the building of a major bridge, a highway and an airport expansion, having cobbled together the money to pay for them by reining in spending elsewhere.

“There is a risk to have an even more nationalistic approach,” said Marcelo de Assis, the head of Latin American upstream research at Wood Mackenzie Ltd. “It’s not a good signal to place a general when a pro-market guy is being sidelined.”

‘The Oil Is Ours’

Bolsonaro and Branco got into an increasingly public spat over rising fuel prices that reached a boiling point when the Petrobras executive said he didn’t care about complaints from truck drivers, a key Bolsonaro constituency. This week, Bolsonaro said that Luna would “fix things up” at Petrobras and told Brazilians that “the oil is ours” -- a nod to the nationalistic campaign that was launched around the time when the company was created in the 1950s.

Luna, on the other hand, was part of a team who was called on to disband a trucker’s strike that paralyzed Brazil in 2018, when he served as defense minister -- contacts that could help to control a possible crisis ahead.

On Tuesday, Petrobras’s board came out in favor of market-based fuel rates and and said Branco will keep his job until his term ends on March 20.

Petrobras Board Defies Bolsonaro on Market-Based Fuel Prices

The impact of the abrupt management shift atop Petrobras is already being felt. Some of the multinationals interested in buying the company’s refineries and pipelines are getting nervous and could pull out if Luna follows through on interventionist policies like price fixing, said a person involved in the company’s divestment program.

Luna said the refining industry is open to outside investment. But if the fuel price uncertainty grinds these sales to a halt, it means less money to develop giant discoveries in the Atlantic that can take half a decade to get running. The oil majors who partner with Petrobras could see delays in their own growth plans.

The challenge for Luna is to continue expanding Brazilian oil output in deep waters of the Atlantic at costs that can withstand price downswings. For the past five years Petrobras’s management has been focused on slashing expenditures and investing mainly in its most profitable fields in the so-called pre-salt region that brought production to a record last year.

“We can’t forget the basics. Petrobras is the company with the most know how and has leadership in deep water-exploration, where the pre-salt reserves are located,” Luna said. “We can’t pull back from exploring.”

His most recent experience running Itaipu, which was built in the previous century and doesn’t require major capital investments to maintain production, gives him little experience for the challenges he will face at Petrobras, said Assis. These challenges include executing an enormous business plan and tapping capital markets and infrastructure investors to help finance it.

“From the view from the oil industry, the first challenge is he has no background,” he said. “It’s a problem because it is a market with a lot of volatility.”

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