Lula’s strategy for Petrobras worries investors

Brazilian President Luiz Inácio Lula da Silva, has pledged to lead state oil giant Petrobras in a more populist direction and the investors they are not happy.

Petroleo Brasileiro SA it will shield consumers from sharp swings in fuel prices and increase investment in refining projects to curb fuel imports, according to initial comments from Lula and his economic team.

Petrobras It was down 9.8% in New York at 11:14 am local time, as investors weigh how much the policy change will erode earnings and dividends.

One of Lula’s first executive decisions was to extend a moratorium on the fuel tax, reversing a move by his finance minister to let tax breaks expire. Petrobras’ incoming chief executive Jean Paul Prates said the tax break would give Petrobras enough time to review its own pricing policy.

The move raises the specter of a return to policies that previously depleted the oil giant’s account balances. Petrobras spent an estimated $40 billion on motor fuel subsidies the last time Lula’s Workers’ Party was in power, making it the world’s most indebted oil company.

After the party was ousted from government, drastic cost cuts and asset sales improved the company’s balance sheet.

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Prates supports the Brazilian government setting a national reference price for gasoline and other refined products, to serve as a guide for the prices Petrobras charges its clients.

While Petrobras is likely to tweak its internal pricing formula, investors shouldn’t be too scared, he told reporters in Brasilia on December 30 after his nomination.

Investors also fear that Lula’s promise to modernize the refining sector, ostensibly to reduce costly fuel imports, could further drain the company’s coffers and point to Mexico as a warning sign.

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Petróleos Mexicanos has spent billions of dollars over budget on a new plant that was supposed to improve the nation’s fuel production capacity.

Petrobras would focus on expanding existing plants, but investors say the money would be better spent producing oil in giant deepwater fields.

Brazil’s energy ministry is expected to nominate Prates to Petrobras’ board on Tuesday. Itaú expects Petrobras to finish choosing a new board by the end of February.