Feature: Brazil election casts shadow of uncertainty over oil industry

Congressmen Jair Bolsonaro, an ex-military officer running on a hard-line public safety platform who was recently stabbed on the campaign trail, led the latest poll by local firm Datafolha late Thursday with 35%. Fernando Haddad, who took over the Workers' Party campaign from jailed former president Luiz Inacio Lula da Silva, was running second at 22%, while leftist candidate Ciro Gomes was third at 11% and market-friendly center-right candidate Geraldo Alckmin had 8% of the vote.

Brazil's political future gets even more uncertain considering Bolsonaro likely lacks the support to win 50% of the vote. That means the top two vote getters will face off in a second round in late October. Polls show that Bolsonaro loses against most opponents in the second round despite his first round lead because of high voter rejection figures versus other candidates.

While executives at the Rio Oil and Gas 2018 conference and Brazil's fifth subsalt production-sharing auction downplayed the impact of the election and any change in government, many admitted that another change in policy could be on the horizon just as the future was looking bright. Brazil carried out a series of successful licensing sales since mid-2017, both concession auctions and production-sharing bid rounds, that raised record signing bonuses and profit-oil guarantees for the government. The acreage will also generate nearly a decade worth of investments as seismic surveys are conducted and exploration wells are drilled.

The race is still considered to be close despite the double-digit difference in the latest polls, with shifting alliances among the parties of the top four candidates capable of influencing the vote should one withdraw from the race and throw support behind a friendly rival. Bolsonaro and Geraldo Alckmin share market-friendly policies that would likely include continuing with recent oil-industry reforms, while Haddad and Gomes favor the state-led model of PT predecessors Lula and Dilma Rousseff.

HADDAD, GOMES THREATEN REVERSAL

The biggest industry concern comes from Haddad and Gomes, who would both likely try to return to the previous regulatory regime. That would mean state-led oil company Petrobras would likely be required to hold at least a 30% operating stake in all subsalt fields sold under production-sharing contracts. Foreign oil companies are currently allowed to operate subsalt fields, with Equinor, Shell, ExxonMobil and Total all leading groups developing acreage acquired at recent sales.Gomes has went even further, saying that he will tear up contracts signed from the recent concession and production-sharing bid rounds, although oil companies will be reimbursed for their lost rights. Such a move would buck Brazil's trend of honoring contracts, even during changes in regulatory regimes, oil-industry executives noted.

"We have safely lived through a lot of volatility," Andre Araujo, chief executive of Shell Brasil, said of the company's 105 years in Brazil on the sidelines of the subsalt bid round September 28. "This is a country that respects contracts and we continue with our bets here."

Shell and other global heavyweights such as ExxonMobil, Chevron and Equinor all made heavy bets on Brazil over the past 18 months, reflecting confidence in the sanctity of those contracts. But the new government, which will take power on January 1, 2019, will also control appointments at regulatory agencies, ministries and other government entities that can also affect the pace of development, officials conceded.

Marcio Felix, the executive secretary at the Mines and Energy Ministry and a leader in the government's open dialogue with the industry, said during several speeches at the conference that "common sense" should prevail when it comes to evaluating recent reforms. The composition of Congress is unlikely to change much in the current election cycle, Felix noted.

"I believe in common sense and I don't believe that Congress will make a lot of changes," Felix said. Felix noted that the ministry and National Petroleum Agency, or ANP, will leave a schedule of upcoming bid rounds through 2021 ready for the next government to carry out.

Industry executives, however, confirmed a sense that the fifth subsalt bid round could have been the last chance to win development rights in the region for some time, depending on the outcome of the election.

TRANSFER-OF-RIGHTS DISPUTE

The next government will also be tasked with resolving the so-called transfer-of-rights deal with Petrobras. Petrobras paid the equivalent of $8.51/b for the rights to pump 5 billion barrels of crude from subsalt fields owned by the government in a 2010 oil-for-shares swap. The deal, however, included a price adjustment based on actual oil prices when the fields were declared commercially viable for development.

Petrobras is widely considered a creditor in the deal now because the commercial declarations happened after the collapse in oil prices started. But the government and Petrobras have been stuck trying to work out a deal, which will likely include a hefty cash payment to Petrobras. Petrobras also found as much as three times as much oil as previously thought, so the government also wants to sell development rights to recoverable reserves the ANP pegged at 5.1 billion-15.2 billion barrels of oil equivalent.

The Senate is currently sitting on a Lower House-approved bill that would help facilitate a deal and also allow for an auction to develop the additional subsalt barrels discovered in the transfer-of-rights areas by Petrobras until after the elections. It's unclear whether the vote will be held before the new government takes control, but the auction of development rights will not take place until 2019 at the earliest, according to Felix.

ANP Director General Decio Oddone said in a speech at the conference that constant delays related to the transfer-of-rights areas represented a lost opportunity for Brazil.

"We've been talking about this for five years already," Oddone said. "We're talking about something that could generate two trillion Reais in revenues. Where's the urgency? We act like we're rich," Oddone said.

Oddone, however, noted that the transfer-of-rights auction would likely generate Real 100 billion in signing bonuses given the level of exploration and development already conducted in the region, a massive injection of capital for a cash-strapped government.