- Shell and other drillers have sued to block the levy, which effectively yanks the welcome mat for oil majors.
According to Bloomberg article published on March 16, 2023, when Shell Plc’s new chief executive officer, Wael Sawan, landed in Brazil last month on his first official trip abroad, the reception was warm. He received assurances that the country’s new leftist leadership would respect the status quo in the oil industry, people familiar with the visit said, and he left confident that business would keep chugging along.
The camaraderie was short-lived. Two weeks later, Brazil surprised drillers by enacting a temporary tax on oil exports. In response, Shell and a group of foreign oil companies filed an injunction against the levy, risking a public legal battle with President Luiz Inácio Lula da Silva’s administration. The clash could damage Brazil’s hard-won reputation as Latin America’s rare petroleum-rich nation that welcomes foreign oil producers and respects its contracts with them.
Should this credibility erode, it might well chill $20 billion a year in oil industry investments in Brazil at a time when there are already serious questions about where the world will find its next font of fossil fuels.
The 9.2% export tax, announced on the last day of February, was the first of two actions by the administration that sent tremors through the international oil industry. Lula’s government also halted about $2 billion in planned sales of oil field rights and fuel refineries while it carries out a review, even though the buyers had already raised money to complete the transactions, which were signed under the previous government.
The back-to-back policy shifts may cause drillers to rethink deploying billions of dollars in Brazil, which ranked as the world’s eighth-largest oil producer in 2021, according to the latest data available from the US Energy Information Administration.
Largest Oil Producers
Two deep-water fields that could be affected if companies hold back investments include Shell’s Gato do Mato and Equinor’s Pão de Açúcar, which are still in the design phase and haven’t yet been approved for development, according to Marcelo de Assis, the head of Latin American upstream research at consultancy Wood Mackenzie Ltd.
“Everyone will be checking their portfolios, especially the new investments,” de Assis says. “They will look at the costs and risks compared to projects in places like Uganda.” The companies declined to comment on specific projects, though Norway’s Equinor ASA says there needs to be “absolute respect” for contracts to justify long-term investments.
Lula’s recent moves mark a clear departure from the generally accommodating stance toward investors that characterized his first presidential term, which extended from 2003 through 2010. Since taking office in January, he has publicly criticized the central bank for keeping interest rates high, saying it’s stifling the economy, and called into question whether the institution should be autonomous. On several occasions, his comments on these matters have sent financial markets reeling.
Like many world leaders, Lula is eager to tap windfall oil profits to shore up public finances and kick-start growth. Apart from the export tax, he’s publicly bemoaned the record dividends Petrobras, the onetime oil monopoly, has paid out to shareholders, saying the company should be pumping excess profit back into the economy.
Shell, along with Equinor, Galp Energia, Repsol and TotalEnergies, filed an injunction last week against the tax, which is scheduled to last four months but some fear could become permanent. Shell said in a statement that the levy had been “announced with no significant consultation with the industry.” The Brazilian Petroleum and Gas Institute, a trade group that represents local as well as foreign companies, was swift to criticize the levy.
Such moves aren’t uncommon in other parts of Latin America, including Argentina, Bolivia, Ecuador and Venezuela. Leftist governments in those nations have amped up pressure on local oil producers in recent decades, including retroactively altering licenses and deal terms.
In Mexico, President Andrés Manuel López Obrador, a longtime ally of Lula’s, ended competitive oil auctions in 2018 that were part of landmark energy reforms carried out a decade ago. And last year his government sided with the national oil company, Petróleos Mexicanos, in a dispute over control of an 800 million-barrel oil field that was discovered by Houston’s Talos Energy Inc.
Even Jean Paul Prates, whom Lula handpicked to run Petrobras, said at an international oil conference in Houston earlier this month that the export tax wasn’t a smart way to resolve Brazil’s fiscal problems, but added that he was confident the tax would expire in June, as planned.
The signs so far are that foreign companies want to keep operating in Brazil. Shell and Equinor have signed collaboration agreements with Petrobras since the tax was announced, a clear indication they aren’t rushing for the exits.
The levy was triggered by an internal battle in Lula’s cabinet over how to close a budget deficit, a key requirement for bringing down high interest rates that are hobbling the economy. The government decided to gradually reinstate federal taxes on fuels that were suspended by the previous administration. The export tax is meant to shore up revenue until the fuel taxes are completely restored.
The oil industry is already grappling with unpredictable price swings and geologic risk, says Telmo Ghiorzi, the head of a Brazilian association of oil services providers known as AbesPetro. Adding contract uncertainty will discourage explorers from drilling deep-water exploration wells, which can cost more than $100 million each. “It’s oil economics 101,” Ghiorzi says. “You’re telling the investor to reduce activity.”
