Brazil’s bold plan for deepwater oil reserves

. Mar 28, 2019
petrobras brazil oil prices Protesters ask for lower oil prices. Photo: Petrobras

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Good morning! Markets & Bolsonaro: is the honeymoon over? Senate could force government shutdown. Brazil’s bold plan for deepwater oil reserves.

Markets & Bolsonaro: is the honeymoon over?

Ever since Jair Bolsonaro became the leading presidential candidate last year, Brazilian investors have gotten really excited, wagering the government would have the muscle to pass the liberal agenda of economic guru Paulo Guedes. What investors failed to consider is Mr. Bolsonaro’s own track record—as a congressman, he voted for more state intervention. Just 3 months into his term, investors seem to realize they’ve bet in the wrong horse.

Mr. Bolsonaro has publicly disavowed the pension reform, alienated key allies, and lost a big chunk of his popular support. Meanwhile, foreign investors continue to bail on Brazil. As our Weekly Report showed back on Jan. 12, foreigners have increased their short positions ever since the “Bolsomania” started, back in September. In February alone, they pulled USD 662m from Brazilian stocks—continuing what is the big flight of capital since the 2009 global crash.

</p> <p>Speaking before a Senate committee, Economy Minister Paulo Guedes once again threatened to resign if the reform doesn&#8217;t move quicker—and with fewer amendments. &#8220;I&#8217;m here to help, but if the President and Congress don&#8217;t want my help, I won&#8217;t cling on to my job,&#8221; he told senators. Among Mr. Guedes&#8217; team, the message was clear: either the president starts backing him, or he&#8217;s out. As a result, Brazilian assets crashed.</p> <p>The president, however, has done nothing to solve the crisis. Instead of making peace with Speaker Rodrigo Maia—who is crucial for the government—Mr. Bolsonaro decided to tease him, referencing his father-in-law&#8217;s recent arrest. Congress is counterattacking. After passing a bill taking the government&#8217;s authority over the budget away, the House wants to make the administration have to give BRL 39bn to states.</p> <ul> <li><strong>Go deeper: </strong><a href="" target="_blank" rel="noopener noreferrer"><em>If Brazil’s economy is still crawling, why were stocks soaring?</em></a></li> </ul> <hr /> <h2>Senate could force government shutdown</h2> <p>There are two possible consequences of the Senate passing the constitutional amendment stripping the government&#8217;s power over the federal budget: either the administration will not obey the federal spending cap, or there will be a government shutdown. The conclusion comes from the Independent Fiscal Institution (IFI), a Senate body created to bring monitor public spending.</p> <p>The bill states that the administration must honor investments proposed by lawmakers. If it passes, the government will effectively control only 3% of the budget. In the House, the amendment passed in a landslide—with only 6 nay votes. Even the president&#8217;s son voted for it. Senate President Davi Alcolumbre has already declared his &#8220;total support&#8221; for the bill.</p> <p>This proposal was presented in 2015, when Congress was trying to sabotage the Dilma Rousseff administration. Which shows the level of prestige this administration is enjoying among lawmakers.</p> <ul> <li><strong>Go deeper:</strong> <a href="" target="_blank" rel="noopener noreferrer"><em>Analyzing public spending in Brazil</em></a></li> </ul> <hr /> <h2>Brazil&#8217;s bold plan for deepwater oil reserves</h2> <p>The Brazilian government is mulling over the possibility of auctioning—for the first time ever—deepwater oil reserves beyond the 200-nautical-mile limit established by the UN. Brazil had bid to extend its territorial sea to 350 nautical miles since 2004, with partial success: the country has been authorized to explore parts of the Santos reserve beyond previous limits.</p> <p>The National Petrol Agency has already recommended the government include areas in the 2020 pre-salt auctions which are, in theory, in international waters. Geological studies suggest that extra-territorial reserves have between 20 and 30 billion prospective barrels (non-confirmed reserves), which would almost double the pre-salt prospective reserves.</p> <p>A 1994 UN convention established the 200-mile limit. Until 2004, countries could bid for an extension based on geological studies. The economic potential for Brazil goes beyond oil—there is also the prospect of cobalt and manganese reserves, which has led the Navy to call the region the &#8220;<a href="">Blue Amazon</a>.&#8221;</p> <p>Go deeper: <a href="">Petrobras oil pricing system</a></p> <hr /> <h2>What else you need to know today</h2> <ul> <li><strong>Railways.</strong> Twelve years after its last railroad concession, today the federal government will auction a 1,537km stretch of the North-South Railway—which was projected 34 years ago. When ready, it will run over 4,500km, connecting the Amazonian state of Pará to Rio Grande do Sul, Brazil&#8217;s southernmost state. Two consortiums are vying for the contract, and the minimum bid is BRL 1.3bn. <a id="nw" name="nw"></a></li> <li><strong>Pension reform.</strong><strong> </strong>Among the main causes of the evangelical caucus in the current legislature is to establish a narrower vision of &#8220;family&#8221; (a man and a woman) and restrict abortion rights (even in cases of rape). But that has taken a backseat. For now, congressional evangelicals are all-in on the pension reform—and have advised the president to do the same. Despite providing President Bolsonaro key support along the campaign, the evangelical caucus has been disgruntled with the government and recently declared its &#8220;independence.&#8221;.</li> <li><strong>Financial aid.</strong><strong> </strong>Economy Minister Paulo Guedes announced that, within 30 days, the government will launch a BRL 10bn aid program to help state finances. The minister is also considering the possibility of sharing revenue from pre-salt oil royalties with states and municipalities—this money currently goes exclusively to the federal government.</li> <li><strong>Beef.</strong><strong> </strong>American inspectors will visit Brazilian meat-packing plants in June and, if everything goes well, Brazil could be allowed once again to export &#8220;in natura&#8221; beef to the U.S. by August. Brazilian producers, however, won&#8217;t have much space on the market—having to fight over a quota of 64,800 tons with several other countries. But having the approval stamp from U.S. sanitary authorities can serve as an image boost, and help them export to other markets.</li> <li><strong>Trust.</strong><strong> </strong>The Businessmen&#8217;s Trust Index, calculated by the National Confederation of Industry, has dropped for the 2nd straight month, to 59.8 base points. It remains 6.5 points above the historical average and above the 50-point mark, which separates optimism from pessimism.

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