Extractives sector: The regulatory environment outlook in Brazil
PGI offers our geopolitical expertise to support organisations operating in either a particular geography or within a sector specific focus.
In part two of our four-part series, we explore the risks and challenges facing the extraction sector. In this piece, we take the example of regulatory environments in Brazil – providing alternative scenarios and their likelihood; something which is a staple of our work to help our clients plan ahead.
Case study: Brazil
- Following the October 2022 presidential elections, the regulatory environment and civil unrest targeting the extractive sector will likely worsen.
- In the event that Lula wins the election, the regulatory environment for the extractive sector will likely worsen.
- In the event that Jair Bolsonaro is re-elected, there is a heightened risk of civil unrest disrupting extractive industries.
In October 2022, Brazil will hold a presidential election which will likely see current right-wing President Jair Bolsonaro run against former left-wing president Luiz Inácio Lula da Silva (Lula). Current polls place Lula far ahead of Bolsonaro, whose ratings have plummeted to record low levels over the past couple of years. Despite contrasting ideologies, they both pose a challenge to the stability of Brazil’s regulatory and political environment.
Oil and gas represent a significant part of the Brazilian economy. The country is the seventh largest oil producer in the world, and the gas sector has seen an accumulated production growth of 95 percent between 2010 and 2019. Production in Brazil is expected to increase significantly in the coming years.
Scenario 1: Lula elected president
During Lula’s presidency between 2003 and 2010, he used a nationalistic economic model to grow the extractive sector. This included restrictions on foreign investment, as well as using the state-owned company Petrobras to fund social programmes. Here for example, 2010 reforms gave Petrobras mandatory participation rights in all pre-salt exploration projects, and introduced a production-sharing regime, fostering a substantial increase in the state’s take from the oil sector.
Lula would likely attempt to implement several nationalist economic policies. The former president has been very quiet over what his policies will be if he runs in 2022, though it is likely he would attempt to implement several of the nationalist economic policies employed during his previous presidency. Such policies would see the reintroduction of restrictions on foreign investment in the oil and gas industry, as well as the potential for greater taxation and royalties.
Scenario 2: Jair Bolsonaro re-elected
President Bolsonaro is heavily in favour of growing the extractive sector. The President has made significant strides towards expanding the role of foreign energy companies in Brazil since 2018, as well as privatising state-owned industries.
Over the last few months, Brazil has seen several mass nationwide anti-government protests. President Bolsonaro has seen significant political and social unrest during his presidency due to his impulsive and controversial governing style. Recently the country has seen mass nationwide protests against government policy and corruption, calling for Bolsonaro’s impeachment. Environmental and anti-extractives protests have played a major role in this unrest, driven by Bolsonaro’s perceived disinterest of environmental issues.
In the scenario that Bolsonaro is re-elected in 2022, civil unrest targeting the extractive sector will likely grow. If Bolsonaro continues to implement policy aimed at expanding the extractive sector without taking into consideration the environmental consequences, civil unrest will likely increase in frequency and participation. Recent protests have seen environmental groups and indigenous activists denounce mining and deforestation, as well as interfere with operations. If Bolsonaro implements unpopular polices concerning the oil and gas sector, there is a high risk of civil unrest disrupting production.
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