June 29, 2011 / 4:20 PM / 8 years ago

Exclusive: Brazil's Rousseff pushing Petrobras on natural gas

RIO DE JANEIRO (Reuters) - Brazil’s left-leaning President Dilma Rousseff is quietly pushing oil giant Petrobras (PETR4.SA)(PBR.N) to lower natural gas prices, sources tell Reuters, a move that risks alienating investors already concerned about her growing activism in company affairs.

Brazil's President Dilma Rousseff gestures during a news conference after a meeting with Venezuela's President Hugo Chavez at Planalto Palace in Brasilia June 6, 2011. REUTERS/Ueslei Marcelino

Rousseff and other senior officials see the push as part of a broad strategy to lower costs for consumers — particularly Brazilian factories, which are struggling due to an overvalued currency and soaring labor costs.

The initiative will probably not have a major short-term impact on Petrobras’ earnings. Yet it is likely to intensify criticism that Rousseff is too willing to use state-controlled companies to further her economic agenda, even at the expense of their bottom lines.

Rousseff, a former energy minister, is personally involved in the discussions on how to bring prices down, which are still in a preliminary stage, said sources with knowledge of the situation. They spoke on condition of anonymity due to the sensitivity of the talks.

“The mission is for Petrobras to bring down (natural) gas prices, which are too high in Brazil,” a source said.

Petrobras shares are already down 11 percent in the last year — far underperforming many other global energy companies — in part because of other state-induced policies such as a virtual freeze on gasoline and diesel prices since 2009.

Like many other large companies in Brazil, Petrobras is subject to an often contradictory and conflictive mix of state influence and market forces. The Brazilian government is Petrobras’ controlling shareholder, but much of its capital is held by private investors and it is the second-most-heavily weighted company on Brazil’s stock exchange. Petrobras is also the biggest foreign company traded on the New York Stock Exchange, as measured by value of shares changing hands.

One of the sources said the government is open to a plan that would lower natural gas prices without damaging Petrobras’ earnings. Natural gas accounted for less than 5 percent of the company’s earnings in the first quarter.

One possibility would be reducing high value-added taxes administered at the state level, which are a main reason that natural gas can be three times as expensive for industrial consumers in Brazil as it is in the United States. Market forces could also bring down prices on their own, especially as new supply sources come online and other companies challenge the near-monopoly that Petrobras has had in recent years.

Yet a change to the tax system would need to be approved by Congress — a daunting hurdle at a time when even basic bills sponsored by Rousseff have bogged down.

And if market forces do not move quickly enough, the sources said it may fall to Petrobras to absorb the costs — as it has already done in recent years by keeping gasoline prices flat at the government’s insistence.

A spokesman in Rousseff’s office referred inquiries to the energy ministry, which is leading the initiative. The ministry did not immediately respond to a request for comment. A spokesman for Petrobras declined comment.

STATE INTERVENTION HITS SHARES

Other Brazilian companies have also seen their share prices suffer recently because of government intervention.

Shares for Vale VALE5.SA, the world’s largest iron ore miner, have sagged 8 percent since Rousseff took office in January and began using the government’s influence — exercised via state-run pension funds that hold Vale shares — to oust the company’s chief executive.

Some shareholders saw that move as a way for Rousseff to ensure that Vale will invest in activities such as steelmaking, which she believes are critical to job creation in Brazil but are less profitable than extracting iron ore.

The struggles of Vale and Petrobras -- which together account for about a quarter of the Bovespa .BVSP stock index's weighting -- are a main reason why Brazilian stocks have struggled this year.

Petrobras’ annual release of its five-year investment plan has also suffered delays as Rousseff’s administration haggles with company directors over the total amount of outlays and how much to invest in refining projects — which offer lower returns to shareholders than oil production.

Brazilian officials privately say they believe that Petrobras and other companies should be profitable and obey private-sector rules. Yet they also defend their intervention efforts as necessary to ensure that Brazil’s current commodities-led economic boom has a lasting positive effect on job creation and poverty reduction.

Lower natural gas prices could also help the government in its battle against rising inflation.

Energy analysts said there’s a fair chance that the natural gas issue may work itself out on its own.

High gas prices are largely the result of a pricing policy Petrobras created in 2007. At the time, the company was concerned about possible shortages, and decided to charge industrial consumers high prices to discourage consumption and thus ensure sufficient supplies for thermoelectric generation, said Marco Tavares of the Brazilian consultancy Gas Energy.

The situation is the opposite today, Tavares said, thanks in part to new sources within Brazil and new import volumes via liquefied natural gas (LNG).

Petrobras will have to renegotiate natural gas supply agreements when its contracts with distributors expire in 2012 — at which point the changing market factors will likely push prices down.

“Prices will inevitably fall,” said Tavares.

Additional reporting by Leonardo Goy in Brasilia; Editing by Todd Benson and Gunna Dickson

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