Brazil election: What it means for an aspiring energy superpower

Brazilians head to the polls Sunday for a runoff election to decide their next president. Regardless of who wins the vote, Brazil's new leader must immediately address the factors limiting the nation’s energy potential, writes Alexis Arthur of the Institute of the Americas.

Brazil’s presidential election is heating up as voters head to the polls for the second round on Sunday. Brazilians must now decide between another four years of President Dilma Rousseff or to switch to pro-business candidate Aécio Neves.

In the lead up to the first round on October 5, we described the presidential vote as a ‘change election’.  But in opting for a run-off between the ruling Worker’s Party, which has been in power since 2003, and the Brazilian Social Democracy Party, which held the office for eight years before that, Brazilians have in many ways opted for more of the same. The question now is how heavily they will favor the incumbent or whether they buy Neves’ promise of change.

With polls showing the candidates close together on the eve of the election, the race remains too close to call. The implications for the aspiring energy superpower could be dramatic.

The Brazilian election has been nothing if not eventful, with the twists and turns making it one of the most exciting political competitions in years.

The sudden death of candidate Eduardo Campos in a plane crash on his way to a campaign event in August catapulted his running mate, Marina Silva to the spotlight. Silva, an environmental activist and former minister in the Lula Administration, rapidly climbed in the polls with some hopeful she could become Brazil’s first female president of color. Many expected her to be the once facing off against incumbent president Dilma Rousseff this Sunday.

Aécio Neves came to the campaign as a political heavyweight after two terms as Governor of Minas Gerais – a post he left with a 92 percent approval rating. Yet he trailed the other two candidates in the lead up to the first round.

In the end, Silva won just over 21 percent of the vote. Though not insignificant, it was a similar showing to the last time she ran for president in 2010. More importantly, it was not enough to beat Rousseff who received 42 percent of the vote or Aécio Neves who came from behind to pick up 34 percent.

In a blow to Dilma Rousseff’s re-election chances, Silva has endorsed Neves in the second round. In exchange, Neves has promised to address many of the issues raised by Silva’s campaign, including land reform, indigenous rights, and environmental concerns.

What does this mean for Brazil’s energy outlook?

Brazil’s energy sector, much like its politics, has had its ups and downs in recent years. Since the discovery of the nation’s pre-salt reserves in 2006, Brazil has been on the rise in the energy world. Estimates of the pre-salt reserves run from 50 billion to over 100 billion barrels of recoverable oil, which Brazil must successfully tap if it is to reach its goal to produce over 4 million barrels per day by 2020. Current production is around half that.

But first Brazil must attract investors. The inaugural pre-salt auction in October 2013 received just one bid, from a consortium led by Petrobras. At the time, observers were disappointed with the outcome, and the notable absence of several oil majors.

The rules guiding production sharing agreements and local content were at least partly to blame. Petrobras is required to be the sole operator and have a minimum 30 percent stake in all pre-salt operations. Local content regulations demand 37 percent of equipment, goods, and services to be sourced domestically in the exploration phase, a number that rises to 55 percent in the development phase.

If he wins, Aécio Neves has plans for Brazil’s energy sector. He has promised to entice foreign investors back to Brazil, advocating for more regular and predictable oil and gas auctions. He also wants to foster the natural gas sector through better planning and regulation, and promoting its industrial applications. 

He has also promised to review fuel pricing and subsidies, and many industry players hope he will reconsider the local content rules that have deterred investment in the pre-salt. He has even promised to revive the nation’s flagging ethanol industry.

But Neves will also have to deal with Petrobras. In addition to its exploration and production woes, Petrobras is embroiled in the latest Brazilian corruption scandal. Among several allegations of wrong doing, Petrobras is accused of providing kickbacks to members of Rousseff’s Workers Party.

Rousseff has maintained her innocence throughout the ordeal. Still, her reputation has been tarnished and the case has had an undeniable negative impact on her re-election campaign.

If Brazilians still want change, Aécio Neves appears to be their best hope. But even if he wins on the 26^th , it’s unlikely he’ll be able to keep all his campaign promises. With all the focus on the president, it is easy to forget that Congress will not always be on Neves’ side.

Regardless of who wins the vote this Sunday, the President must immediately address the factors limiting the nation’s energy potential, from reviving Petrobras to removing some of the barriers that have dulled optimism from foreign investors, to focusing on diversification and clean energy initiatives.  It will be a big task for anyone.

Alexis Arthur is Energy Policy Associate at the Institute of the Americas, a policy center focused on Western Hemisphere Affairs based at the University of California, San Diego. She can be contacted at alexis@iamericas.org or via twitter @IOA_Energy.