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Bolsonaro leads Brazilian presidential polls as oil industry awaits second round

Rio de Janeiro — Brazil's oil industry remained cautiously optimistic ahead of Sunday's second-round of voting in this year's presidential election cycle, with market-friendly former military officer Jair Bolsonaro still leading the polls, albeit with a slimmer margin over Workers' Party candidate Fernando Haddad.

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Bolsonaro is currently polling a 48% share of the vote, while Haddad is at 38%, according to the latest Datafolha numbers released Friday. That was down from a 60-40 split Bolsonaro, a right-wing conservative running on a public safety platform, held after the first round of voting in early October over Haddad, who picked up the leftist flag from impeached former president Dilma Rousseff.

Brazil's lackluster economic growth, soaring unemployment and rampant violence have dominated most of the campaign season, with energy policy mostly considered an afterthought amid the country's electorate. The two candidates, however, both hold such starkly different visions for development of Brazil's offshore oil wealth and refined product markets to raise concerns about where policy could be headed.

"Bolsonaro represents the current, favorable status quo although there could be some hiccups," an oil industry executive told S&P Global Platts recently, noting sometimes controversial comments that elicit comparisons to US President Donald Trump. "But a return of the PT to power would definitely represent a step back and likely lead to a slowdown in the recovery we've seen since last year."

Bolsonaro submitted a policy plan for his potential government in early October shortly after the first round, indicating he supported a government-led inquiry into management at state-led Petrobras as well as a review of the country's production-sharing regime for the subsalt fields. The plan reinforced expectations Bolsonaro would likely continue reform efforts that lured investment from heavyweights such as BP, Equinor, ExxonMobil, Shell and Total.

The current government returned to a fixed schedule of bid rounds under concession and production-sharing contracts, opened subsalt fields sold under production-sharing contracts to operation by international oil companies rather than Petrobras and reduced requirements for using locally produced goods and services in exploration and development. The reforms generated heated competition at six auctions held in 2017 and 2018 that generated record signing bonuses and profit-oil guarantees for the government, with activity expected to goose Brazil's oil output by 50% to 5.5 million b/d by the mid-2020s.

While Bolsonaro pledged to continue the fight against government meddling at Petrobras and in industry as a while, market chatter that he was considering naming a general to be Petrobras' CEO raised concerns about previous promises to keep management at state-run entities under industry specific leadership. Current Petrobras CEO Ivan Monteiro and predecessor Pedro Parente were both lauded for their market-oriented turnaround of the company in the wake of the corruption scandal that led to the Operation Car Wash investigation, so a shift in management could be considered a step back.

Bolsonaro has also been highly critical of China's investments in Brazil, saying Asian investors were snapping up local assets on the cheap. The candidate said he wanted to limit foreign ownership in strategic areas such as power generation.

China's CNPC and CNOOC are both partners in the offshore Libra Field, which was the first subsalt area sold under the country's production-sharing regime. CNPC and Petrobras also recently reached an agreement that could see the Chinese company take 20% stakes in the unfinished Comperj refinery and offshore Marlim Field revitalization project.

Bolsonaro also supports Petrobras' divestment plan, which could put an end to the nuisance lawsuits and legal wrangling that has derailed the company's $21 billion 2017-2018 asset sales program. Bolsonaro wants Petrobras to go even further, reducing monopoly stakes the company holds in areas such as refining, distribution, logistics and transport.

Haddad, meanwhile, favors a return to the state-led model of development implemented by former PT presidents Luiz Inacio Lula da Silva and Rousseff.

The candidate wants to overturn changes made to the production-sharing regime in 2016 that removed the sole operator requirement, which forced Petrobras to hold at least a 30% operating stake in each field sold under production-sharing contracts. The company asked for the change because it no longer had the cash to fund the investments, which reduced the pace of development.

Haddad also wants to force oil companies to purchase equipment and services from Brazilian companies. Local content rules, put in place in the early 2000s in an effort to create a robust oilfield services industry, ended up causing cost overruns and development delays when Brazilian companies were unable to efficiently meet growing demand.

Despite Haddad's state-led bent, most oil-industry executives polled by Platts said the candidate would likely take a more pragmatic approach should he win, honor contracts from recent bid rounds and continue with the current schedule of bid rounds, albeit with some changes related to Petrobras' role in the subsalt.

"We're all watching carefully how the election plays out, but the industry as a whole has a lot of experience with political change," another executive said. -- Jeff Fick, newsdesk@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com