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On May 14, President Luis In谩cio Lula da Silva the president of, Brazil鈥檚 state-controlled oil and gas giant. The decision suggested a departure from the company鈥檚 recent focus on maximizing dividends for shareholders. Instead, Lula appears interested in transforming Petrobras into an instrument for state-led industrial development, harnessing the corporation鈥檚 vast resources and influence for economic growth.

Petrobras is crucial for Brazil and the global energy market, as Brazil ranks among the world鈥檚 top ten oil producers. It will not be easy to make everyone happy. The company will now face the challenge of satisfying Lula鈥檚 national development goals while meeting its own production targets, including by finding new oil deposits to build on its offshore success. In the meantime, it faces yet another challenge, as its oil exploration strategy has sparked conflict with environmentalists.

Lula replaced Petrobras President Jean Paul Prates, a former senator from his own Workers鈥� Party with considerable experience in energy management, with Magda Chambriard, an oil and gas industry veteran who served in Lula鈥檚 first administration. The announcement was triggered by Prates鈥檚 decision to issue an extraordinary dividend to shareholders that cost the company $4.3 billion, money that many in Lula鈥檚 administration would have preferred to see reinvested in Brazil.

A Return to Industrial Policy

The Brazilian state owns 37% of Petrobras shares, but the voting structure grants it majority control. Prates鈥檚 dismissal was not entirely unexpected; Lula had previously signaled a desire for Petrobras to pivot towards job-creating investments in areas like refinery construction and shipbuilding. Under the Jair Bolsonaro administration, Petrobras had partially disengaged from downstream operations. Prates had been prioritizing oil exploration and renewable energy.

Since Lula鈥檚 election, Petrobras has already reversed some Bolsonaro-era policies, including the planned sale of eight oil refineries. Instead, the company is looking to expand its capacity. Petrobras is also expected to increase its exposure to the petrochemical sector. Today, it controls 36% of Braskem, the world鈥檚 18th-largest petrochemical company. The controlling shareholder, Brazilian construction giant Odebrecht (now known as Novonor), is trying to sell its shares, and Petrobras might end up increasing its stake.                                                                                                          

Finding Oil

Petrobras is a giant. It over 46,000 workers, has a of $109 billion, and operates across the oil and gas industry, from fields to gas stations. Founded in 1953, it became a major international energy player after the discovery of oil in the Atlantic off the coast of central Brazil in 2006. Known as 鈥減re-salt鈥� because they are found below layers of salt that make extraction difficult, the project languished for years. Strict local content requirements for inputs such as steel, and the insistence that Petrobras hold a majority share in any joint ventures to pump pre-salt oil, contributed to the delays. 

In 2016, however, those requirements were loosened and production ramped up. Brazil now 4.3 million barrels of oil per day, surpassing countries like Iran, the United Arab Emirates, and Kuwait. The Brazilian government predicts that by 2029, Brazil will produce 5.4 million barrels per day, making it the world鈥檚 fourth-largest producer.

But with its pre-salt fields maturing, Petrobras has its eye on offshore areas at the mouth of the Amazon River. Although this region is promising, environmentalists strongly object, pointing to dangers for mangrove swamps and coral reefs and warning that strong currents could exacerbate the effects of any oil spills. The issue is further complicated by Lula鈥檚 efforts to demonstrate strong environmental credentials, and by the influence of his environment minister, the activist Marina Silva. The COP28 UN climate conference last year called for a transition away from fossil fuels and Brazil will host the COP30 conference next year.

Regulators have granted for exploration, but the future of drilling by the Amazon is not clear. Concerns about the potential impacts on Indigenous communities are another source of uncertainty. Petrobras is resisting a requirement to the potential impact on Indigenous populations and Lula has pushed for the oil exploration to. But that could require both legal reforms and perhaps personnel changes in Brazil鈥檚 environmental bureaucracy.

Political Decision-Making

As Petrobras becomes more entangled in the government鈥檚 industrial policy, critics fear it will start making decisions based on Lula鈥檚 short-term political interests. The last government offers a cautionary tale. While Bolsonaro generally favored a market-oriented strategy, he pressured Petrobras to lower gasoline prices as his re-election race neared, even the Petrobras head following a politically damaging price hike.

Increased political involvement in Petrobras also raises concerns about a potential repeat of the that plagued the company the last time Lula was in office and during the administration of his successor, Dilma Rousseff. During that period, Petrobras paid enormous kickbacks for goods and services, enriching politicians, political parties, and Petrobras executives. Though the company has since tightened internal controls, a return to its scandal-ridden era would be disastrous for everyone, from minority private shareholders to Brazilian tax payers.

It鈥檚 Not Just Petrobras

The changes at Petrobras are mirrored by government efforts to reverse, or at least limit, the impact of privatizations in other sectors. Lula has expressed unhappiness over the partial of power generation and transmission firm Eletrobras and through legal, he has sought to increase the voting rights of the state, a minority shareholder. At minerals producer Vale, where the state now owns just 9% of shares, Lula has to name as its president Guido Mantega, who served as finance minister during Lula鈥檚 first term in office. Finally, Lula has repeatedly Roberto Campos, the orthodox economist who leads the Central Bank, and pressed for lower interest rates. Campos鈥檚 term expires in December, and it is expected that his successor will be more in tune with Lula鈥檚 preferences.

 Nevertheless, it is not clear how far Lula will go in reasserting state control over Brazil鈥檚 economy. After all, disregarding the interests of minority shareholders in Petrobras could send dangerous signals, depressing the value of Petrobras stock and discouraging investment in other sectors. Similarly, Lula will have to balance his interest in oil exploration at the mouth of the Amazon River with his environmental commitments. Either way, a significant reversal of recent privatizations would require funding and support from Congress, where his party does not enjoy a majority and must negotiate with conservative parties that remain skeptical about Lula鈥檚 statist economic strategy.