Brazil Yanks the Welcome Mat for Oil Investors

Foreign oil majors have filed an injunction to halt a new tax on crude exports

- Peter Millard

When Shell Plc’s new chief executive officer, Wael Sawan, landed in Brazil last month on his first official trip abroad, the reception was warm. He received assurances that the country’s new leftist leadership would respect the status quo in the oil industry, people familiar with the visit said, and he left confident that business would keep chugging along.

The camaraderie was short-lived. Two weeks later, Brazil surprised drillers by enacting a temporary tax on oil exports. In response, Shell and a group of foreign oil companies filed an injunction against the levy, risking a public legal battle with President Luiz Inácio Lula da Silva’s administration. The clash could damage Brazil’s hard-won reputation as Latin America’s rare petroleum-rich nation that welcomes foreign oil producers and respects its contracts with them.

Should this credibility erode, it might well chill $20 billion a year in oil industry investments in Brazil at a time when there are already serious questions about where the world will find its next font of fossil fuels.

The 9.2% export tax, announced on the last day of February, was the first of two moves by the administration that sent tremors through the international oil industry. Lula’s government also halted about $2 billion in planned sales of oil field rights and fuel refineries while it carries out a review, even though the buyers had already raised money to complete the transactions, which were signed under the previous government.