Feature: Brazil's oil giant under scrutiny

RIO DE JANEIRO, Feb. 10 (UPI) -- The new government has impressed markets with its austere financial moves, but analysts remain cautious on certain fronts. That's nowhere more true than the direction of state-run oil giant Petrobras, especially in light of a potential war in Iraq.

"Unfortunately, Petrobras now seems to have a negative agenda," said Cleomar Parisi, who covers the company for Unibanco, a local bank that recently downgraded the oil company's stock from "buy" to "hold."

"It's about pricing freedom. In my opinion, it is quite clear that if you have a war in Iraq and the price of oil goes above $40 a barrel, Petrobras will not pass the increase on to the consumer," he said of the effect of price controls on company profits.

Such claims are nothing new, although they are taking on a new urgency as Brazil tries to emerge from a disastrous economic year.

Petrobras, which nominally got the right to set its own prices a year ago but still can't do so, has often been accused of being an instrument for the government to control inflation, or to keep fuel prices at a voter-friendly low level.

But unfairly or not, analysts around the globe are using the company as a litmus test for new leftist President Luiz Inacio Lula da Silva and his true appetite for economic liberalization -- or at least his willingness to give the corporate community breathing room.

Since taking office on Jan. 1, though, Lula has done little to ease fears of Petrobras watchers, as he has appointed what analysts term a no-name team of executives to lead the company.

Early last month, Lula appointed Jose Eduardo Dutra -- a geologist with no experience in the oil business -- to replace Francisco Gros and take the chief executive officer spot at Petrobras.

To his credit, Dutra, a 45-year-old Workers' Party senator from a poor northeastern state, has done much to calm market jitters.

He's helped lower the volume of rhetoric regarding Petrobras, especially when it comes to awarding contracts to build oil platforms to foreign companies.

During his campaign for the presidency, Lula railed against a contract awarded to Singapore's Jurong Shipyard to build a $500 million platform, saying that all such work must be given to Brazilian firms.

But Dutra has since said that Petrobras will award contracts based on money for technical value. He's also said that if the government decides that a contract should go to a domestic firm regardless of cost, the government should reimburse Petrobras.

But many analysts question whether that will really happen, especially given the tight budget Lula is working with.

Just more than a week ago, the new chief financial officer of Petrobras was appointed -- and this appointment has spooked investors more than Dutra's.

The day Jose Sergio Gabrielli was chosen as the new CFO, Petrobras' shares dropped 5 percent -- as investors were disappointed that Dutra didn't come through on his promise to appoint a CFO whose name the market would "recognize and trust."

Like Dutra, Gabrielli has never worked in the oil sector and he has little business experience. He does, however, hold a Ph.D. in economics from Boston University.

He spent most of his career researching regional development and served as the head of Bahia State University from 1996-2000. He spent last year as a visiting scholar at the London School of Economics.

"We have a new (Petrobras) president who is basically a politician," Parisi said of Dutra. "The new CFO is someone with no experience in the financial market."

"I believe that the new management team is more susceptible to government pressures, because they belong to the governing party."

Adriano Pires, an economist with the Brazilian Center for Infrastructure, an energy consulting firm based in Rio de Janeiro, echoed Parisi's thoughts.

"As opposed to the two (CFOs) preceding him, Gabrielli isn't a professional recognized by the market, and this is a change at Petrobras that could have negative repercussions -- principally in the process of internationalizing the company," Pires said.

But Brazil remains in a relatively comfortable position as war looms in Iraq because it doesn't rely too heavily on the Mideast for its crude, sourcing only 19 percent of its imports from the region.

Additionally, Dutra often points out that Brazil consumes an average of 1.74 million barrels of oil per day -- and Petrobras produces an average of 1.57 million bpd.

But analysts are quick to note that this doesn't insulate Petrobras from financial woes, as the company must keep pace with world crude prices to remain competitive even as it faces stiff political opposition to a completely free-market pricing scheme.

"If the (Iraq) war is very short, they might be OK, but we don't know if the war will go on for three months or for six months or what," Parisi said. "This can bring huge troubles for the company."

Parisi also said that while Dutra's market-friendly talk is welcomed, investors are waiting for the true character of the new Petrobras team to emerge.

"Right now, everybody is waiting to see what will be Petrobras's real act," he said. "I believe they will only be able to build credibility with time and with making the right decisions."