(Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva’s return to power in 2023 sparked concern among investors that he would use state-owned oil company Petroleo Brasileiro SA to spur economic growth at the expense of shareholder returns.

After an initial honeymoon period, some of those fears are now being realized, putting Petrobras Chief Executive Officer Jean Paul Prates in a tough spot. 

Last week, Prates abstained from a vote in which government-appointed board members shot down a proposal to pay extraordinary dividends. Latin America’s biggest oil company lost about $11 billion in market value after the surprise decision and suffered a wave of stock downgrades.

The government sees Prates in a kind of probation period, and the decision not to replace him for now is partly because Petrobras has no succession plan, according to a person close to Lula. Mines and Energy Minister Alexandre Silveira, who has sparred with Prates in the past over policies including fuel prices, said late Monday that any talk of Prates being replaced was speculation. 

But at least one thing is clear from events over the past several days: Lula is getting more aggressive about enlisting Petrobras in his effort to unleash tens of billions of dollars in industrial investments to create jobs and accelerate economic growth. That has put Prates, who was chosen by Lula for the job, in the middle of the conflicting priorities of the government and Petrobras’s investors, with minority shareholders holding the weaker hand.

The tensions also highlight the struggle over what kind of company Petrobras should be. Management teams appointed by previous governments narrowed Petrobras’s focus to the most profitable oil projects in the deep waters of the South Atlantic and exited less-lucrative businesses, including fertilizers and renewable energy.

Such moves aligned Petrobras more closely with international oil companies like Shell Plc and Exxon Mobil Corp. and were popular with investors. But Prates often said the strategy was driving the company off a cliff because it had no plan to survive the energy transition, and once in power he began reversing course.

“The risk of investing in Petrobras has increased after recent events,” Goldman Sachs Group Inc. analysts led by Bruno Amorim said in a report Monday. “There may be some concerns in the market about the potential for less shareholder-friendly decisions in the future.”

Petrobras didn’t immediately respond to a request for comment.

The president summoned Prates to the capital of Brasilia on Monday. Ahead of the meeting, Lula cast cold water on reversing the decision to withhold dividends, making clear that his priorities aren’t with shareholders.   

Read More: Lula Dashes Petrobras Payout Hopes, Saying Investment Needed

Lula called the market a “voracious rhinoceros” that “wants everything for itself and nothing for the people,” in an interview with Brazilian television network SBT. He added that he was committed to bringing down the cost of gasoline and diesel for Brazilian consumers.

“I think Prates is aligned with Lula, but they need to sit down and talk and have one signal,” said Marcelo Godke, a partner at Godke Advogados in Sao Paulo who specializes in Brazilian corporate law. “It can’t be a mess like this.”

The turmoil about dividends could make it more expensive to access debt markets in the future, Godke said. 

“From a market perspective they are not being wise,” he said. 

Many observers thought Petrobras would keep paying generous dividends under Lula, in part because the government is the biggest shareholder and dividends would help it shore up its finances. They are becoming more fearful of state intervention in what had been one of the best investments in the oil industry. 

Read More: Lula Sets Up Petrobras Dividend Rejection, Roiling Markets

Petrobras’s management has stressed that the money that could have gone to extraordinary dividends was set aside in a reserve fund that can only be used to compensate shareholders, and that it could be tapped at any time in the future for that purpose. The shares were near a 16-year high in February before Prates told Bloomberg in an interview that the company would be more cautious on dividends.

“The issue of record dividend payments was always going to be contentious for a Workers’ Party government as the optics are difficult,” said Schreiner Parker, managing director for Latin America at Rystad Energy AS. “However, the thought of reinvesting cash back into the business is also sound, especially considering the proposed capital outlay detailed in the new strategic plan. This is the tug-of-war that happens with mixed-economy companies.”

Another perennial concern is Petrobras’s history of subsidizing gasoline and diesel prices for Brazilian motorists. So far, Prates hasn’t come under intense pressure to do so because global oil prices have been relatively stable since he took the helm. 

If Prates emerges politically weaker from the dividend battle, it would be harder for him to resist the pressure to subsidize should oil rise above $100 a barrel. Lula’s predecessor fired a series of Petrobras CEOs in 2022 because they failed to contain fuel price inflation when oil was soaring. Lula himself has consistently said that Petrobras shouldn’t be tracking international prices. 

--With assistance from Mariana Durao and Martha Beck.

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