Petrobras head Jean Paul Prates is set to remain in charge of Brazil’s state-controlled oil giant for now, as an internal government battle over the company’s chief executive role cools down, according to people with knowledge of the matter.

A dispute over the job erupted inside President Luiz Inacio Lula da Silva’s administration last week, causing the company’s shares to swing wildly amid reports that Prates would soon be fired. Investors are also closely monitoring Petroleo Brasileiro SA, as the company is formally known, as they wait for a decision on the payout of extraordinary dividends it previously chose not to distribute.

Tensions eased inside Lula’s government after the leftist leader weighed replacing Prates with Aloizio Mercadante, the head of Brazil’s development bank and a longtime ally of the president, the people said, requesting anonymity to discuss internal matters.

The prospect of the job going to Mercadante, a co-founder of Lula’s leftist Workers’ Party, caused Prates critics like Mines and Energy Minister Alexandre Silveira to back off their push for a replacement, the people said, because his proximity to Lula would make him an even stronger potential rival when shaping Petrobras’s role in energy policy and selecting government representatives for the board.

Silveira had wanted to replace Prates with an ally of his own, the people said. On Tuesday, a week after he renewed his repeated criticism of Prates’s perceived lack of alignment with the government, Silveira instead praised him, telling reporters in Brasilia that he admired the chief executive and that any decision belonged solely to Lula.

The job atop Petrobras is one of the most coveted roles in Brazil, despite the difficulties of leading an enterprise that is both controlled by the state and owned by private shareholders. The company’s substantial investment plan — estimated at $102 billion from 2024 to 2028 — makes it a potential instrument of development, and has inspired debates within the government over whether to use it to boost the economy or refrain from intervening in its affairs.

Prates has faced pressure from Lula since taking the helm last year, with the president pushing the company to lower jet fuel prices and increase investment to generate economic and job growth. The current dispute began after Prates abstained from a vote in which government-appointed board members shot down a proposal to pay extraordinary dividends that investors expected. 

Lula, who wanted the company to hold the funds and reinvest them, summoned Prates for an explanation after reaction to the decision wiped out $11 billion of Petrobras’s market value.

Dividend Payout

Prates and Finance Minister Fernando Haddad, who supported keeping him in charge of Petrobras, are now close to convincing Lula to pay out the extraordinary dividends that were withheld, according to the people.

One factor behind Haddad’s push is the economic team’s need for revenue to reach its goal of eliminating the primary fiscal deficit this year. The operation would bring in as much as 15 billion reais ($3 billion) if the entire payout is made, helping offset losses from a congressional extension of payroll tax exemptions that will cost the government around 10 billion reais, one of the people said.

Haddad has explained to the president that the extraordinary dividends cannot be turned into investments due to Petrobras bylaws, and considers the original decision not to make the payout a mistake, one of the people said. Paying the dividends, in his view, is a better way to boost investment and social spending, as Lula wants to do.

Haddad, Silveira and Chief of Staff Rui Costa met last Wednesday to discuss the matter. While they agreed that the dividends should be paid, there was still no consensus on the amount or when the payments should be made, the people familiar said, adding that they still need to meet with Lula to discuss the subject.