Author: Sam Davis
As we await the sale of the Petrobras refinery in Pasadena, Texas, which was put on the market in February this year, we turn our attention back to Brazil and the plans the company has to revive its domestic refining market. Back in April, Petrobras announced they were considering the potential sale of a majority stake in four of its 13 refineries, with total capacity of approximately 850 kb/d. This announcement was part of a broader divestment and business realignment strategy to raise capital in the wake of ballooning corporate debt resulting from the oil price crash and scandals that have plagued Petrobras over the past several years. However, the ruling this past summer of the Brazilian Supreme court to suspend the sale of the refineries (due to lack of congressional approval) dealt a blow to the company’s efforts to meet its $21 billion target for asset sales by the end of this year.
If congressional approval is obtained and Petrobras can secure foreign investment partners, two regional joint ventures will be created, each with a different investor holding 60% equity and Petrobras as the minority stakeholder. One company would operate the Northeast hub comprising the Landulpho Alves (RLAM) and Abreu e Lima (RNEST) refineries, with total capacity of 430 kb/d, while the other company would operate the Southern hub comprising of the Alberto Pasqualini (REFAP) and Presidente Getulio Vargas (REPAR) refineries, with total capacity of 416 kb/d. If implemented, Petrobras´ national monopoly will be over, with Brazil split into five regional hubs. The Northeast and Southern hubs (equivalent to 25% of the market) would be controlled by the new investors, while the other three hubs (75% of the market) would remain under Petrobras´ control.
The plan also opens the door for investment to improve operating performance, particularly in the Northeast hub, where refinery utilization in the RNEST refinery (115 kb/d) has been capped due to restrictions on pollutant emissions. During 2017, the refinery operated at 73%, 6% below the national average. It could also revive the 115 kb/d expansion of the refinery that was originally planned by Petrobras but was put on hold due to losses from the scandal. The RLAM refinery, the only one of the four available for sale without deep conversion capacity, also ran at low levels in 2017 at just 69%. These refineries process crudes from the Marlim and Lula fields, along with some other domestic offshore crudes priced at a $1-2/bbl discount to the Brent marker. Figure I below shows how their yields compare to those in the Southern hub and rest of the country. While refinery yields in the Northeast hub are less attractive than the rest of the country, they also present more opportunities to improve with additional investment from the new operators.
According to Petrobras, five companies have signed confidentiality agreements expressing interest in a potential partnership, but the recent election of Jair Bolsonaro and Brazil’s new President is cause for concern as the right wing candidate known for his controversial views on social issues sent mixed signals during the campaign about his support of fully liberalizing fuel prices. While he supported allowing domestic fuel prices to align with international markets, a policy in place since 2015, he backed a truckers’ strike against rising fuel prices which led to a reinstatement of temporary price controls.
We will learn a lot more once President Bolsonaro takes office on January 1, 2019. Along with his anticipated Presidency, we will get to hear plans from the recently appointed CEO of Petrobras, Roberto Castello Branco. In his first public comments since being named CEO last week, Mr. Branco has said he expects the courts to rule in favor of the refinery sales and signaled his intention to cut costs and sell parts of its downstream operations to focus on its core business – oil exploration and production in the pre-salt basin. A lot will depend on whether the incoming government can provide the free market environment that foreign investors are seeking in order to maximize profitability of the refining assets.
In case you missed it, please see our recent blog publications on Brazil’s refining industry: “La La La” – The Latest Rumblings in the Brazilian Refining Sector and Brazil’s oil industry braces for uncertainty as “Trump of the Tropics” wins election.
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