Will Petrobras Sell its Refineries by the Year-End Deadline?
Press 
15 de Jul de 2021
FEATURED Q&A
Q: Brazilian state oil firm Petrobras is close to selling its first refinery after antitrust watchdog Cade in June approved the state oil company’s $1.65 billion deal with Abu Dhabi’s state-owned investment fund, Mubadala. However, the lengthy negotiating process between the two parties has raised concerns that the oil company will not be able to close planned sales of an additional seven refineries by the end of this year, the deadline Petrobras and Cade set for the transactions. What is the state of Petrobras’ planned refinery sales? Is the company likely to meet the Dec. 31 deadline, and what implications would missing it have for the company’s broader divest-ment plans and financial situation? How well has Petrobras weathered the Covid-19 pandemic?
A: Adriano Pires, founding partner and director of the Brazil-ian Center of Infrastructure (CBIE): “Petrobras has placed eight refineries in the divestment process. In March, it signed the sale of the Landulpho Alves Refinery (RLAM) in Bahia and its associated assets to Mubadala Capital for $1.65 billion. The contract provides adjustments in the sale value due to variations in working capital, net debt and investments. In June, Cade approved the transaction. The operation was questioned at the Federal Court of Accounts on accusations that it had been sold for below-market value, but the court dismissed the complaint. RLAM will be the first of eight refineries that are in the sales process to have the contract signed. Cade in April extended the sale period for the other refineries. Petrobras is expected to meet the deadlines, as these have already been adjusted. If Petrobras fails to comply with any of its commitments, Cade may apply fines that vary according to the level of noncompliance. In addition to being financially harmful to the company, this would also delay cash inflow from the sales. For the refining market, it postpones the opening and operation of new players. Petrobras’ results have been good. It ended 2020 with a net profit of 59.9 billion reais in the fourth quarter, compared to 8.15 billion reais for the same period in 2019, exceeding market expectations. Last year, despite the impact of the pandemic, the company recorded a profit of 7 billion reais, reversing markets’ loss forecast. Petrobras’ results in the first quarter were also positive, given the explosion in commodity prices and recovery of fuel sales in Brazil.”
A: Cleveland Jones, professor and researcher at the Nation-al Institute of Oil and Gas at the State University of Rio de Janeiro: “Despite political and legal disputes regarding Petrobras divestments, Brazilian institutions, including the courts and the Cade antitrust agency, have shown themselves to be robust, allowing Petrobras to proceed with its first refinery sale, the RLAM refinery in northeast Brazil. Given that success, it is likely that further refinery sales will indeed proceed, even if they are again subject to attempts to block them. The refineries that Petrobras is seeking to sell are outside the southeastern region, where it has a natural interest in retaining refineries, as they are close to its major producing areas in the Campos and Santos basins. Besides being in Petrobras’ interest, selling refineries outside the southeastern region brings new players and new invest-ment to the Brazilian downstream sector and improves competition in fuel supplies. Cade and the courts cannot ignore this reality. Indeed, Petrobras is consolidating its place as an independent player in the economy, and less as an arm of the government. Even President Bolsonaro’s demagogic attempts at controlling Petrobras’ fuel pricing policy have been taken in stride, as Joaquim Silva e Luna, the new Petrobras president tapped by Bolsonaro, has not substantially changed the company’s fuel pricing policies. In any case, Petrobras’ production has not been seriously hurt during the pandemic, and it has extremely low breakeven costs, so it is generating strong cash flows and is paying down its huge debt very quickly. In this sce-nario, some delays in divestment would not be very serious, and its independence seems assured, for now.”
A: Mark Langevin, senior advisor to Horizon Client Access: “The 2019 agreement was as peculiar as it was autocratic. The agree-ment to divest half of Petrobras’ refinery capacity and downstream assets was made possible by the Lavo Jato corruption debacle and the election of President Jair Bolsonaro in 2018. However, the political decision to activate Cade as the institutional mecha-nism to force through the privatization of many of the national oil company’s profitable assets was carried out by Economy Minister Paulo Guedes and former Petrobras CEO Roberto Castello Branco to dodge the legis-lative process rather than submit their argu-ments to public debate and congressional deliberation. Cade’s Department of Econom-ic Studies (DEE) made a preliminary finding that Petrobras was responsible for market abuse, a dubious claim given the company’s longstanding practice of pricing below inter-national parity. Before the final study was completed, Castello Branco conceded the merits and advocated for divestment as the best ‘penalty,’ an unprecedented measure in Cade’s six-decade long history. A minority of Cade’s administrative tribunal disagreed, claiming the DEE finding fell short of docu-menting market abuse and that selling off refineries would not necessarily increase competition. The reliance on Cade rathe than Congress to decide the strategic future of Petrobras runs the risk of a policy rever-sal. It is this risk that partially contributes to the delayed sales of RLAM to Mubadala and Refap to Ultrapar Participações, and may also explain the failed Repar tender. Petrobras has effectively managed the exter-nalities of the pandemic and will likely wrap up the sales of RLAM and Refap before the end of the year, but future divestments face greater uncertainty, as the 2022 presidential and congressional elections loom.”
A: Sarah Phillips, assistant, and Lisa Viscidi, director, of the Energy, Climate Change and Extractive Industries Program at the Inter-American Dialogue: “In 2019, Petrobras announced plans to sell eight of its 13 refineries, accounting for nearly 50 percent of Brazil’s refining capacity. The sales are part of the company’s broader divestment plan to reduce debt and focus on more profitable offshore pre-salt blocks. So far, the pace of divestment has been slow—the Landulpho Alves Refinery that Abu Dha-bi’s state-owned investment fund, Mubadala, purchased is the first and only refinery to be offloaded. Sales agreements are expected to be signed for three other refineries by the end of July, but it appears unlikely the firm will sell the remaining assets by the December deadline. These delays will affect its financial plans, as the refinery sales represent the majority of the revenue the company aims to raise through 2025. While Petrobras has weathered the pandemic better than some of its state-owned peers—mainly thanks to steady oil sales to China—Covid-19 was partly responsible for delays in the refinery divestiture process due to interruptions to normal business operations. Petrobras’ sales plan may also be held up due to political risk issues. Earlier this year, President Jair Bolsonaro abruptly called to replace Petrobras’ market-friendly CEO following a dispute over fuel price increases. In order to keep refinery sales apace and attract investment, the Brazilian government will need to send clear signals that it will not intervene in fuel pricing, which could diminish private refiners’ profits, and instead stick to fair-market prices.”
A: Gilberto Bercovici, professor at the University of São Paulo: “In 2019, Petrobras and Cade en-tered into an agreement whereby the state-owned company offered to privat-ize half of its refineries. Such an agreement is unconstitutional and illegal, as it violates Article 177 of the Brazilian Constitution, which guarantees the state monopoly on the oil refinery sector; Cade acted outside its authority when it intervened. The agreement also violates the privatization procedure rules, since the privatization of the activities described in Article 177 are expressly forbid-den pursuant to Article 3 of Law 9491/1997. As a consequence of this unconstitutional and illegal act, countless lawsuits were filed against government officials and the company itself. The lawsuits claim that this agreement is null and void, and demand compensation for the acts committed in det-riment to public assets. Petrobras’ directors and Cade members have been sued so that they are obliged to compensate the state for the damages incurred. Due to the many irregularities in the privatization procedure, the ongoing lawsuits seek its suspension. The sales process lacks transparency, as the financial and economic effects on the states and cities where the plants are located were completely disregarded. There is at least one lawsuit related to each of the eight refineries currently under sale. Some of the leading candidates for the 2022 presidential election have also criticized the privatization and pledged to reverse the process. The existing lawsuits, as well as the likely nation-alization of all privatized refineries, should be taken into consideration.
