Brazil's Supreme Court allows Petrobras refinery sales to proceed

Rio de Janeiro — Brazilian state-led oil company Petrobras can proceed with plans to sell nine of its 13 refineries after the country's Supreme Court denied a request to suspend them in a majority decision handed down Oct. 1.

The decision "allows for continuity in the company's strategy to optimize its portfolio and improve allocation of capital, permitting greater value generation for our shareholders," Petrobras said in a statement.

The latest Supreme Court decision grants Petrobras more legal muscle in the company's seemingly never-ending battle to justify corporate asset sales, which have frequently come under attack from labor unions and political parties affiliated with the former ruling Workers' Party, or PT. The PT favors a state-led model for development of Brazil's oil wealth, but more-business friendly administrations in power since mid 2016 have rolled back many of the onerous rules.

The reform efforts reopened Brazil's offshore oil patch to investors, allowing foreign oil companies to operate subsalt fields under production-sharing contracts, creating an annual calendar of licensing sales and production-sharing auctions, and reducing requirements to use locally produced goods and services. The improved terms led to record-setting signing bonuses and profit-oil guarantees to the government at concession sales and production-sharing auctions held in 2017-19.

Brazil's government has also worked to end monopolies across Latin America's largest economy, including those held by Petrobras in refining and natural gas. Petrobras signed separate agreements with local antitrust regulators that will reduce its share of the refining and natural gas markets to about 50%.

The latest case, which was brought by Senate leaders, argued that Petrobras violated a separate 2019 Supreme Court decision handed down by Justice Ricardo Lewandowski that allowed Petrobras and state-controlled companies to sell directly controlled subsidiaries via direct sales or private placements, but still prohibited the privatization of other assets without congressional review. The 2019 ruling considered such sales portfolio management or divestments rather than a privatization of state-owned assets.

The distinction is important in relation to the refineries, which need to be wrapped into subsidiaries or special-purpose entities along with the pipelines, terminals and other included infrastructure in order to be sold.

Senate leaders, meanwhile, argued that the refinery sales were a privatization of state-owned assets that would require congressional approval. Petrobras used the creation of subsidiaries to thwart the country's constitution and Lewandowski's 2019 decision, Senate leaders said.

While the Supreme Court denied a request for injunction, the full court will still hear the merits of the Senate leadership's complaint at a later hearing, justices noted in their decisions.

"We are very happy," Petrobras CEO Roberto Castello Branco said in a statement. "We always believed in a positive result because we trust in the capacity of our Supreme Court."

Petrobras is accelerating plans to sell off the refineries and expects to sign the first sales contract by the end of 2020. The company is currently in exclusive, binding talks to sell the Refinaria Landulpho Alves in Bahia State to the UAE's Mubadala Investment Co.

In addition, Petrobras said in a separate statement Sept. 21 that it had entered binding talks to sell the Refinaria Presidente Getulio Vargas, or REPAR, in Parana state to Ultrapar Participacoes -- a consortium led by Shell-Cosan joint venture Raizen, and China Petroleum & Chemical Corp.

Petrobras received two proposals with similar values for REPAR, so the company launched a second round of bidding to receive binding offers, Petrobras said.