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Petrobras divestment plan opens door for other players: analysts


Brazilian state-led oil company Petrobras will expand asset sales and partnerships in several key segments, including refining, in moves that will further open Brazil to foreign oil companies and other players, according to analysts and industry observers.

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The company's 2017-21 investment plan, unveiled Tuesday, forecasts a jump in divestments and partnerships to $19.5 billion in the 2017-18 period.

That total is on top of the $15.1 billion target set for divestments in 2015-16, a mark that Petrobras has struggled to reach amid a market flooded with assets as companies adjust to the low oil price environment.

So far, the company has sold about $4.1 billion.

Article Continues below...

Petrobras is refocusing on oil and natural gas exploration and production, especially in the promising subsalt frontier, after years of being used by Brazil's government as a tool for broader economic development.

The company plans to exit segments such as biofuels, LPG distribution, fertilizers and petrochemicals, officials said.

The strategy is the latest signal that Brazil's new government, which officially took over August 31, is committed to luring investors in an effort to jump-start growth in Latin America's largest economy.

"As the focus on subsalt exploration and production increases, the company is expected to seek partnerships for refining projects and to withdraw entirely from biofuel and fertilizer production, as well as petrochemicals," Joao Augusto de Castro Neves, Latin America director for political risk consultants Eurasia Group, said in a research note. "This rebalancing of priorities is likely to create more opportunities for international oil companies and other investors in Brazil's energy sector."

Petrobras did not provide many details about the potential retreat from the refining segment, which has been a source of financial pain in the past.

The government, Petrobras' leading shareholder, refused to allow the company to pass along higher oil prices to consumers at the pump in 2011-14 for fear of stoking inflation.

The moves cost Petrobras more than $20 billion in lost revenue, according to analyst estimates.

The scenario reversed in late 2014, when the collapse in international oil prices turned losses in the refining system into profits when Petrobras maintained fuel prices at elevated levels rather than pass along lower oil prices to consumers.

Petrobras now sells diesel and gasoline at a premium to international benchmarks in the US Gulf of Mexico of 40% and 20%, respectively, rather than at a discount.

The company disappointed analysts and investors by not disclosing a transparent pricing policy, but company officials said the long-term goal was to maintain at least parity with international benchmarks to ensure returns were attractive to potential partners.

"We want to leave the practice of competitive prices free for partners to make a decision on the price movements that will be made," Jorge Celestino Ramos, Petrobras director of refining and natural gas, said during the presentation.

Concerns about the pricing policy have affected past and present efforts to lure partners for refining projects.

Petrobras signed memorandums of understanding with China's Sinopec and South Koreas GS Caltex to study construction of two "premium" refineries to produce low sulfur diesel for the export market, but Sinopec and GS Caltex backed out of the projects, which were eventually canceled.

Petrobras is also seeking partners to build a second 115,000 b/d refining train at the Refinaria do Nordeste, or Rnest, also known as Abreu e Lima. The second train would raise total output at the refinery to 230,000 b/d.

The refinery's first train, which started up in December 2014, is operating at reduced capacity of 100,000 b/d until emissions-abatement equipment is installed.

The work is expected to be completed by the end of 2018.

The company has also halted work on the Comperj refinery outside Rio de Janeiro, which is nearly 90% complete, and will not restart construction of the plant unless it finds a partner. Completion of a natural gas processing plant, which will handle gas produced from subsalt fields, is moving forward at the site.


Petrobras is evaluating what type of business model to use for potential partnerships or divestments in its refining business, with the studies at an "advanced phase," Ramos said.

"We're studying some business models that cover both a set of assets or isolated assets," Ramos said, adding that the key goal is to "guarantee stability and confidence on the part of partners."

The opportunities to industry players are ample if concerns about fuel prices can be resolved, analysts said.

Brazil is a country of more than 200 million people, with fuel consumption likely to return to the strong growth seen earlier this decade if the country can dig its way out of the worst economic downturn since the 1930s.

Fuel consumption, especially diesel and gasoline, typically tracks GDP growth.

Petrobras expects oil product sales to reach 2.3 million b/d in 2017, including 917,000 b/d of diesel and 529,000 b/d of gasoline.

That would be in line with expectations for this year, with the latest data from the National Petroleum Agency, or ANP, showing total product sales hovering at slightly more than 2.3 million b/d through July.

In 2015, Brazil consumed 2.444 million b/d of oil products, including 985,880 b/d of diesel and 708,896 b/d of gasoline, according to the ANP.

Expectations for a return to economic growth, however, caused Petrobras to estimate a 5.2% increase in the Brazilian oil product market over the next five years to 2.4 million b/d by 2021, including 997,000 b/d of diesel and 476,000 b/d of gasoline.

Partnerships were a constant refrain by officials when talking about the divestment plan.

Industry insiders noted that Petrobras has been more willing to cede operational control in sales of stakes in the company's wholly owned subsidiaries as a way to move the sales process forward and generate higher offers.

That was what happened with plans to sell fuels-distribution unit BR Distribuidora, with Petrobras changing the terms of the proposed sale to give investors operational control but still retaining a greater share of the lucrative unit's profits.

Analysts said similar models could be followed to sell other important but profitable assets such as logistics firm Transpetro. In other areas, however, Petrobras is looking to shed assets completely.

"What we're doing is searching for partners," Petrobras Refining and Natural Gas Director Jorge Celestino Ramos said during a presentation of the plan.

"We're going to have divestments in biofuels production, LPG distribution, fertilizer production and our stakes in petrochemical companies. These are the areas we're leaving, and these assets are being put into our partnership and divestment program."

Petrobras put its Liquigas LPG distribution business up for sale in June and is evaluating proposals for the unit, which analysts estimate could fetch $500 million.

The company is also in exclusive talks to sell Petroquimica Suape and textiles unit Citepe to Mexico's Alpek in a deal that could raise as much as $700 million. The company would also like to sell its minority stake in petrochemicals company Braskem.

But the company's exit from fertilizer and biofuels production, where the company holds stakes in several ethanol and sugar mills as well as owning and operating three plants that produce biodiesel, was new if not unexpected.

Petrobras halted work on several new fertilizer plants amid investigations into a corruption scandal at the company and has not restarted construction.

"Clearly we're not the best operators of these types of products," CEO Pedro Parente said during the presentation. "Ethanol, for example, is basically an agricultural product and certainly is not our specialty. We're humble enough to recognize that there exist people who do this better than us."

--Jeff Fick, --Edited by Jason Lindquist,