RIO DE JANEIRO, BRAZIL – Brazil is self-sufficient in petroleum: it produces a daily average of 3 million barrels of oil, a volume more than sufficient to supply domestic consumption, 2.5 million barrels per day. But it still needs to import oil and derivatives, such as gasoline and diesel. Why does this happen?
This need is caused by the low processing capacity of the refineries installed in the country. The amount refined has remained stagnant at around 2.3 million barrels since 2015, amid falling investments in the sector.
According to projections by the government-linked Energy Research Company (EPE), national oil production should jump 53.8% by 2031, to 5.2 million barrels/day, but the increase in the volume of oil processed at Brazilian refineries will only be 10.2%.
INVESTMENTS ARE LACKING
Estimates by the Brazilian Petroleum Institute (IBP) indicate that the country needs R$120 billion (US$24 billion) in new investments in infrastructure to guarantee national supply until 2035, which gives an annual average of R$9.2 billion in investments in the sector.
But the average annual investment has been falling. It was R$14 billion between 2002 and 2016, it fell to R$6 billion from 2017 to 2021, and Petrobras does not plan to inject more than R$1.2 billion per year until 2026, according to the company’s strategic plan.
REASONS FOR FEWER INVESTMENTS
According to experts and executives from the sector, the combination of five factors hinders the attraction of more investments in Brazilian refineries. See below.
- Lower profit margins: Profit margins in refining are historically lower than in oil extraction and production, experts point out. Fuel processing is a lower risk activity than oil exploration. A refinery is an industrial operation planned based on known market demand. Oil production is more uncertain and risky, so the profit margin is higher.
- Petrobras’ position: For some specialists, the still-dominant role of Petrobras in Brazilian refining scares off investors interested in putting money into the sector since the state-owned company can influence market prices and still dominates a large part of the distribution and storage logistics.
- Logistics: To compete with a Petrobras refinery, it is not enough for a competitor to build another plant. This company needs access to the network of pipelines, railroads, roads, and derivative import and export terminals, which belong to the state-owned company.
- Ability to set prices: As the government controls it, Petrobras can make decisions based on not economic criteria, even when this represents loss-making pricing practices in this activity. This option affects the other competitors since the state-owned oil company dominates most of the market.
- Legal security: The lack of transparency or regulation in the derivatives price policy, sometimes in line with international prices, sometimes below profitable values, inhibits private investments in the sector, point out specialists.
The founding partner and director of the Brazilian Center for Infrastructure (Cbie), Adriano Pires, who the government invited in March to chair Petrobras, says that, by holding 75% of the refining in Brazil, the state-owned company has the power to establish reference prices in the fuel market.
“Brazil is the fourth-largest fuel consumer globally, but what bothers investors is the concern that the government could intervene in the refinery prices at any moment,” said Adriano Pires.
For the executive director of derivatives at the Brazilian Petroleum Institute (IBP), Valéria Lima, there are ample opportunities for investments in production infrastructure and logistics in Brazil that can guarantee greater security of national supply and even a reduction in the total cost of supply. But she points out that there is still a lack of legal security for more companies to enter this market.
“The projects in this industry are capital-intensive, with long-term returns, demanding clarity and stability of rules for doing business. Thus, the migration to this new scenario depends on legal, regulatory, and tax security, considered by investors in their decisions,” said Valéria Lima.
THE CENTRAL ROLE OF PETROBRAS
By law, Petrobras had exclusive rights to operate in the refining sector until 1997. Over the decades, Petrobras built a network of 15 refineries, 14 of which were inaugurated before the 1980s.
After a 1990s decade marked by low investments due to the economic crisis, Petrobras expanded its investments in refining, starting in 2007. The refinery park doubled its processing capacity over the decade.
But, as of 2014, two factors changed the plans: the beginning of Operation Lava Jato, which investigated embezzlement of funds, and the fall in oil prices, where the price per barrel plummeted from US$110 to US$30.
REFINING CAPACITY (IN MILLION BARRELS/DAY)
1965: 0,8
1975: 1
1985: 1,4
1995: 1,5
2005: 1,8
2015: 2,3
2022: 2,4
PETROBRAS’ INVESTMENTS IN REFINING AND OIL PRODUCTS DISTRIBUTION
2002/2006: R$18.6 billion
2007/2011: R$96.5 billion
2012/2016: R$90.8 billion
2017/2021: R$6.2 billion
2022/2026: R$6.1 billion
TRANSITION AFTER PETROBRAS’ MONOPOLY
For some specialists and the current Petrobras management, the exit of the state-owned company from some refineries will attract companies and investors.
Petrobras has begun the process of selling off refineries. The plan is to keep only five units.
“By divesting refineries, the company helps to reduce market concentration and favors competition,” said Rodrigo Araujo Alves, Petrobras Director of Finance and Investor Relations.
“The Brazilian market has the potential to attract private investment to the refining sector as long as we have competition and clear rules,” said Adriano Pires.
“This opening of the refining sector is important to attract private capital, make the domestic market more dynamic, and take advantage of Brazil’s potential, reducing logistics costs, making it feasible to modernize the refining park, and increasing the supply of products,” said Valéria Lima.
CRITICISM TO THE REFINERY SALES
For the economist of the Petrobras Social Observatory (OSP) and the Brazilian Institute of Political and Social Studies (Ibeps), Eric Gil Dantas, Petrobras’ investment capacity in refineries is higher than that of private companies.
According to him, the total cost to extract oil – including taxes, amortization, and refining – is US$42.4 a barrel. Considering domestic market values of US$104.62, Petrobras has a US$62.22 operating profit margin.
“We do not see Petrobras’ participation as a problem, but rather as a solution. Petrobras produces the oil and refines it, so the margin to absorb variations is very large,” said Eric Gil Dantas.
For the vice-director of the Institute of Energy of USP/IEE, Ildo Sauer, former director of Petrobras, there is a business logic when Petrobras participates in different stages of the petroleum chain, in which an activity can finance another area.
The higher margins in production, for example, allowed the company to invest more in refining. Therefore, the state-owned company has greater power to contribute resources efficiently to these activities.
Sauer also says that there are hardly competitive infrastructure and logistics conditions for a refinery to serve regions far away from its area of operation. Therefore, the government only transfers regional monopolies to private companies by selling refineries.
MINISTRY SAYS IT STIMULATES BUSINESS
The Ministry of Mines and Energy said that the construction of oil refineries for derivatives production or waterway terminals for storage and handling of derivatives is a free initiative of economic agents, respecting the existing regulatory framework and that “acts to make the business environment favorable to the realization of these investments, through measures and actions that have as pillars the predictability of rules and legal and regulatory security.”
With information from UOL