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Petrobras keeps cutting

The Brazilian company will need to maintain momentum to meet its ambitious divestment objectives

Brazil's state-controlled Petrobras, still reeling from the Lava Jato corruption scandal and its monumental debt obligations, is banking on offloading subsidiaries and assets to restore its fortunes. The firm will pursue a 2023 divestment target of $26.9bn, focusing on its untapped deep-water pre-salt reserves and returning the company to financial health.

Freeing its asset portfolio of low-performing onshore and shallow-water fields is the upstream priority in the near term. Last year, the national petroleum, natural gas and biofuels agency (ANP) gave the company a mid-2019 deadline to decide which of 254 fields to invest in or relinquish. Petrobras has been granted carte blanche by the Bolsonaro-led administration to offload 70pc of the fields, but has since asked for an extension on its deadline. Décio Oddone, director general of the ANP, spoke of the importance of the resale to improve the overall investment climate and attract new companies.

In the downstream, Petrobras will look to reduce its near 98pc domestic refining monopoly. The firm made its first move outside Brazil itself, with Chevron agreeing at the end of January to purchase the company's Pasadena refinery in the US for $350mn. The facility has a processing capacity of 110,000bl/d and a storage capacity of 5.1mn bl of oil and products.

In the domestic market, the justice ministry has advocated the sale of four refineries to improve market competition and streamline the state's involvement. But Petrobras plans to retain a 60pc stake in the four should the sale go ahead. Two of the facilities are in the northeast: the Refinaria do Nordeste (Rnest) in Pernambuco and the Refinaria Landulpho Alves in Bahia, with a combined capacity of 430,000bl/d. Rnest also has a second processing train but construction was halted when it was only 80pc complete. When finished it will have 115,000-bl/d processing capacity. In the south, the Refinaria Presidente Getúlio Vargas (Repar) in Paraná and the Refinaria Alberto Pasqualini (Refap) in Rio Grande do Sul have a combined processing capacity of 416,000bl/d.

Obstacles on the road

But efforts to privatise the refineries have encountered difficulties in the past. Court justice Ricardo Lewandowski suspended the sales last year when two trade unions lodged protests and the process was handed back to Congress. Petrobras has said this year it will resume the process, after meeting the requirements set by the Federal Supreme Court.

Similar obstacles have afflicted Petrobras' upstream divestment strategy and threaten to resurface in 2019. Last year, court justice Marco Aurelio Mello suspended a Petrobras' upstream assets sale when the leftist Workers' Party (PT) filed a lawsuit. On 11 January, court justice Dias Toffoli overturned the decision, pending re-evaluation by Congress on 27 February.

"Should the decree's suspension or revocation be confirmed, the most immediate impact will be the uncertainty introduced into ongoing and new divestments, as [it will raise questions] to the legitimacy of the procedures followed to date and the ones to be followed after the Supreme Court's decision," says Ali El Hage Filho, a partner at Brazilian law firm Veirano Advogados.

Trimming the fat

While Petrobras focuses on core areas of the business, lesser priority divisions will be put up for sale. The company plans to terminate its fertiliser and biofuels subsidiaries. Last year it closed the fertiliser plants Fafen-SE in Laranjeiras, Sergipe and Fafen-BA in Camaçari, Bahia. The firm will now also look to sell its minority share in BSBios, a biofuels producer, and auction off fertiliser producers Araucária Nitrogenados, in Paraná, and Unidade de Fertilizados Nitrogenados, based in Tres Lagoas, Mato Grosso do Sul.

Similarly, the company will optimise its overseas portfolio. Its Nigerian assets will be sold to a consortium including trading house Vitol, and its Paraguayan fuel assets transferred to Grupo Copetrol, a Paraguayan fuel operator. Petrobras will also dilute its ownership of the Transportadora Associada de Gas (TAG) pipeline by 90pc. The pipeline, in the north/northeast, has a capacity of 75mn m³/d and last year the firm was in talks with French utility Engie when the court injunction blocked the sale.

The pending pipeline deal echoes that of the controversial southern midstream business Nova Transportadora do Sudeste (NTS), which was sold to Canadian firm Brookfield Infrastructure Partners in 2017 for $4.2bn. The federation of oil workers union opposes both the TAG and NTS deals, saying they leave Brazil's gas pipelines and pricing in the hands of multinationals. The union claims the NTS sale means that Petrobras will pay $1bn/yr to utilise the pipeline network, outstripping the deal's value after four years.

Concerns over the sale of state-controlled fields and infrastructure triggered protests last year. In the state of Rio de Janeiro, offshore workers staged demonstrations at the prospect of Campos Basin fields being sold and the privatisation of Transpetro, a transportation and fuel logistics subsidiary. At the time, the oil and gas workers' syndicate Sindipetro issued a statement denouncing planned sales. "It is a betrayal to the people, to the eyes of all, the selling of optimal areas of the sector-exactly the same as the neoliberal discourse of the 90s." Other workers' unions have discussed mobilising in the future.

Ending the deadlock

Petrobras hopes 2019 will see its costly deep-water operations finally start delivering. At the beginning of February, the Brazilian company announced the start-up of its Lula North Deepwater project. Located around 260km (160 miles) off the coast of Rio de Janeiro, the P-67 floating production storage and offloading vessel is currently capable of processing 150,000bl/d of oil and 6mn m³/d of natural gas. The holding consortium consists of Petrobras with a 65pc share, Shell Brazil with 25pc and Portugal's Galp with 10pc.

As new deep-water projects come on stream, the firm is targeting a production figure of 2.8mn bl/d in 2019 — a 777,000-bl/d increase from 2018. To meet this goal, Petrobras is significantly raising investment, with a 13pc boost over the 2018-22 plan. The company has allocated $84.1bn between 2019 and 2023, with around 82pc of the budget dedicated to E&P. Pre-salt E&P in deep-water basins has been assigned 56pc of the total investment, underlining
its importance to the new strategy.

Petrobras will look to reduce its near 98pc refining monopoly

The new government also plans to resolve the "Transfer of Rights" dispute with Petrobras. In 2010, Petrobras was given the rights to produce 5bn boe in certain areas in return for company shares, based on the oil price at the time. But the reserves found far outstrip 5bn boe, and negotiations between the government and Petrobras on exactly how much has been found — and on what price Petrobras should pay for its share given the gyrations in oil price over the last few years — have become deadlocked. At the end of last year, the government reportedly agreed a settlement figure, but in January denied this. Most agree, though, that Petrobras will end up a net creditor, if not on exactly how much will be returned to it.

"The settlement of this dispute and the launch of the preparations for bidding the volumes in excess of the original 5bn boe is fundamental for balancing public accounts. The new government has this as one of their priorities for its first 100 days, so there are a lot of incentives for everyone to complete this process as soon as possible," says Filho.

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