Petrobras’ plan to divest its natural gas pipeline and distribution companies was recently forced back a step. The company’s proposed sale of its residential gas distributor Liquigas for $820bn to rival private company Ultragaz was barred by Brazil’s anti-trust agency, the National Economic Defense Council (CADE), on 28 February. Under the deal, Ultragaz would have ended up with 60% of Brazil’s large residential gas market. CADE Commissioner Cristiane Alkmin argued that the deal would not “bring any benefit to society.”
During the past few months, Alkmin met with representatives of Liquigas and Ultragaz to identify measures to reduce that high level of market concentration, but they fell short of finding a legal solution. The six CADE commissioners voted 4-2 against the proposed sale. The outcome forces Ultragaz to pay $89.9mn in fines, equivalent to roughly 10% of the agreed sales price to Petrobras. CADE’s heightened scrutiny of mergers and acquisitions comes after successive corruption investigations revealed the agency’s failure to properly examine the spree of acquisitions made by JBS, Brazil’s largest meat producer.
The CADE decision hinders Petrobras’ divestment plan in the near term, but it is unlikely that the anti-trust agency will block the company’s overall strategy of selling off downstream assets. Indeed, earlier in February, CADE and Alkmin approved Petrobras’ sale of two small subsidiaries, Companhia Petroquimica Suape and Companhia Integrada Textil de Pernambuco (Citepe), to Petrotemex of Mexico after analyzing the impacts on the terephthalic acid market. Petrobras holds 100% of Liquigas shares and is currently considering a corporate restructuring program that could lead to a staggered IPO on the Sao Paulo stock exchange later this year.
Petrobras’ divestment of its gas pipeline subsidiaries and the proposed sale of Liquigas overlap with President Michel Temer’s efforts to reform the natural gas market and implement its “Gas to Grow” program. Launched in July 2016 and running parallel to Petrobras’ divestments in the sector, the program entails regulatory reforms to increase competition among private gas producers and distributors in order to lower prices for consumers. Proposed amendments to the “Gas Law” would codify international best practices, encourage start-ups, offer more market transparency and information, and allow for greater private sector participation in the contracting process.
These reforms could also lead to the creation of a new regulatory agency to coordinate pipeline infrastructure and transportation of gas to local distributors, as is the case with electricity and the National Electricity System Operator (ONS). However, the Temer administration’s proposed reforms to the Gas Law would shift the market regulatory function from the state governments to the National Petroleum and Biofuels Agency (ANP). In December 2017, the proposed Gas Law legislation failed to get a floor vote in Congress, due to mounting opposition organized by local distributors and their states’ congressional delegations. Furthermore, last week the government conceded to demands to keep regulation at the state level.
Petrobras and other gas-to-wire producers seek an exemption from the proposed rules governing local pipeline services, as they want to avoid yet another layer of red tape. Secretary of Gas and Petroleum Marcio Felix announced last week that conversations are under way with producers and distributors to overcome such regulatory challenges and “surgically” amend the proposed Gas Law for a congressional vote in May 2018. Federal Deputy Marcus Vicente, a Progressive Party (PP) member from the state of Espirito Santo, is sponsoring the bill. He and Secretary Felix will need to work together in the coming months to ensure that the president of the Senate, Eunicio Oliveira, agrees to a floor vote. (In early December, Oliveira adjourned the Senate without considering the new legislation.)
The natural gas market liberalization initiative also impacts Petrobras’ efforts to negotiate partnerships to mitigate the costs of modernizing the company’s refineries. The NOC has not yet adopted a clear JV or shareholding model, but discussions continue among prospective partners. Petrobras owns 14 refineries and retains control of nearly all of the nation’s installed capacity. Last July, the company announced discussions to form a partnership with China National Petroleum Corporation (CNPC) regarding the Rio de Janeiro refinery (COMPERJ).
A massive overhaul and expansion of the petrochemical plant was suspended when investments were halted in 2015, but the Chinese firm would supposedly finance the process’ final stages. COMPERJ’s expansion is aimed at meeting the upward consumption of diesel fuel, naphtha, jet fuel, coke and LPG. Last week, Petrobras CEO Pedro Parente announced that discussions were being finalized with Chinese investors to “inject capital” into the complex; the NOC signed a $590mn contract with Chinese firm Shandong Kerui Petroleum to finish construction of COMPERJ’s natural gas processing unit.
Petrobras is also studying the possible sale of shares of six refineries, including Landulpho Alves (Rnest) in the state of Bahia, Alberto Pasqualini (Refap) in Rio Grande do Sul, Presidente Getulio Vargas (Repar) in Parana, Duque de Caixas (Reduc) in Rio de Janeiro, Gabriel Passos (Regap) in Minas Gerais, and the newly constructed Abreu e Lima refinery in Pernambuco. These six facilities refine nearly half of all domestic gasoline and diesel production. Notably, the construction of Abreu e Lima and the expansion of COMPERJ were both subjects of the Lava Jato corruption investigations; massive contractor malfeasance was exposed, as were procurement kickbacks to Petrobras directors and political parties.