BRAZIL'S DOWNSTREAM INDUSTRY FACES SHAKEUP

More upheaval is in store for Brazil's refining/marketing industry.

State owned Petroleos Brasileiro SA is considering participating in foreign downstream operations.

At the top of the Petrobras list for foreign downstream investment is the U.S. market. Officials of the Petrobras refining/marketing arm are negotiating a possible U.S. joint venture with an undisclosed American company. Another option they are considering is direct investment in as many as 100 Petrobras owned service stations in the U.S.

Petrobras also seeks to step up exports of petroleum products.

Further, there are signs that Brazil's refining/marketing industry is evolving into a more competitive domestic market.

That is essential if Brazil's refining/marketing industry is to operate efficiently and economically, private sector downstream company officials say. Those officials criticize the government for excess regulations that they say stifles competition and hikes costs needlessly.

Petrobras markets petroleum products in Brazil through Petrobras Distribuidora SA (BR), the nation's major supplier of gasoline and fuel alcohol with a 37.3% market share. BR's revenues in 1989 totaled $4.3 billion, down 0.2% in real terms from 1988 because of slower economic growth.

The decline in marketing revenues is partly behind BR's interest in seeking marketing investments outside Brazil. Negotiations are under way for possible BR downstream investments in Argentina and Paraguay.

U.S. MARKETS EYED?

BR soon will send a trade mission to the U.S. to study prospects for establishing Petrobras owned service stations there.

The company prefers a possible joint venture to cut outlays. Likely entry point for the BR initiative would be the U.S. East Coast.

BR estimates installing a service station in the U.S. costs about $1 million, while buying distribution rights can cost $10,000-100,000/station.

BR directors have received a proposal from an undisclosed U.S. company to form a marketing joint venture in the U.S.

The Petrobras unit thinks it may be operating in the U.S. by next year. It is not known whether it would use the BR or Petrobras logo, and there remains the possibility that its wholly or partly owned service stations would retain local brand names.

Petrobras emphasizes that such an investment would have to prove a good commercial opportunity, not just for promoting the company image abroad.

"Petrobras's idea of establishing a network of filling stations in the U.S. makes a lot of sense," said a Brazilian private sector industry official. "China and Saudi Arabia are selling gasoline to the U.S.-as well as to Brazil-but neither of those countries has the experience of Petrobras in distributing derivatives."

EXPORT MARKETS

Petrobras continues to focus on expanding exports of products, with an emphasis on the U.S. market. Other target markets are Africa and other nations in South America.

During January-June 1990, the U.S. imported from Brazil an average 18,800 b/d of finished gasoline, 37,700 b/d of residual fuel oil, and 100 b/d of lubricants.

In an effort to deflect criticism of the quality of its products, BR recently introduced what it claims to be its first motor oil ranking among the best in the world: Lubrax Supra SG with API-SG/CE specification. BR says it is suitable for use in gasoline, alcohol, and some diesel fueled engines.

This new product comes at a time when Brazilian gasoline and diesel fuel quality has been heavily criticized by industry officials and Brazilian consumers.

Paramins, a U.S. manufacturer of additives for fuels and lubricants conducted a 34 country survey that found Brazilian diesel fuel among the poorest in quality in the world.

The study showed Brazilian diesel has a significantly lower energy content than most other comparable diesel fuels and a sulfur content of 0.58%, exceeded only by diesel in Turkey at 0.65% sulfur and in Pakistan at 1.54%.

That compares with diesel sulfur content of less than 0.1% in Austria, Australia, and Scandinavia, 0.11% in West Germany, 0.13% in the U.K., 0.2% in the U.S., 0.22% in France, 0.35% in Japan, and 0.49% in Venezuela, the Paramins study found.

Petrobras noted that the sulfur content of Brazilian diesel varies widely among its refineries. At the Petrobras refinery in Porto Alegro, Rio Grande do Sul, processing Iraqi crude oil yields a diesel sulfur content of 0.8%. At the Petrobras refinery in Salvador, Bahia, using domestic crude oil delivers a diesel sulfur content of only 0.03%.

There are about 1.2 million diesel fueled vehicles in Brazil traveling a total 200 million km/day.

DOMESTIC MARKET

BR earmarked $100 million to expand marketing of lubricants domestically in 1990, mainly in rural areas.

BR's share in Brazil's competitive market for lubricating oil and grease grew to 16.3% last year from 14.6% in 1988.

BR has 6,065 service stations in Brazil, last year incorporating into the chain another 219 dealer franchises.

Total volume of refined products and fuel alcohol in Brazil was an average 1.045 million b/d in 1989, a 4.5% increase from 1988. Of that total, BR's sales volume was about 392,000 b/d, up 1.7% from 1988.

The marketing subsidiary posted $35 million in after tax profits last year, a drop of 16.7% from 1988.

INEFFICIENCY, HIGH COSTS?

Brazil's products distribution infrastructure is burdened by government regulation and red tape that add up to needlessly costly transportation costs, said Paulo Kastrup Netto, vice-president of Texaco Brasil and vice-president of Brazil's petroleum products wholesalers association (Sindicom).

Sindicom includes BR and 14 private companies.

"Sometimes freight costs are double what they should be," Kastrup said.

"Brazil spends about $840 million/year to transport these products to 21,000 service stations spread throughout the country. This figure represents almost half the $1.9 billion total investments Petrobras has allocated for exploration, production, and refining this year. What is most upsetting is that about $4 million probably is being wasted in freight frauds."

He explained that, unlike countries such as the U.S. where products transport is by pipeline, products in Brazil are transported by road, rail, ships, and barges, taking 116 days to arrive at retail outlets.

Kastrup said one of the most glaringly irrational aspects of the Brazilian transportation system is a ban on distributors or any other private company to construct pipelines.

Petrobras has a constitutional monopoly on building pipelines.

The company argues that it has limited resources and must place a higher priority on investments in exploration, crude production, and transportation of crude oil and natural gas to refineries and processing plants, leaving no room in the budget for products pipelines.

DEREGULATION ON TAP?

Fernando Grandinetti, price manager for Shell Brasil, said the crux of the problem is excessive governmental regulation.

However, he contends President Fernando Collor de Mello's administration is taking major steps toward deregulation that should result in a drop in retail prices.

Until recently, a service station operator could not sell products below prices set by the government. When one owner attempted that in a recent promotional effort, he was threatened with a fine by a government agency.

Collor then issued an executive order that the government no longer interfere in retail petroleum products pricing, paving the way for open competition.

That has resulted in a reduction of Brazilian products prices, even after Iraq's invasion of Kuwait and the subsequent spike in oil prices.

In addition, companies no longer have to ask government permission to build service stations.

There are other major deregulation moves in the pipeline, Grandinetti said.

Shell holds a 21 % share of Brazil's refined products market.