The push to privatize Brazil's petroleum sector remains on track despite the taint of scandal that hit state oil company Petroleos Brasileiro SA and the ensuing political crisis for the administration of President Fernando Collor de Mello.
Collor's efforts to reform Brazil's beleaguered economy have focused heavily on privatizing state-owned companies by selling assets or ending monopolies. Nowhere is that task more daunting than with Petrobras, one of the world's biggest petroleum companies, which has an entrenched monopoly over most upstream and downstream operations in the country.
Collor and the energy ministers and chiefs of Petrobras during his administration have pressed measures to inject free market principles in Brazil's petroleum sector.
The Collor administration earlier this year sent a bill to Brazil's Congress calling for a constitutional amendment to end Petrobras' monopoly over exploration, production, transportation, refining, and exports and imports of oil and gas. The amendment is expected to be voted upon in 1993.
When charges of corruption were leveled at top officials in Collor's administration and at Petrobras earlier this year (OGJ Apr. 20, Newsletter), some observers feared the privatization campaign might be derailed.
NEW MINISTER, PETROBRAS CHIEF
However, Collor appointed as new Mines and Energy Minister Marcus Vinicius Pratini de Moraes as part of a mid-April cabinet reshuffle he hopes will restore credibility to his administration.
Pratini, an economist, former congressman, and for the past 5 years president of the U.S.-Brazil Business Council, is expected to take tough steps to clean up corruption and inefficiency in the energy sector while keeping to the course of privatization. While chairman of Brazil's Foreign Trade Association, he called for a drastic reduction of the government's role in the economy.
Pratini in early May appointed Benedicto Fonseca Moreira president of Petrobras. Moreira is expected to continue the momentum of restructuring and working toward an end to the company's monopoly begun by former Petrobras Pres. Ernesto Weber.
A former vice-president of Brazil's Foreign Trade Association and former director of Calex-the defunct import-export arm of Banco do Brasil, Moreira said Petrobras "must become an important factor in the new strategy of national development and prepare itself to compete efficiently with or without a monopoly."
PRATINI: CURBING CORRUPTION
In an interview with Oil & Gas Journal, Pratini said he will seek to curb corruption in Brazil's energy sector by strengthening the public sector auditing system to keep a close check on public expenditures.
While acknowledging that won't be a cure-all, Pratini said, "I would like to bring attention to a very serious problem: corruption is a twin sister of inflation. One of the most serious problems in Brazil-responsible for the increase in the cases of corruption-is the long period of high inflation."
The rate of inflation in Brazil currently is about 20%/month.
"Thus, when we speak of combating inflation as a priority from the economic point of view, we also believe this will reduce the level of temptation for violating administrative norms in public enterprises."
Pratini's industry experience also acquaints him with the benefits of privatization, which he plans to accelerate in Brazil's petrochemical industry, currently controlled by Petrobras' affiliate Petroquisa. Upon his appointment as minister, Pratini resigned his job as president of PPH Cia. Industrial de Polipropileno, a polypropylene resins producer in Rio Grande do Sul state.
Petroquisa's assets are estimated at $4 billion. There are about 35 petrochemical companies in Brazil, with Petroquisa holding overall 95% of the interests in those companies.
PRIVATIZATION UPDATE
In mid-April 1992, shares in Petroflex, the first Brazilian petrochemical company to be privatized, sold at a premium of 20.8% over asset valuation.
Fifty percent of Petroflex voting stock was sold at auction to the PIC combine of Suzano 40%, Coperbo-Norquisa 40%, and Unipar 20%. The Petrobras pension fund Petrus acquired another 14% of total voting stock. The main currency used was privatization certificates with some SiderBras debentures, with the total sale valued at an equivalent of $222.1 million.
Pratini says he prefers high technology companies be sold for cash and not certificates.
The next petrochemical company to be privatized was Copesul in May. It is the basic feedstock supplier for the Triunfo petrochemicals complex. Bidding for 65% of Copesul's voting shares was expected to surpass $490 million.
Brazil has offered 10% of Copesul's voting shares to employees. Another 10% will be offered to the public next summer. Petroquisa will retain a maximum 15% interest in Copesul's steam cracking operations. Estimated ethylene capacity is about 600,000 tons/year.
Six more petrochemical complexes are to be auctioned by early 1993 by privatization administrator Banco Nacional de Desenvolvimento Economico e Social. Sales scheduled this year include:
- In early August, Nitriflex synthetic rubber plant, Rio de Janeiro.
- In September, Cia. Industriale de Polipropileno, a 100,000 ton/year polypropylene resin plant and Polysul Petroquimica, a 200,000 ton/year high density polyethylene plant, both at Triunfo in Rio Grande do Sul state.
- In late December 1992 or early 1993, Petroquimica Uniao, including a fluid catalytic cracker at the Sao Paulo complex that in 1990 produced 360,000 tons of ethylene, 204,000 tons of propane, and 170,000 tons of benzene.
PRIVATIZING OIL AND GAS
Although he is strongly in favor of privatizing Petrobras oil and gas operations, Pratini recognizes that will prove much more difficult than privatizing petrochemicals.
Unlike the situation with the petrochemical sector, Petrobras holds a constitutional monopoly on exploration, production, refining, and imports and exports of oil and gas.
Pratini questions Petrobras' efforts to become self-sufficient in oil because the company already meets two thirds of the country's oil needs. In 1991 Petrobras produced 635,000 b/d of oil and imported about 500,000 b/d. And Petrobras is targeting output of more than 1 million b/d by 1995.
Although he supports privatization of Brazil's petroleum sector, Pratini does not necessarily want to abolish Petrobras' role as a state company, just its monopoly. He wants to see Petrobras compete on a level playing field with private Brazilian and international companies.
"When Petrobras was created in 1953, the monopoly made sense. But now times have changed. Monopolies are disappearing all over the world."
Pratini added that he intends to restructure Petrobras to turn it into a modern and competitive company.
"The company has to be administrated as if it were a private enterprise," he said, contending it has become "a giant public department" that needs to be modernized so as to not "absorb financial resources that should go to the social area."
NEW EMPHASIS
In addition to shuffling ministers, Collor revamped his cabinet structure to restore independence to the mines and energy ministry, giving the sector a stronger emphasis.
Previously it had been consolidated with the transportation and communication ministry into a superministry of infrastructure. Collor split the infrastructure ministry into the two ministries again.
Natural gas and environmental concerns will get a heightened emphasis during Pratini's tenure.
Pratini said Collor gave him a green light to continue studies to change Brazil's energy mix-dominated currently by oil, with natural gas accounting for only 2% of domestic energy consumption.
Plans call for boosting the gas share of Brazil's energy mix to 10% while slowing the intensive investment intended to make Brazil self-sufficient in oil. Pratini says this is a good time to import oil because world crude prices are low. And additional natural gas supplies could be imported from such neighbors as Argentina and Bolivia to help rein Petrobras' capital spending on domestic energy projects.
In his first days in office, Pratini immediately was faced with an environmental crisis. On April 17, an oil spill involving 300 bbl of heavy crude oil occurred at Petrobras' Mataripe refinery asphalt plant at Madre de Deus, Salvador, in Bahia state.
The spill contaminated beaches and marshes and killed thousands of fish and other wildlife. Pratini went to Petrobras headquarters in Rio de Janeiro and led cleanup operations that involved deploying 1,000 km of containment booms as well as skimmers and dispersants. Pratini ordered Petrobras to determine the cause of the spill and punish those responsible within 6 days. Within a few days, Petrobras had cleaned up 80% of the area affected by the spill. By April 23 Petrobras determined a valve had been left open in the transfer of oil between storage tanks and internal security measures for removing equipment needing repair were disregarded. A Petrobras operator was fired, two were suspended for 29 days, and another for 10 days.
PETROBRAS RESTRUCTURING
Petrobras restructuring began under Weber, who insists it will be maintained as a state company and not actually privatized.
Pratini said he will accelerate the process started by Weber to restructure Petrobras, "to increase its productivity, reduce costs, raise its level of competitiveness, and enable it to survive whether the monopoly is maintained or not."
In an interview with OGJ prior to Moreira replacing him, Weber said, "What the government wants to do is to substitute the monopoly so that monopoly becomes a governmental concession, no longer being exclusive to only one company. The government would then grant concessions, so that other companies would then get into the act in Brazil's petroleum industry. This means that private and international companies would have access to exploration, production, refining, transport, and import and export of petroleum under the coordination of a special governmental organ."
Petrobras' strategic planning covers three scenarios for the Brazilian economy: continued economic crisis with high inflation rates and worsening recession, certain stabilization and moves toward a deregulated "neoliberal" economy without monopoly, or a move towards a "sociodevelopmental" economy-one a little more centralized than the neoliberal, with the maintenance of state monopoly by Petrobras.
Weber says the company is preparing itself for any of these scenarios by reducing bureaucracy and simplifying decisionmaking by bringing it closer to operations. Crucial administrative changes are planned at company headquarters with about 700 employees directly involved in a search for defining Pdetrobris' new organizational model.
Keys are decentralization and maintenance of enough staff for planning and coordinating operations. Technical departments would be moved to operations locations, which in turn will reduce costs. For example, the property values at Petrobras headquarters in Rio are so high that housing the supercomputer used for processing seismic data there has become too costly. So Petrobras is decentralizing all data processing functions.
"The main thrust of the administrative reform is to increase the efficiency of logistic and administrative support with headquarters basically housing the central organization of the Petrobras system and its holdings," Weber said.
Through streamlining the last 2 years, Petrobras has reduced staff by 6,000 through voluntary early retirement, and it plans to reduce the work force by another 2,700 this year. At present, Petrobras has 53,857 employees.
PETROBRAS' FINANCIALS, SCOPE
The rationale for restructuring Petrobras gained impetus with the company's poor financial performance in 1991.
Petrobras Group reported a consolidated net loss of $239.6 million in 1991. The main operating company's profit of $119.6 million was offset by losses of subsidiaries and affiliates. It was the first time Petrobras had a loss, and the company won't pay a dividend this year as a result.
The company blames the poor results on a new accounting standard that requires applying the National Consumer Price Index to financial reporting, which resulted in a 1991 increase in depreciation costs of $511 million in Petrobras' balance sheets and $118 million in the group's subsidiaries and affiliates.
Independent analysts say the company has $3.8 billion in debt, of which $2.6 billion is short term. There have been some difficulties in servicing obligations, such as in December 1991 when Petrobras was late paying some suppliers.
Longer term, the company attributes much of its financial woes over the years to the Brazilian government requiring it to subsidize domestic refined product prices to combat inflation.
The scope of Petrobras' operations guarantees that its financial health will have a far reaching effect on Brazil's economy. Last year Petrobras had revenues of $13.9 billion and accounted for 2.5% of Brazil's gross domestic product.
Within Brazil, Petrobras has commercial relations with about 3,500 service companies and about 6,000 supply companies, contributing indirectly to the generation of about 3 million jobs.
Petrobras places about 85% of its orders for capital goods in the domestic market-in 1991 about $800 million-and is responsible for about 5% of all taxes paid to the federal government.
SPENDING PLANS
Petrobras plans capital spending in 1992 of $2.9 billion, in line with its goal of producing 1 million b/d by 1995.
Of that, $2.1 billion is earmarked for exploration and production intended to maintain production at an average 700,000 b/d in 1992. That level matches the peak in 1991, Petrobras hopes that the peak this year will be about 790,000 b/d, the level it projects as the average in 1993. To produce 1 million b/d by 1995, Petrobras will have to spend about $18 billion for E&P.
The company wanted to fund this spending from cash flow. However, Brazil's minister of the economy told Petrobras to review its plans and increase the share of foreign capital in its investment program.
According to the infrastructure ministry, agreements with the International Monetary Fund, Paris Club, and private banks opened new opportunities for international financing. At the first of this year, despite a gloomy economy, Petrobras was able to raise $1.3 billion through an offering of commercial paper on international markets.
Petrobras had planned spending $4.4 billion in 1993, $5.6 billion in 1994, and $6 billion in 1995 as it built crude production to an average 880,000 b/d in 1994 and 1 million b/d in 1995. But after Pratini's call to reorder priorities, Petrobras is reassessing spending plans.
To increase crude oil and natural gas production, Petrobras plans to implement more than 200 projects through 1995. The most important involve development of supergiant fields Marlim and Albacora, plus Pirauna/Marimba and Enchova/Enchova Oeste fields off Rio de Janeiro state. This will represent 32% of projected production in 1995.
Petrobras also plans to invest $2.6 billion in refining and $1.5 billion in transportation. It plans to hike capacity at existing refineries by 400,000 b/d to 1.8 million b/d. Transportation outlays will go mostly for new pipeline construction.
Tenders for the construction of offshore oil platforms Enchova and Enchova Oeste in the Campos basin were canceled twice because Brazilian contractors incorporated a cost overrun of about 25%, or $150 million, in estimates of the contract value.
Petrobras has decided to let contract for individual platform modules and let foreign companies join with Brazilian ones in upcoming tenders.
MONOPOLY PROPONENTS' VIEWS
Successful privatization moves in the steel and telecommunications industries have sparked further debate about privatizing the petroleum sector beyond the usual reform minded elements. And a coalition of forces opposed to demonopolization has formed in response.
Proponents of ending monopoly will not have an easy task in convincing Brazil's Congress to vote for changing the monopoly clause in the constitution.
Despite the recent cabinet reshuffle, largely based on the political support and votes each new minister represents, the government still does not count on an absolute majority in Congress. It follows, then, that success of the antimonopoly forces will largely depend upon the economic performance of Collor's administration during the next 2 years.
Although many politicians agree with the government's austerity measures, if Collor is not able to reduce inflation and restore economic growth, he likely will lose congressional support for his programs heading into the 1994 elections.
A promonopoly coalition has formed from both extremes of the political spectrum.
"Brazil may become a giant incorporated society, in case the government continues to promote the privatization of strategic sectors of the economy, such as the petroleum sector," said Aureliano Chaves, a conservative former vice-president of the Joao Batista Figueiredo military regime and former mines and energy minister under the administration of President Jose Sarney.
Another prominent promonopoly spokesman is Severo Gomes, formerly a senator and minister of industry and commerce during the military regime. He argues that ending the monopoly does not guarantee free competition and will only serve the needs of multinationals that will act as oligopolies.
AEPET'S STANCE
One of the principal ideologues of the promonopoly forces is Diomedes Cesario da Silva, president of the Association of Petrobras Engineers (Aepet).
His organization actively lobbies Congress to maintain the monopoly clause and has produced many studies for the public in support of its position.
In a recent testimony to Congress, Diomedes said, "if Congress ends the monopoly, Petrobras will no longer have the obligation to supply the domestic market with oil products. The company will have to operate as the multinationals, that is, based only upon the profit motive."
Diomedes contends Petrobras will no longer be obliged, for example, to import one third of the 30,000 b/d of liquefied petroleum gas consumed for cooking in Brazil.
Petrobras would import LPG only if import prices allowed a healthy profit in domestic sales, which in turn would require an immediate 200% increase in domestic prices without the Petrobras subsidy to prevent a shortfall of LPG supplies, he claims.
"This will happen with all petroleum derivatives, unless the government continues to subsidize these products, and this would be contradictory with the objective of ending monopoly and diminishing the government's participation in the economy.
ENERGY SECURITY QUESTIONS
Diomedes also appealed to a growing feeling of nationalism among the major parties in the congress.
"And the Armed Forces? What will happen to them? Who will supply them with strategic oil products, such as gasoline, jet fuel, and oil for ships? Shell? Exxon? Texaco? Of course not, unless this happens at market prices and with cash payment."
Sen. Roberto Campos contends that what Diomedes fails to say is that free marketeers are not against maintaining Petrobras as a state company in competition with other companies.
What they oppose, says Campos, is the monopoly clause, which they consider obsolete and even strategically dangerous for the country.
He cited the level of about 40% of total imports of 1 million b/d during the Iran/Iraq war that came from Iraq as a strategically dangerous decision.
Campos also pointed out that as a monopoly, Petrobras, with its 24 unions, can paralyze the country in the event of a labor action, thus posing a threat to national security.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
