Start Ipiranga, Manguinhos, Dax Oil, Univen and REFAP – the challenges of private refining in Brazil after the end of the state monopoly in the sector

Ipiranga, Manguinhos, Dax Oil, Univen and REFAP – the challenges of private refining in Brazil after the end of the state monopoly in the sector

July 2, 2018 10:08 pm to 22:08
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With the reopening of the oil market in Brazil in 1997, it was expected that new private investments would be made in the sector. New investments were expected in the refining park and that competition would bring gains in quality and prices. In order for Petrobras and the private companies (Manguinhos and Ipiranga) to adapt to the free market, Law 9,478/97, known as the “Petroleum Law”, guaranteed a market reserve for a few years (Law 9,478/97, in its articles 69 to 74, allowed the institution of subsidies to private refineries and the control of prices and imports by the Regulatory Agency for up to 5 years). This, in a way, would allow companies to transition to the competitive regime.

In fact, in a short time, there were some market movements that reinforced the expectations initially imagined. The Repsol YPF group, for example, acquired part of the control of the Manguinhos refinery. Later, it also acquired 30% from one of Petrobras' refineries in Rio Grande do Sul. In addition, the Manguinhos and Ipiranga refineries proposed plans to expand their units to the ANP. Two new private refineries emerged, Univen and Dax Oil. The restructuring of the sector and free competition appeared to be having the intended effect with the end of the monopoly. However, the following years showed that the difficulties for private refineries were immense. A brief analysis of each of them over the last decade demonstrates the size of the challenge.

Maguinhos Refinery

Inaugurated in 1954, in the state of Rio de Janeiro (RJ), the Manguinhos Refinery was prevented from expanding its activities due to the state monopoly resulting from the creation of Petrobras in 1953. As a result, its refining plant remained of low complexity. and small, when compared to other existing refining plants in Brazil. Thus, it has always needed light oil for proper processing in its manufacturing facility. Until 1963, the refinery itself purchased imported light oil to meet its needs. From that year onwards, Petrobras also began to exercise a monopoly on the import of oil and derivatives, even meeting the needs of the private refinery, a situation that persisted until the early 2000s. Considering that the refinery survived the period of the monopoly, it is conceivable that, over the period, it had some market reserve allowed by successive governments, otherwise it would have been acquired by Petrobras, as happened with the Manaus (REMAN) and Capuava (RECAP) refineries. ), or it would have broken down at the time due to oil shocks and controlled prices in Brazil.

After 44 years of operation, one year after the end of the monopoly of refining activities in the country, in 1998, the Spanish group Repsol YPF acquired part of the shares of the Manguinhos Refinery, sharing control of the unit with the hitherto owner. , the Peixoto de Castro Group. With the promise of new investments, the partnership presented itself as an opportunity to leverage the refinery's business, although this did not happen exactly in the following years.

Investments, initially estimated by the new consortium, were reduced. There were several reasons. Repsol YPF began to experience difficulties in Argentina, which had been in crisis for almost a decade, and the refinery's operating results were also never encouraging. The price of oil in the international market soared, making Manguinhos' refining margin negative, since fuel prices in the Brazilian domestic market were still defined by Petrobras, under the indirect control of the Federal Government, which held prices for long periods, not passing them on fully to the final consumer. As of 2004, the average price of oil in the foreign market began to rise steadily, causing the refinery's production to be completely interrupted in the years 2006 to 2009, as seen in Figure 1.

Figure 1 – Average load processed in Manguinhos, in MMBep (millions of oil equivalent barrels), and the relationship with the price of crude oil (Source: own elaboration based on ANP, 2017)

Not resisting a serious financial crisis, the refinery went into judicial recovery in 2008, when it was acquired by the Andrade Magro Group, which already operated in the chemical and fuel distribution segment. When it resumed operations in 2010, in subsequent years there was a downward trend in the use of oil (Figure 2), until, from 2013 onwards, Manguinhos started to process other loads (naphtha and condensate, for example) as a way of to keep operating. Operating and financial results continued to be quite poor and the refinery remained on the brink of bankruptcy. At the end of 2017, the refinery controller announced a change in the name of the unit, which became REFIT. Despite the name change, the challenges to refining oil were gigantic due to the age, size and technology present in the refinery. Possibly, the refinery is, today, a more valuable asset as a fuel storage terminal than as an oil refining unit itself.

Figure 2 - Loads used in Manguinhos, in MMBep, from 2000 to 2016 (Source: own elaboration based on ANP, 2017)

Ipiranga Refinery

The Ipiranga Refinery began its operations in 1937, having adjusted its shareholding control the following year, pursuant to CNP resolutions, whose issue established that only natural-born Brazilians could be shareholders of refineries in Brazil. Similar to what happened with the Manguinhos Refinery, after the establishment of the Petrobras monopoly, Ipiranga's private concession was maintained, but it was also prevented from increasing its refining capacity throughout the period, being maintained, however, through its market reserve over the period.

The breaking of the monopoly in 1997, through Law 9,478, also guaranteed Ipiranga a market reserve for five years, so that it could prepare for free competition. In 1998, the ANP ratified the ownership and rights related to Ipiranga's refining facilities, existing at the time, giving the refinery a refining capacity of 12,500 barrels/day, based on the existing operational capacity. Although it was prevented from expanding its activities during the monopoly, an important improvement was implemented at the Ipiranga Refinery in the 1970s, which was the installation of a Vacuum Distillation Unit. This gave Ipiranga a little more flexibility than the Manguinhos refinery (which only relied on atmospheric distillation), which allowed it to process slightly heavier (and cheaper) oils.

Seeing growth and with an open market, Ipiranga asked the ANP to expand its refining capacity to 17,000 barrels/day, which was authorized and effectively carried out in 2002. In addition to increasing its capacity, the production profile was changed due to the possibility of using more suitable raw materials, with the direct import of more than half of the oil consumed from the second half of 1999 onwards (RPR, 2014). Soon, however, difficulties arose due to the escalation of oil prices in the international market, associated with the lag in the domestic prices of derivatives, mainly LPG, gasoline and diesel, which made up Ipiranga's portfolio. Figures 3 and 4 show the prices of LPG and gasoline, respectively, to illustrate the lag in prices recorded from the end of 2003.

Figure 3 - Evolution of LPG quotations from 2002 to 2008 (Source: MME, 2008)

Chart analysis: it can be observed that from 2004 to 2008 the domestic price (IP) of residential and industrial LPG remained below the international price, demonstrating the state subsidy for this fuel in that period.

Figure 4 - Evolution of Gasoline prices from 2002 to 2008. (Source: MME, 2008)

Chart analysis: it is observed that in several and long periods the domestic price (PI) of gasoline was below the international quotation. Although at times, the domestic price was higher than the imported one, making clear the perception that he was much longer under the state subsidy.

Given this scenario, between 2003 and 2006, the refinery reduced its operations by almost half, recording financial losses in its refining activity (RPR, 2014). The drop in production recorded in those years can be seen in Figure 5.

Figure 5 - Average load processed at the Ipiranga Refinery and the relationship with the price of crude oil (Source: own elaboration based on ANP, 2017)

In 2007, control of Grupo Ipiranga, whose assets involved fuel distribution stations, petrochemical plants and the Ipiranga Refinery, was acquired by a consortium involving Petrobras, Ultrapar and Braskem. In 2009, the refinery was renamed Refinaria de Petróleo Riograndense (RPR), in which each of the three controlling partners now holds 33.3% of the shares in the corporate structure. From that moment, the refinery operated with some profit in its operations, as Petrobras started to industrialize its own oil at times when the price of crude and derivatives brings losses to the unit. The future of this refinery is uncertain, due to the age of its facilities, load limitations and small size.

Two new small refineries emerge: Univen and Dax Oil

Univen from São Paulo and Dax Oil from Bahia were two refineries created a few years after the opening of the oil market in Brazil. In order to fill market niches or gaps left by Petrobras, they invested in small refining units, compared to the large state-owned refineries, to serve very specific markets with the production of special solvents. A model, by the way, very common in the American market, which has more than 100 small refineries spread across the country (TAVARES, 2005). Despite the promising start, it did not take long for the same problems to appear as the other private refineries had, exposed to the high value of oil on the international market and the control of fuel prices by the Brazilian government.

Univen, a small refinery, located in the city of Itupeva, São Paulo, was founded in 1992 and acquired by the Vibrapar group in 1997. Initially, it produced only hexane and, in 2001, its industrial park was expanded, starting to produce also other special solvents. In 2003, it received authorization from the ANP to process and refine light oil, petroleum condensate, naphtha and other petroleum fractions for the production of fuels and solvents (UNIVEN, 2014). In 2010, it was authorized to expand its processing plant from 6,919 barrels/day to 9,158 barrels/day (ANP, 2013).

Bahia's Dax Oil is also a small private refinery located in the Camaçari Petrochemical Complex, licensed to produce solvents since 2005, from the processing of naphtha and other petrochemical streams, being expanded in 2010 to a refining capacity of 2,095 barrels/ day (ANP, 2013). The unit was developed in partnership with the Federal University of Bahia (UFBA) and was supported by the State Government and the Association of Producers of Oil and Natural Gas Extracted from Marginal Fields in Brazil (APPOM). It was a refinery designed to meet local production, allowing independent oil producers located in Bahia to market their oil production, which, being small, was not of interest to large companies.

The two small refineries sought to adapt to market conditions. Univen, which initially produced more solvents at its unit, began to invest heavily in gasoline production from 2005 onwards (Figure 6), with one caveat: it used the same method adopted by Manguinhos, to pay ICMS due to the São Paulo tax authorities with precatories from the government itself. Facing a lag in the domestic price of gasoline in relation to the international market, a rise in the dollar and a tightening of the São Paulo tax authorities in relation to ICMS, it began to produce less and less of the fuel, until the unit stopped in 2012 (the controller, Grupo Vibrapar, filed a bankruptcy and judicial recovery in the same year). On the other hand, Dax Oil, which initially produced solvents, began to invest more in the production of fuel oil (Figure 7), as a way of surviving in the market. The small refinery in Bahia continues to operate, unlike its counterpart in São Paulo, which has not operated since 2012.

Figure 6 - Historical profile of derivatives produced by Univen (Source: own elaboration based on ANP, 2017)

Figure 7 - Historical profile of derivatives produced by Dax Oil (Source: own elaboration based on ANP, 2017)

The curious case REFAP

A curious case that illustrates well the difficulty of private refineries in Brazil is the joint venture formed between Repsol YPF and Petrobras, in 2001, at the Alberto Pasqualini Refinery (REFAP), in RS. As previously mentioned, Spain's Repsol, as a strategy to expand its business in South America, acquired the Argentine state-owned YPF and part of the controlling interest in the Manguinhos Refinery (RJ), in Brazil. In 2001, in an asset exchange with Petrobras, Repsol acquired 30% from the Alberto Pasqualini Refinery (REFAP), in an operation that involved some refining, petrochemical and gas station assets on Argentine soil in favor of the Brazilian state-owned company.

One of Petrobras' goals at the time was to internationalize and dominate the market in the Southern Cone. REFAP then became an independent corporation (S/A), a subsidiary of Petrobras. With the new partnership, investments were made to expand its oil processing capacity in the following years. Apparently, the Brazilian government was interested, at the time, in using the same business model in other Petrobras refineries, following the liberal economic trend that began in the 1990s. However, REFAP was the only refinery in which the model took hold, as soon then, in 2002, the government of then president Lula interrupted this trend.

REFAP S/A, which at the time of its incorporation already used 70% of imported light oil in its refining unit, started to import even more in the following three years (Figure 8), reaching 84% of processed cargo in 2004. Priority at that time would be to obtain the greatest possible production of light derivatives, which are known to have greater added value. However, as already discussed, the price of a barrel of oil on the international market began to rise steadily from 2003 onwards, greatly increasing the cost of raw materials, as was the case with other private refineries.

With heavy investments to recover the so-called “bottom of the barrel”, to reduce dependence on imported light oil, REFAP inaugurated, in 2006, its Delayed Coking Unit (UCR) and a Waste Catalytic Cracking Unit (RFCC), which made it possible to adapt its refining unit to Brazilian oil. It is observed that, in 2011, the use of national oil exceeded that imported in the blend of oils used by the refinery, and in 2016, the use of domestic oil curiously reached 84% of the load (the same number recorded in 2004 with imported oil).

Figure 8 - Profile of oil used in REFAP (Source: own elaboration based on ANP, 2017)

Like other private refineries, with the increase in oil prices, REFAP started to have negative refining margins. This is all associated with the need for successive investments for the modernization of its plant and requirements for the production of better quality derivatives, with lower sulfur contents. Therefore, at the end of 2010, after intense discussion about the need for new investments, whose partner did not agree, Petrobras announced the repurchase of 30% shares belonging to Repsol, returning the refinery to being 100% Petrobras again. This curious case of REFAP demonstrates the difficulty faced by private refineries in the country since the reopening of the oil market in Brazil 20 years ago. SOURCE Marcelo Antunes Gauto, Chemical Industrial Petrobras

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