Petrobras refinery sales at legal crossroads

Brazil's supreme court is preparing to consider a challenge to state-controlled Petrobras' plan to sell half of its refining capacity, a legal crossroads that coincides with negotiations and bidding for two of the eight refineries on offer.

A hearing of the full court is scheduled to begin on 30 September. But the court already revealed part of its hand before its president Luiz Fux unexpectedly pulled the case from virtual voting on 21 September: three of the 11 justices voted in favor of subjecting the refinery divestment plan to congressional approval, as petitioned by top lawmakers at the behest of oil labor unions that oppose the sales.

Fux's abrupt decision coincided with Petrobras' announcement that it would open a second round of bidding for its 208,000 b/d Presidente Getulio Vargas refinery (Repar) in Araucaria after receiving two comparable offers in a process involving China's state-owned Sinopec and domestic fuel distributors Raizen and Ultrapar. The second round could happen in October, people familiar with the matter tell Argus.

And exclusive talks are already underway with Abu Dhabi's state-owned investment fund Mubadala since July for the sale of 333,000 b/d Landulpho Alves refinery (Rlam) in Mataripe. Company executives have said a sales agreement for the northeastern refinery could be signed by the end of the year.

The sequence of court events has raised doubts about the timing of the refinery sales, and whether they will generate the more than $15bn projected before the Covid-19 pandemic and Saudi-Russian oil price war wreaked havoc on global oil markets earlier this year.

"If you look at this year, you may have a pessimistic view but . . . you must see this opportunity in a medium, long-term view," Petrobras downstream director told Argus in an interview last month.

Analysts say it is too early to know how the valuations will shake out, but the court case and a tense political climate have made some investors jittery.

"Even though eight supreme court votes are missing, the market prices in the possibility of the company having to think of another solution to sell the assets, which would mean a longer time for the auction and, consequently, more time with the company paying interest on higher debts compared with its peers," says Ilan Arbetman, analyst with Ativa Investimentos.

The refinery sales account for a significant chunk of Petrobras' 2020-24 divestment portfolio of $20bn-$30bn, which is intended to reduce the company's $87bn debt load and allow it to focus on deepwater oil development.

For Petrobras, the quick scheduling of the full court hearing at the end of September could help to mitigate uncertainty and avoid delaying the firm's goal of closing the refinery sales by the end of 2021, as agreed with Brazil's anti-trust watchdog Cade. Petrobras has already discussed the possibility of a delay with Cade as a result of issues stemming from the pandemic.

In its defense, Petrobras is relying on a 2019 supreme court decision that cleared the firm to sell controlling stakes in assets without the approval of congress. Opposition lawmakers argue that the company's recent shift of refinery units into separate subsidiaries in anticipation of their sale runs afoul of the court ruling, because they see the refineries as an integral part of the corporate structure.

Petrobras executives express confidence that the court will decide that the sales are part of its business strategy aimed at optimizing capital for shareholders, including the federal government itself.

By Nathan Walters