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Brazil finding the balance

The country faces key downstream and infrastructure challenges

Efforts to reform Brazil's downstream fuels market illustrate the tension between trying to move away from over-arching state control, but also placate a populace angry after corruption scandals and economic austerity.

Under existing law, Petrobras plays the role of the country's sole supplier, but this no longer reflects the on-the-ground reality. Nor is it the part the company, which is actively looking for partnerships at some of its refineries, is keen to play. The supreme federal court is, though, taking a keen interest in the legality of any potential partnership.

It's estimated that, to meet Brazil's fuels demand in 2030, an investment of over $10bn in downstream infrastructure would be required. Petrobras is unlikely to be willing or able to shoulder that burden alone. Effective policies that promote market freedom and open the sector to competition and new entrants are key to attracting the requisite investment capital.

But a truck drivers' strike over rising diesel prices—which paralysed the country for nearly two weeks in May, affecting sectors transportation and food supply—highlights the tension between reform and protectionism. The strike came after Petrobras started applying an import price parity policy in its diesel sales to stop losing money on its imports.

After negotiation with unions, President Temer agreed a partial climbdown. But his decision to subsidise the diesel price at the pump to get the truckers back to work led Petrobras chief executive Pedro Parente to resign in protest. Parente had been credited with restoring foreign investors' confidence and steadying Petrobras after its corruption scandals.

Post-Parente, Petrobras accepted the diesel price subvention programme, a temporary government fix to try to alleviate diesel price fluctuation. Any differences between prices paid and selling prices will be later reimbursed to Petrobras by ANP.

But analysts claim that this programme, which is set to finish at the end of the year, is harmful for the industry in the long term. Before the strike, there was a growing number of new players importing fuel. Most private diesel importers are now unable to compete against fuel at a regulated price, leaving Petrobras as virtually a sole supplier. According to an executive at the firm, it's now supplying 90% of diesel market demand, compared to a 74% average in 2017. If this scenario persists, it's likely to shut out new entrants entirely and postpone, or worse, the investment required to expand supply infrastructure to meet future demand.

Ageing infrastructure gets a boost

The ANP published a resolution in September offering a reduction in royalties for incremental production from mature fields, as Brazil faces the challenge of what to do with ageing infrastructure.

The new resolution cuts royalties for the additional volumes from the standard 10% to 5% for fields which have been producing for more than 25 years or have produced more than 70% of original proved reserves. Operators must request the incentive from the ANP, alongside a revised development plan that outlines the schedule, costs, volumes and expected revenues of projects that will deliver incremental production, and evidence of economic benefits to federal entities from making these investments.

The prize for re-invigorating mature assets is potentially significant. According to a recent report from consultancy Wood Mackenzie, redeveloping the Campos Basin's mature oilfields could extend the basin's life, add more than 200,000 b/d of oil equivalent per day to its declining production by 2025, and generate additional $3bn in royalties.

But next year may also see the start of a large-scale decommissioning phase. According to the ANP, there are around 160 offshore production platforms in Brazil, of which more than 60 have been in operation for over 25 years and may be candidates for decommissioning. Petrobras is, for example, seeking contractors to scrap nine ageing platforms at the Marlim field.

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