Global Insight Perspective

Significance

The Ipiranga and Manguinhos private refiners account for just 30,000 b/d of the country's total refining capacity and are finding it harder than Petrobras to absorb the loss in revenues resulting from the price differential between the international and domestic oil markets, which the interim head of ANP has said has reached as high as 30%.

Implications

With Petrobras as the country's main refiner, private refiners have effectively been forced to follow its pricing policy in order to remain competitive, even though the costs of importing crude oil have risen. The reduced margins and higher costs have resulted in temporary closures at the refineries.

Outlook

Despite the comments by the head of Petrobras regarding possible fuel price adjustments, the proposals being discussed with regard to the private refiners' problems indicate that the government is not anticipating a radical shift in the state oil company's fuel pricing policy and that there continues to be a reluctance to pass on higher oil costs to end-consumers.

Petrobras Contemplates Fuel Price Adjustment As Ministry and Regulator Look for Solution to Avoid Closure of Private Refineries

The President of state oil company Petrobras José Sérgio Gabrielli has indicated this week that the company will adjust domestic fuel prices if international oil prices stabilise above US$60 per barrel, according to local press reports. Although Gabrielli's comments do not mean that petrol (gasoline) and diesel price increases are imminent or even inevitable, they will be welcomed by the country's two privately owned refineries, one of which is owned by Ipiranga and the other of which is owned by Repsol-YPF and the Peixoto de Castro group.

The two private refiners account for just 30,000 b/d of the country's total refining capacity and are finding it harder than Petrobras to absorb the loss in revenues resulting from the price differential between the international and domestic oil markets, which the interim head of ANP has said has reached as high as 30%. With Petrobras as the country's main refiner, private refiners have effectively been forced to follow its pricing policy in order to remain competitive, even though the costs of importing crude oil have risen. The reduced margins and higher costs have resulted in temporary closures at the refineries. In April, private refiner Ipiranga was forced to suspend operations temporarily at its 15,000-b/d refinery in the Brazilian state of Rio Grande do Sul in an attempt to minimise losses resulting from the disparity between high international oil prices and low domestic prices. The other private refinery, Manguinhos, has been shut down since 3 August.

ANP and the Ministry of Mines and Energy are currently trying to work out a solution that allows the two private refineries to remain operational. Proposals under discussion include using revenues from the Cide fuel tax to support the private refiners and Petrobras offering support in the form of discounted crude oil supplies, the lease of refineries or access to its export infrastructure. According to local press reports, Gabrielli has indicated that the leasing option is not appealing, but has suggested the possibility of allowing the Manguinhos refinery to export refined products using Petrobras's infrastructure. Minister of Mines and Energy Silas Rondeau said on 1 August that a solution would be announced in 15 days.

Outlook and Implications

Despite the comments by the head of Petrobras regarding possible fuel price adjustments, the proposals being discussed with regard to the private refiners' problems indicate that the government is not anticipating a radical shift in the state oil company's fuel pricing policy and that there continues to be a reluctance to pass on higher oil costs to end-consumers.

The issue of price adjustments is extremely sensitive in Brazil, a country with a history of hyperinflation, but which has managed to bring it down into single digits because of the adoption of the 'Real Plan' and the central bank's hawkish approach to monetary policy. Petrobras's adoption of a more cautious fuel pricing policy since the Worker's Party (PT) government took power in January 2003 contrasts sharply with the fuel pricing policy adopted by the company under the previous government, when higher international oil prices automatically triggered domestic price adjustments. The more cautious approach partly reflects increased domestic production, but it has also resulted in Petrobras forfeiting potential revenues and has had a greater effect on private refiners that rely on imported crude, rather than on domestically produced crude.

Although Ipiranga and Manguinhos only account for a small fraction of Brazil's total refinery capacity and their problems are unlikely to cause disruptions to the supply of refined products in Brazil, the government is keen to avert the possibility of Manguinhos's 500-strong workforce losing their jobs if the refinery remains shut down. The problems of the refiners have also been a key test of the ANP, whose influence over the energy sector is due to be reduced under a proposal to reform the regulators, which is currently stalled in Congress. Its role should be to promote greater competition, which explains the need to find a solution that allows the private refiners to remain operational. However, at the same time, their problems reflect some of the limitations to the opening of the oil sector under the former Cardoso government. The opening of the oil industry to private participation was completed with the deregulation of the domestic fuel retail market in January 2002. Other companies are allowed to import crude oil and refined products now, but Petrobras has retained a de facto monopoly over the downstream sector as it controls most of the country's existing refineries, which gives the company considerable influence over prices within the domestic fuel retail market.