Brazilian Petrochemical Cluster

Akerele, Toyosi; Barboza, Marden; Faria, Diogo; Gopaul, Lavan; Pares, David. Prof. Laura Alfaro. Harvard Kennedy School / Harvard Business School. May 2017. Rise in Government Debt: Inflation: • From 51% of GDP in 2013 to 70% in 2016 6% (2013) 10% (2016) • Brazilian Bonds downgraded to ”junk” (September 2015) Benchmark Interest Rate: 7% (2013) 14% (2016) Economic interventions (from 2010); • Uncertainty among producer and Industry Confidence Index: investors 58% (2013) 35% (2015) Administered prices (2006 to 2016) • Gasoline prices +44% • Minimum Wage +168% Unemployment: 5.4% (2013) 11.5% (2016) Investigations and corruption scandals: • Accusations against the President and political allies; Economic contraction (∆ GDP): • Public Protests (starting in 2013): 2014 2015 2016 • Dilma impeached (August, 2016) -0.3% -1.9% -2.5% Refineries are chemical plants that transform crude oil into oil products

Crude oil Refinery Oil products

Raw oil as produced, with Chemical plant with Fuels and chemical varying qualities: varying complexity, feedstocks with varying . Density: lighter oil according to: market values, such as: yield higher valued . Oil quality: lower oil . Diesel products quality can demand more . LPG . Sulfur content: sweet complex refineries . Jet fuel (low sulfur) oil can be . Mix of products: more . Naphtha refined simpler complex refineries can . Fuel Oil refineries yield higher valued . Asphalt products

3 Timeline

First First Petroleum Petrobras is Pro Alcohol Refinery in reserve Stablished Program Brazil discovered

1932 1938 1939 1946 1953 1960 1980

First Estate Brazil is Auto CNP is Created Owned sufficient Refinery Importance of Oil in Brazil’s Economy

• 12th largest producer in the World Oil Participation in Brazil GDP in 2015 • By 2020 7th largest

• 15th World’s largest reserve in 2015

• 7th largest oil consumer

• 8th largest refining country • Petrobras 7th 13%

• Refining growth 7% per year

Other Oil Strategy, Structure, Rivalry

INPUTS MAIN BUSINESS SELECTED OUTPUTS Fuels Distribution (85% of revenues) Crude production Refining

Petrobras Ipiranga 28% 19% Petrobras Petrobras 80% 98% Other Raízen private 16% players 37% Private players Private players 20% 2% Chemicals (<10% of revenues) Other Braskem private 100% players 0% Outputs & Prices

Refining outputs for Petrobras, per volume Price composition of Petrobras and revenue (2015) major outputs (in 2017) 60.00% 60%

50.00% 50%

40.00% 40%

30.00% 30%

20.00% 20%

10.00% 10%

0.00% Diesel Automotive Fuel oil Naphtha Liquefied Jet fuel Other oil 0% gasoline (including petroleum products Retail Ethanol or VAT (State Federal Petrobras* bunker fuel) gas margin Biodiesel Tax) Taxes Volume % Revenue % Gasoline Diesel LPG Due to Brazil’s oil and fuels balance, refining spreads in the country are significantly higher than that of all major refining regions in the world

Oil and fuels balance in Brazil Oil and fuels prices Regional refining spreads MMbbl/d USD/bbl, average 2016, no tax USD/bbl, average 2016

Oil production 4 -4 Brazil Refining capacity -9 3

Oil 2 US Midcontinent

1

3 0 US Gulf Coast 2010 2015 2020 2025 1 2

4 Consumption (diesel & gasoline) Mediterranean Yield capacity (diesel & gasoline) 3 +25 +14 +9 Fuels 2 NW Europe

1

0 Singapore 2010 2015 2020 2025

1 Transfer price of oil between Upstream and Downstream departments at Petrobras 2 FOB price of domestic oil exports. Transportation explain most of the price gap, but other factors such as difference in oil quality have also impact on the price differential 3 West Texas Intermediate (WTI) is the main benchmark for oil prices in the United States Source: Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP), Empresa de Pesquisa Energética (EPE), BP Statistical Review of World Energy 2016, Energy Information Administration (EIA), Energy Information Administration (EIA), International Energy Agency (IEA), US Federal Reserve, Petrobras 8 … however, the industry does not attract private capital, new projects were poorly executed and current operation costs are ~2x higher than benchmarks

Virtually no private capital is invested … Petrobras’ new projects overrun … the industry underperforms in the sector,… in budget and time, and… peers on asset operation Refining capacity additions, bbl/d Cost of new refineries, USD billion Unitary operational cost3, USD/bbl Petrobras Private Petrobras4

Construct. Neste oil delay (y) Petroplus RNEST 1 7 Marathon

9x 149 Tesoro

Western 97 Valero 3 54 7 45 COMPERJ 2 92 21 Phillips 66 13 11 16 '07 08 09 10 11 12 13 14 15 16 3.5x Thai Oil

1 The first half of the refinery is in partial operation since late 2014, however the entire project is expected to start operation in 2018 2 The projected date for the start-up of the first half of the refinery is 2021 3 Data varying from 2011 to 2016, adjusted by CPI to 2016. Does not include depreciation and amortization. Petroplus (now bankrupt), Phillips 66 (excludes maintenance) and Valero data refer to operations at Cressier, US Midcontinent and in US North Atlantic, respectively. 4 Although Petrobras reported a refining cost of 2.58 USD/bbl in 2016, other direct OPEX (excluding COGS) and Corporate department costs (prorate) were added. Source: International Energy Agency (IEA), Empresa de Pesquisa Energética (EPE), Petrobras, O Globo, Exame 9 Supply dynamics

Construction

Import Input

Transport

Export Output Storage

Source - http://www.argenteraoilgas.com/brazil-refineries Output per refinery – (source http://www.worldlistmania.com/16-largest-oil-refineries-in-brazil/) Capacity # Refinery Name Location Company (bbl/d) 1 REPLAN Paulínia Paulinia Petrobras 415,000 2 RLAM Sao Francisco do Conde Petrobras 280,000 3 REVAP Sao Jose dos Campos Petrobras 251,500 4 REDUC Duque de Caxias Petrobras 242,000 5 REPAR Araucaria Petrobras 220,000 6 REFAP Canoas Petrobras 201,000 7 RPBC Cubatao Petrobras 170,000 8 REGAP Betim Petrobras 151,000 9 Lubnor Fortaleza Petrobras 82,000 10 RECAP Maua Petrobras 53,500 11 REMAN Manaus Petrobras 46,000 12 RPCC Guamare Petrobras 35,000 Refinaria 13 Refinaria Ipiranga Pelotas Riograndense 17,000 Grupo Peixoto de Refinaria Castro and Repsol 14 Manguinhos Rio de Janeiro YPF 13,800 15 Univen Itupeva Univen Petroleo 6,900 16 DAX Oil Camacari Dax-Oil 2,100 TOTAL 2,186,800 Key Players in the Petrochemical Cluster in Brazil

Brazil generates the third-highest amount of electricity in the Americas, GOVERNMENT INSTITUTIONS behind only the United States and Canada. Hydroelectricity provides more 1. Brazil Council for than 70% of Brazil's generation. Competitiveness

2. Ministry of Communications

3. Ministry of Development, Industry Foreign Trade

4. Ministry of Education

5. Ministry of the Environment

6. Ministry of Finance

7. Ministry of Labor and Employment

8. Ministry of Science and Technology Source: U.S. Energy Information Administration, International Energy Outlook 2016 9. Ministry of Transportation Key Players in the Petrochemical Cluster in Brazil {2}

FINANCIAL INSTITUTIONS RELATED INDUSTRIES R & D The 10 Major Brazilian Banks AND CLUSTERS 1. EMC Brazil Research 1. Steel and Development •GAS PIPELINES Centre 1.1. Banco Bradesco Financiamentos •1. GASBOL 2. Iron and chemical 2. Federal Institute of 2.2. Caixa Econômica Federal •2. GASENE production 3.3. HSBC Education, Science and •3. GASUN 3. Auto assembly Tech, Guarulhos 4.4. Banco J Safra S/A •4. Gran Gasoducto del Sur 4. Mining and 3. Universidade de São 5.5. Banco Itaú Processing of Paulo 6.6. Banco do Estado do Rio Grande •5. Paraná–Uruguaiana do Sul S/A petroleum products 4. Dupoint R & D •6. Urucu–Manaus pipeline Center 7.7. Banco PanAmericano S/A 5. Cement 8.8. Banco Santander manufacturing 5. Brazil Technology Centre by GE 9.9. Banco do Brasil 6. Technology based 10.10. Citibank Enterprises