By: John Auers and Robert Auers
We have written frequently about the dramatic shift that has taken place in the U.S. refined product trade balance over the past few years. The U.S. has moved from the largest importer of products to the largest exporter by most measures over the past decade, with the resulting shift approaching 6 million BPD and total exports exceeding 5 million BPD. There have been several reasons for this development, including stagnating domestic demand in the U.S., increasing demand in developing economies and the growing competitiveness of the U.S. refining industry. Another reason, and the one which we will discuss today, is the problems refiners in other countries have experienced in adding new capacity and even operating their existing facilities. Nowhere is this more evident than in Latin America, a region which has been the recipient of a majority of the growth in U.S. product exports. This is a region that two decades ago was in product balance, but since then has moved to a deficit of over 3 million BPD as product demand has grown and refinery throughputs have declined. Over the next few weeks we will do a dive into the refining landscape in the key countries in the region, taking a look at what has happened and developments which will impact regional product trade balances going forward. In the first two installments of this series, we will be visiting Brazil, which is both the largest consumer and refiner in Latin America. Some notable events within the downstream sector have taken place in recent months, which like the theme song from the 2014 Brazilian World Cup, “La, La, La” performed by Colombian singer Shakira, will be influenced by forces outside from outside the country.
“Our Fingers Are Stuck in the Socket” – Brazil’s Growing Product Imports as Refineries Slump
Like Latin America as a whole, not so long ago Brazil was largely self-sufficient in refined products, due both to a substantial refining industry and a significant move towards using biofuels as petroleum substitutes. However, while the refining industry has struggled in recent years, product demand has continued to grow. This has resulted in a significant shortfall in product supply, which has been met in large part by imports from U.S. refineries (primarily on the USGC). While product demand within Brazil has increased by about 700 MBPD since 2007, refinery throughput has remained the same over that time period, as shown in Figure 1 below.
Some of the shortfall in product supply has been made up for by biofuels, programs to which the Brazilian government has provided significant support; however, economics, production issues, and “blendwall” limitations have limited the growth of these substitutes. This has resulted in a significant increase in imports from the U.S., primarily of diesel, as shown in Figure 2 below. While there has been a recent downtick in exports, Brazil remains the third largest customer of U.S. products (after neighbors Mexico and Canada) and has seen the largest increase in the last 5 years. 
“All My Life, Too Late” – Troubled History of Brazil Refinery Projects
Brazil has certainly made it a priority to address the growing shortfall in product supply and state-owned Petrobras has for many years had a very ambitious spending program, announcing and initiating plans for several large grassroots refinery projects. Despite the fact that billions have been spent and some were scheduled to already be in operation, only one has actually made it to start-up. Even with this “success,” Phase 1 of the Abreu e Lima refinery in the northwest of Brazil came at the exorbitant cost of $16 billion and four years later than originally scheduled. All of the proposed refinery projects in Brazil have been plagued by delays, cancellations and cost overruns, with reasons ranging from inefficient and misdirected project execution, corruption, and other management failures, to ultimately running out of money. The COMPERJ grassroots refinery project located just outside Rio de Janeiro is perhaps the most spectacular failure. This proposed 165 MBPD plant was originally proposed in 2004, when $2.5 billion (reported cost estimates vary widely) was allocated for the project. By 2008, when the project broke ground, the budget had increased to over $8 billion and completion was scheduled for 2013. Construction on the project was halted in 2015 after a reported $14 billion (even more by some accounts) had been spent on the project. Table I below provides a summary of troubled history of Brazilian refinery projects over the last several years.
“Get Ready, We’ll Do it Again” – CNPC to the Rescue?
The recent announcement that state owned giant China National Petroleum Company (CNPC) has signed a Letter of Intent to form a partnership with Petrobras has provided some fresh hope that the stalled ComperJ project can be completed. The details of the partnership still need to be finalized, but a key component is a plan to study the economic viability of resuming construction on ComperJ. CNPC’s involvement in multiple successful refinery projects both in China and in other countries, along with its financial capabilities certainly lends new credibility to the ComperJ project. Upstream synergies included in the proposed partnership, which would include production from the prolific Marlim field, are also potential positives. However, nothing is final and we will be keeping a close watch on further developments regarding this collaboration before we become firm believers that ComperJ can yet make it to start-up; and if so, at what capacity the refinery will be rated.
“Is it True That You Love Me?” – Will the Market “Love” Brazil’s Refinery Offering?
Back in April, Petrobras first announced that they were considering the potential sale of a majority stake in four of its 13 refineries. In June, they announced that they had extended the deadline for potential bidders to sign nondisclosure agreements (NDAs) due, at least partially, to a lack of interest. The company did, however, note that five companies had signed NDAs already. Nonetheless, Petrobras decided to suspend the process in July after a Brazilian Supreme Court Justice ruled that the National Congress must approve all sales of state-controlled companies. We suspect that a general lack of interest in the assets (at least at a price deemed acceptable by Petrobras) may also have contributed to this decision, as might the fact that this is an election year.
Speaking of the election, the first round took place two weeks ago and the runoff is scheduled for this coming Sunday. Energy issues and corruption scandals within Petrobras have been key campaign issues, and next week we will take a look at the potential fallout from the election on the petroleum industry in Brazil. In subsequent weeks, we will be visiting our key countries in Latin America to discuss developments in the refining sectors and how those could impact regional and global trade flows.
TM&C continually monitors developments in the refining industry on a global basis. We pay particularly close attention to activities involving refinery expansion projects and on a biannual basis publish THE World Refining Construction OUTLOOK, a detailed analysis of every announced refinery project. The latest version of this report was issued in August, and we will be issuing the 2018 edition in February. In the WRCO, each project we track is listed by region and ranked based on its probability of success. In addition, a detailed discussion of the regional factors and trends that are affecting refinery construction projects is provided. If you would like more information on this or our other products, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call.