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BUSINESS GUARDIAN www.guardian.co.tt JUNE 2014 • WEEK FOUR
Petroleo Brasileiro SA, Brazil's
state-owned energy company,
formulated a strategy in 1999
to go global:
1. Buy a stake in a Texas oil refinery.
2. Modify the facility so it could process the
heavy crude produced in Brazil.
3. Export crude to the US.
4. Tally profits.
The plan unravelled. Petrobras didn't get a
good deal on the refinery, Chief executive officer
Maria das Gracas Foster told the Brazilian Senate
June 11. The company's squabbles with its part-
ner sidetracked the plant modification, pinching
profit for years, according to court documents
and interviews with consultants, bankers and
At least four federal investigations in Brazil
are currently looking into the deal and the deci-
sions of officials including President Dilma
Rousseff, the Petrobras chairman at the time
of the purchase.
Petrobras, in a statement to Bloomberg News,
said that taking the initial stake in the Pasadena,
Texas, refinery "offered good investment poten-
tial" in 2006. Not making the planned mod-
ifications hurt its financial performance, the
company said. Petrobras told Bloomberg News
that it's cooperating with the investigations
and conducting its own internal review.
Petrobras, the world's eighth-largest energy
company by market capitalisation, hasn't ben-
efited from the biggest oil discoveries this cen-
tury made off Brazil's coast.
Last year, the international refining unit lost
US$7.9 billion. Government policy forces the
Rio de Janeiro-based company to sell fuel for
less than it costs to produce as a check against
inflation and to protect consumers. In the last
five years, 43 percent of its market value has
Another Petrobras refinery, under construc-
tion in Brazil, was budgeted at US$2.5 billion
and is expected to cost US$18.5 billion, according
to a regulatory filing.
The oil business was booming in 2006, the
year Petrobras bought a 50 per cent interest in
Pasadena Refining System Inc, the second-
smallest facility on the Houston Ship Channel,
from Transcor Astra Group SA for $415.8 mil-
The price of crude had risen fourfold in the
previous four years as developing countries
began to import more fuel for their growing
economies and the Iraq War took 1 million bar-
rels off the market.
Brazil and Petrobras were also enjoying boom
times. Oil production from the offshore Campos
Basin was putting Brazil in a position to become
a significant exporter. Petrobras figured the
Pasadena refinery could be a foothold in the
US where the company would process its own
Astra, a closely held company based in Bel-
gium, had bought the refinery in January 2005
for US$42.5 million, meaning that its investment
rose almost 20-fold in value in about a year,
based on the amount Petrobras paid.
Refining oil overseas offered Petrobras the
promise of profitable margins. Building from
scratch was expensive, however, so the company
shopped for existing refineries that it could buy
or take a stake in.
Refineries make money by converting crude
oil into more expensive refined fuels, like gasoline
and diesel. The cheaper the crude, the bigger
the profit margin.
In 2006, the heavy crude from Latin America
was about US$13 a barrel cheaper than lighter
crudes common in the US. The problem was,
the Pasadena facility, located just outside the
Houston city limits, was designed to refine
Petrobras and Astra said at the time of the
sale that they planned to retrofit the plant. That
way it could devote at least 70 per cent of its
100,000-barrel-a-day capacity to heavy crude.
Petrobras and Astra quarreled over details.
Astra said in court papers that Petrobras agreed
to supply oil for the refinery at prices that would
allow the business a guaranteed after-tax return
of at least 6.9 per cent every year for 15 years.
Petrobras reneged on the agreement by insist-
ing that the capacity of the refinery be doubled
and that the guaranteed rate of return, as well
as the obligation to supply crude, didn't apply
to that expansion, Astra lawyers said in federal
court papers filed in Houston.
Petrobras said in court documents that the
expansion of the refinery's capacity was only
In 2007 and 2008, Petrobras agreed to pay
US$700 million for Astra's half stake and another
US$87.7 million for Astra's interest in their joint
trading business, court records show.
A few months after the agreements, Petrobras
disputed their validity. It argued in part that
officials at its US unit negotiated the buyout
independent of the company's Rio headquarters
and therefore the parent shouldn't be bound
by the deal, court records show.
Legal maneuvers prolonged the dispute
another four years. Astra finally exercised an
option to force the sale. In 2012, Petrobras
agreed to pay Astra US$820.5 million for its
half of the refinery, bringing the total price tag
to US$1.24 billion, a 3,000 percent premium
over what Astra had paid for it in 2005. The
price was finalised after an international arbi-
tration panel found that Petrobras should pay
for certain debts that had accumulated during
the litigation. Petrobras continues to own the
Astra CEO Thomas Exl said the company
declined to comment. A lawyer who represented
Astra during the litigation with Petrobras also
declined to comment.
Brazil's Congress, its federal police and its
federal prosecutor are looking into the Pasadena
deal. A prosecutor in Brazil's national audit
office has finished an investigation and the
audit office is preparing a separate report. Their
findings could lead to charges against Petrobras
officials of "gestão temerária," or reckless mis-
management, according to prosecutor Marinus
Marsico, who works in the audit office.
Rousseff said in a March statement that the
Petrobras board she headed in 2006 approved
the initial stake in the Texas refinery without
knowledge of the option that allowed Astra to
force the sale of its remaining share to Petro-
Jose Sergio Gabrielli, Petrobras's CEO at the
time, told lawmakers on May 20 that the Texas
refinery deal wasn't Rousseff's responsibility
because the board hadn't been briefed on the
Comparable deals at the time show that
Petrobras overpaid. The average purchase price
of all US refinery sales in 2006 was near 100
per cent of replacement cost, said Michael
Leger, president of Turner, Mason and Company,
a Dallas consulting firm that advises in refinery
transactions. After the recession, prices began
to drop, and by 2010 the average refinery pur-
chase was 12 per cent of replacement cost, he
By comparison, Petrobras paid about 100
per cent to 150 per cent of replacement cost
for Pasadena. That's based on the roughly
US$800 million to US$1.28 billion it would
have cost to replace it at the time of the latest
transaction, excluding certain infrastructure
items like tank farms and pipeline hookups,
according to Russell Heinen, a Houston-based
analytics specialist at consulting firm IHS whose
focus area includes refining.
"The timing was certainly poor," Leger said.
The Pasadena plant has been a drag on Petro-
bras's business. International refining costs,
including those at Pasadena, rose 33 per cent
to US$1.73 a barrel in 2006, the year the com-
pany bought a piece of the facility. By 2008,
they topped US$5 a barrel, mainly because of
technical problems at the plant, the company
said in its financial results for those periods.
After Petrobras stabilised maintenance work
at Pasadena in 2013, costs eased to US$4.06
Foster said April 15 that while the company
has had offers to buy the refinery, the board
doesn't recommend selling. The market value
of the refinery and affiliated properties is $222.2
million, according to county tax assessor records.
That's less than one-fifth what Petrobras paid.
The Pasadena plant wouldn't be of interest
to Royal Dutch Shell Plc, which operates four
oil refineries on the US Gulf Coast, John Abbott,
the company's downstream director, said in a
May 16 phone interview.
Since the turn of the century, many Gulf
Coast refineries, including Royal Dutch Shell's
Deer Park, Texas, plant and Exxon Mobil Corp's
Baytown, Texas, facility, have invested in equip-
ment upgrades to allow them to process the
cheaper heavy crude.
That was the promise that Petrobras was
hoping to tap into at Pasadena.
Failing to upgrade meant lost profit oppor-
tunities. In 2011, for example, the refinery
imported about 78,000 barrels of lighter crude
a day from West Africa. If it had been able to
replace those barrels with heavier oil from places
such as Brazil, Mexico and Venezuela, it would
have saved US$355 million.
The premium paid for the refinery and the
decision not to overhaul limited the profits
Pasadena could realize for about five years. It
wasn't until 2011 that oil produced in the US,
as measured by West Texas Intermediate trades
in New York, started to get cheaper than Brent
crude, the benchmark in Europe, Africa and
the Middle East, as improved use of horizontal
drilling and hydraulic fracturing, also called
fracking, pulled oil from dense shale rock in
North Dakota and Texas that had mostly been
The US recession that lasted from December
2007 to June 2009 may have ruined Petrobras's
chance to upgrade Pasadena at a price that
"Many refinery companies delayed or post-
poned investments they had previously
announced when the economy went south,"
said Jim Watson, a specialist in refinery and
chemical plant valuations at energy consulting
firm Pearson Watson Millican and Company
Petrobras said in its statement to Bloomberg
News that not modifying the plant hurt its
investment. Petrobras preferred shares have
dropped 43 per cent since June 17, 2009, in
Sao Paulo trading.
"After 2008, with the changed conditions
providing small margins, owning 100 per cent
of the Pasadena refinery, without the modifi-
cations to process heavy oil, yielded a low return
on the capital invested," the company said.
Following years of losses, the Pasadena refin-
ery posted a profit of US$63.8 million in the
first quarter of 2014, the company said in its
statement to Bloomberg News.
"It would've been a good project if the revamp
had been done," Foster, the chief executive offi-
cer, told Brazilian lawmakers last week.
plain in Texas
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