Bloomberg Línea — Petrobras (PETR3, PETR4) has made the decision to resume work on the second production unit of the Abreu e Lima Refinery (RNEST), and which came under the spotlight amid corruption allegations as part of the so-called ‘Operation Car Wash’.
After almost a decade of being paralyzed, the project returns with a potentially multibillion-dollar budget but shrouded in uncertainties, ranging from costs to the completion schedule.
On Friday, Petrobras’ CEO Jean Paul Prates said that the first tender for the works of the second phase of RNEST has already started, with the offer of seven contracts.
“We have approved the investment at board level and we are completely free to restart the issue [of the project] of the second phase. The bidding is already underway,“ he said.
On its balance sheet released on Thursday, the oil company reported an expenditure of 1.9 billion reais in the second quarter, mainly related to the second phase of RNEST.
According to the financial report, the assessment of the recoverability of the second phase of RNEST “resulted in the recognition of impairment losses amounting to 1.85 billion reais, mainly due to:
- reassessment of the project, with a revision of the scope of the logistics infrastructure, and which impacts the increase in investments required for the implementation of the second phase
- increase in the discount rate to 7.4% per year, from 7.1% in December 2022;
- depreciation of the US dollar against the real
The company pointed out that the project is still “resilient” and presents “positive net value”, although it did not provide more details.
According to the executive director of engineering, technology and innovation of the state-owned company, Carlos Travassos, the contracts related to the new works at RNEST are at different stages.
“It is a set of seven large contracts. Companies of various sizes will be able to participate in a very robust investment, with the potential to generate 30,000 direct and indirect jobs,” he said.
RNEST dates back to mid-2005 and Petrobras had even negotiated the entry of Venezuelan state-owned oil company PDVSA as a partner in the project - but which did not happen.
The refinery’s works were marked by delays, revisions and uncertainties and were at the center of suspicions of corruption in the so-called operation ‘Lava Jato’ or ‘car wash’, amid accusations of overpriced contracts. The budget jumped to more than $20 billion in mid-2014, up from $2 billion initially.
Petrobras’ CEO at the time of the delivery of the first phase of the project, Maria das Graças Foster, publicly stated the importance of not repeating “past mistakes”.
“RNEST taught us a lot. Lessons learned must be written, read and never forgotten,” she said at the time.
Although Petrobras has not disclosed the investment destined for the works of the second phase of RNEST, the value is expected to total billions of dollars.
“The construction of the second phase [of RNEST] is potentially a multibillion-dollar project,” managing partner of A&M Infra, Filipe Bonaldo, said.
The expert explained that the construction of a fuel production unit is complex. “Small and medium-sized companies do not have the financial scope for this type of project because they do not have enough cash flow,” he said.
In addition, he recalled that the number of companies able to carry out this type of project in Brazil has decreased a lot due to the unfolding of ‘Lava Jato’: many have closed their doors or reduced in size.
“Before, the market had about 20 companies with the capacity and financial strength to carry out this type of work, but today we have five or six,” said Bonaldo.
Traditionally, for this type of project, Petrobras works with the modality of hiring engineering, procurement and construction (EPC) companies, which are responsible for all the management of the works. Even so, suppliers in this chain must comply with the oil company’s quality and compliance rules.
It is estimated that hundreds of companies act directly or indirectly in a project of this magnitude, supplying everything from steel to large pipes, as well as others specialized in different services.
The project’s challenges
In Bonaldo’s view, there are three major challenges to be overcome for the second phase of RNEST to be completed. The first is the competition with other projects of similar size in the electricity sector - with emphasis on transmission and generation - and infrastructure in general, such as sanitation, for example.
A second challenge is the lack of manpower, explained the consulting partner, both qualified for the refining segment and of workers in general.
“We already have a natural deficit of this type of labor in the country,” he said.
The third and most significant challenge of all, in Bonaldo’s assessment, is the resumption of the project itself.
“The company that enters now will not start from scratch. First, it will have to understand everything that has been done and make a budget from that,” he said. “This causes uncertainty, due to the pressure of time and costs. Even if a first budget release comes out, there is a risk of unforeseen problems appearing later,” he added.
From the investor’s perspective, the major concern should be the cash consumption for the completion of the second RNEST phase, he said. “If the project is not put on its feet within the expected time and within the estimated costs, this will reduce the company’s ability to distribute dividends and to make other investments,” Bonaldo added.
He said that once started, the project will need to be finished. “But there are doubts about whether Petrobras will be able to complete it in the estimated timeframe, or whether it will end up costing much more than expected, given the project’s recent history.”
Petrobras executives reinforced last week that the approval of the second phase of RNEST has been well analysed.
“Our project implementation system is carried out in phases, and this evaluation is done by a collegiate body, according to objective criteria. From the moment it goes ahead, it is because it is economically viable for the company,” Travassos said.
Prates, the company’s CEO, said that Petrobras should hold a major meeting with suppliers from all over the region at RNEST, probably after the September 7 holiday.
“We will re-inaugurate this great phase of Petrobras and resume the works with seriousness, responsibility, and above all with a great multiplier effect in the regions in terms of job creation, qualification of suppliers and training of people,” he said.
Production forecasts
The Abreu e Lima refinery is located in the Suape port industrial complex, 45km from Recife, in Pernambuco state, and began operations in 2014.
The plant has been refining oil and producing refined oil products for the market since December 2014. According to Petrobras, the main objective of phase two is to produce diesel and meet the demand for derivatives in the north and northeast regions of the country, in order to reduce imports.
According to the state-owned company, the start of commercial operation of the second refining facility is scheduled for 2027, with production of gasoline, liquefied petroleum gas (LPG), naphtha and, mainly, low-sulfur diesel (S-10).
The company projects that the second phase should add about 13 million liters of S10 diesel per day to the national production capacity.
While the project of the new unit remains on paper, Petrobras has been disbursing resources to carry out the maintenance of the works that were paralyzed, said Bonaldo.
“The cost to keep the unit ‘hibernating’ is very high,” he said.
He said he believed that the expansion of the Abreu e Lima refinery should be one of the great tests of the state.
“Given the uncertainties of the project, the completion of the second phase of RNEST, on a scale of complexity from 1 to 10, is 10″, he said.