Why Brazil's fuel market liberalization could backfire

A provisional measure (MP) by Brazil’s economy ministry meant to stimulate competition in the mid and downstream segments may backfire and inhibit private investments, BNamericas was told.  

The MP establishes rules for third-party access to marine terminal infrastructure, pipelines or transport vessels, airfields, and other assets for the handling of oil and oil derivatives and biofuels.

In a letter recently sent to local oil and gas watchdog ANP and to which BNamericas had access, Vibra Energia – one of the country’s main lubricant producers and fuel distributors – claimed the MP discourages investment and makes maintenance of current assets unviable. 

According to Vibra, the MP does not respect owners’ preference right over ports and airports nor existing contracts and the risks investors assumed for such facilities. 

“The proposed changes point to an increase in state interventionism and a significant reduction in the legal security of contracts, contrary to relevant constitutional elements, such as free enterprise, economic freedom and the perfect juridical act, discouraging the participation of private capital and damaging even the next auctions announced,” Vibra wrote. 

The company emphasized that the MP does not guarantee fuel price reductions and instead could lead to higher product handling costs by eliminating efficiencies and synergies. 

“Requiring the hiring of a third company to operate the facilities, prohibiting companies that exercise the distribution activity from also acting as a terminal operator …, as well as restricting the preference right of investors, form a set of norms that discourage investments in infrastructure and increase costs, which may impact the fuel price for the final consumer,” Vibra added. 

The company suggested measures that can be adopted to reduce fuel prices and volatility, such as tax simplification, the establishment of tools to combat so-called recalcitrant debtors, and the resumption of the Cide fuel subsidy to stabilize prices.

Marcus D’Élia, a partner at consultancy Leggio Consultoria, agrees that the MP is flawed, as the logic of investing in an asset to gain market share is lost when anyone is allowed to use the same asset.  

Allowing more companies to access the same asset does not necessarily create competition and can harm the final consumer price, D’Élia said.

“Competition in a market such as fuel depends on increasing competition between road, rail, or waterway routes to the same municipality,” D’Élia told BNamericas.  

He added, “it is the same with refineries: there won't necessarily be a cheaper price in some markets because a refinery was sold [to a different player]. This only happens when you have two assets competing, like a port competing with a refinery.”

The deverticalization in the fuels segment follows the refining and natural gas market models linked to Petrobras’ divestments. Petrobras held a de facto monopoly in these areas until recently. 

Formerly BR Distribuidora, Vibra Energia was divested by Petrobras via two follow-on operations where the state-run company’s shares in the group were sold. 

Local studies have, however, shown that there is a risk of private monopolies in certain regions after Petrobras concludes the sale of its refineries, for example.