Petrochemical company failed to pay $1bn natural gas supply contract, started arbitration against oil giant

07/08/2024

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Unigel reactivated operations at the Sergipe and Bahia plants in 2021 with an investment of R$500m — Foto: Divulgação

Petrobras plans to take over nitrogen fertilizer plants in Laranjeiras (Sergipe) and Camaçari (Bahia) leased to Unigel in 2020, Valor learned. The move aligns with the state-owned company’s strategy of resuming production of these inputs in Brazil after shutting down operations in units regarded as unprofitable. However, the strategy comes up against interests and contracts signed with the petrochemical company, which invested at least R$500 million to reactivate these plants.

Unigel, which is under financial restructuring, started arbitration against Petrobras seeking to review the terms of a contract for natural gas supply, a raw material in fertilizer plants. The 10-year agreement follows the take-or-pay model (which provides for a minimum payment regardless of consumption) and is valued at $1 billion.

Gas supply was halted in the middle of last year as part of an understanding between the two companies, while the parties tried to reach an agreement regarding a new price increase, which made the production of fertilizers economically unfeasible. Urea prices fell sharply in the international market since the end of 2022, but prices for the gas sold in Brazil remained higher than those in other parts of the world.

Unigel decided to open the arbitration proceeding following unsuccessful negotiations and when an alternative tolling contract (industrialization to order) proposed by the state-owned company was questioned by the public spending watchdog TCU. The proceeding was initiated in 2024 at the International Chamber of Commerce (ICC).

According to people familiar with the conversations, Unigel has failed to comply with the terms of the contract, which provides for annual payments of $100 million, since last year, when it halted operations at the Laranjeiras and Camaçari factories. However, the company refuses to give up the business and is seeking compensation for the termination of the tolling agreement by Petrobras.

“The [take or pay] contract may be reviewed whenever it offers too great a benefit to one party and too great a loss to the other,” one source says. Unigel argues that Petrobras is exercising “abuse of economic power” by holding a monopoly on natural gas in the country.

The oil giant, in turn, continues to implement its plan to retake fertilizer production. On Friday (5), 214 workers were rehired at Araucária Nitrogenados, a plant in Paraná that is being reactivated. The unit, included in Petrobras’s divestment plan in 2019, accounted for 30% of the Brazilian ammonia and urea market supply. Brazil relies on imports of nitrogen fertilizers.

At the end of December, Unigel obtained a preliminary injunction from the Rio de Janeiro courts preventing Petrobras from executing penalties, including retaking the plants for non-performing the contract for gas supply. On Wednesday (10), the Rio de Janeiro Court of Justice (TJ-RJ) will decide on an appeal filed by Petrobras. According to sources close to Unigel, the arbitration court will reassess the injunction, but the expectation is that the current situation will not change until a final decision is made.

Also at the end of December, Unigel and Petrobras signed the controversial tolling agreement, and the termination was announced by the state-owned company at the end of June. According to the company, the contract’s effectiveness conditions were not met within the set deadline (June 27, 2024) and, therefore, its validity was terminated before taking effect.

“The company reaffirms that the contracting party continues to analyze a final, profitable, and viable solution for the supply of fertilizers to the Brazilian market. As it has been informed to the market, Petrobras plans to reorganize its operations in the fertilizer segment within the scope of its 2024-2028 Strategic Plan,” the company states.

In an order at the end of January, Justice Benjamin Zymler, rapporteur at the TCU, gave Petrobras 15 days to provide clarification on the tolling contract and highlighted the possibility of voiding the agreement. The agreement, valid for 240 days and expected to pay R$759.2 million to Unigel for providing industrialization, storage, shipping, and after-sales services for urea, ammonia, and automotive liquid reducing agent (ARLA-32, used to reduce diesel vehicle emissions), has never come into force.

The TCU’s experts found signs of wrongdoing and potential losses of R$487.1 million to Petrobras in the event the agreement was executed. According to the order, the TCU’s experts also saw a potential loss of R$1.23 billion if the state-owned company took back plants leased to Unigel. If the oil giant did not take back the plants, losses could be R$542.8 million.

In a note to the market released on Tuesday (2), Unigel said the termination of the tolling agreement does not significantly change the company’s projections included in the reorganization plan, which covers R$4.14 billion in debts. The plan has been approved by most of its creditors. In addition to renegotiating financial debts, Unigel has divested some assets—it has just received $100 million for its operation in Mexico—and the Slezynger family has agreed to give up a 50% stake in the business to creditors sticking to the plan.

Unigel declined to comment on the matter and said the arbitration is confidential. Petrobras did not respond to Valor’s request for comment.

*Por Stella Fontes — São Paulo

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