Welcome changes in downstream markets – and the risk of intervention by antitrust authorities

Plans announced by Petrobras new management of selling its refineries and focusing on deep water (pre-salt) E&P tend to enhance competition in the downstream markets and to create relevant investment opportunities in Brazil. They are part of an ambitious project of divestments of refineries called Parcerias em Refino, which was launched by Petrobras in early 2018, subsequently suspended in connection with a decision by Brazil`s Supreme Court, and then resumed (see the article in this newsletter).

Paradoxically, this welcome trend may be hampered by initiatives taken by Brazil’s antitrust authority CADE. Following a joint study conducted with the industry watchdog National Oil Agency (ANP), CADE set out a far-reaching investigation into the alleged abuse of dominance on the part of Petrobras. Initial recommendations indicate this might result in over-arching forced divestiture of assets designed to undo vertical integration and thus foster competition.

CADE’s initiative is as ambitious as it is disputable. Under the relevant statutory provisions, Brazil`s antitrust authority must act in reaction to alleged anticompetitive behavior (or in the context of merger reviews). While the forced selling of assets is a remedy provided for under the relevant statutory provisions, it should only be resorted to in those situations where the market growth and ensuing dominance of the relevant investigated party result clearly from established anticompetitive behavior; as the antitrust jargon has it, when causal link is established between the investigated conduct and the market structure at hand. This stems from common sense and it is indeed how CADE has been applying the law over time, as demonstrated by its case law.

Petrobras’ dominant position in Brazil’s downstream markets does not result from violation of antitrust law and policy, however. It results from deliberate choices taken by the Executive and Legislative branches of government. Indeed, this was a design adopted when Petrobras was created in the early 1950s; and it was reiterated in the 1990s, when the Federal Constitution was amended in order to allow for competitive markets in the energy industry.

The Oil & Gas Act (Lei do Petróleo) which followed the constitutional amendments, chose to institute competition in a gradual fashion, through the abolition of government controls over prices (to this date, never fully implemented) and over imports, and not through the thorough reshuffling of the structure of the industry, as occurred in relation to telecom and power.

Under Brazil`s government history and tradition, and – more importantly - under the applicable statutory provisions, it is up to the so-called core, or direct, administration, which does not include the antitrust authority, to promote the redesign of the structure of regulated industries, which is to be done through Congress and the Executive branch.

The National Council for Energy Policy (CNPE) is empowered to set the general guidelines for the industry, while the Ministries of Mines and Energy and of Economy have specific competences in this regard. Under the structure of the new federal administration, the latter has an area – the Secretariat for Energy and Quantitative Studies - specifically entrusted with proposing laws and guidelines aimed at fostering competition in the energy industry.

The administration is better equipped than CADE to ensure the feasibility of divestment and the attractiveness of the assets and businesses to be divested, to maximize value for Petrobras and its shareholders – and, importantly, to foster competition. These are not incompatible objectives, and the agents in the relevant departments of the Federal Government may reach out to CADE to hear its opinion in shaping and pursuing them.