Unigel Demands Compensation from Petrobras for Brazil Fertilizer Losses

Unigel Seeks Compensation from Petrobras Over Fertilizer Plant Deal

The Brazilian chemical company Unigel is seeking compensation from the state-run Petrobras for losses incurred on two leased fertilizer plants, as revealed by a legal letter. The two plants, crucial to President Luiz Inacio Lula da Silva's strategy to reduce Brazil's dependency on imported fertilizers, have been non-operational since the second half of last year.

In December, both firms agreed to a "tolling" contract that would have Petrobras supplying natural gas in exchange for fertilizer. This arrangement was intended to allow Unigel to restart production without worrying about fuel prices. However, the deal was abandoned in June after Brazil’s federal audit court (TCU) indicated it could lead to an 87 million dollar loss for Petrobras.

In an unreported letter dated June 20, Unigel's lawyers highlighted that the delay in executing the tolling agreement had exacerbated the company's financial difficulties. They demanded that Petrobras fully reimburse Unigel for the losses accumulated since signing the deal. Unigel stated that the total losses amounted to "hundreds of millions" of reais. Petrobras has not responded to inquiries regarding Unigel’s compensation demands.

Both enterprises are still working on finding a solution to restart production, although the letter suggests relations are strained, with Unigel labeling Petrobras' actions as "abusive." Enhancing fertilizer production remains a priority for Lula's administration. Since Lula took office in 2023, Petrobras has reversed its strategy of divesting from fertilizers, announcing a return to operations at one of its plants in June.

Brazil, a major agricultural power, is one of the world’s largest consumers of fertilizers, importing over 80% of its supply. According to a 2022 plan, Brazil aims to reduce fertilizer imports to 45% by 2050. Despite this, the two fertilizer plants in Sergipe and Bahia, leased by Unigel from Petrobras since 2019, have remained idle this year.

Operational, these plants made Unigel the largest producer of nitrogen fertilizers in Brazil. Unigel is currently spending around 13 million reais ($2.4 million) monthly on these plants, a significant burden as the company attempts to restructure 4.1 billion reais of debt with bondholders. Prior to firing the plants' employees in March, Unigel was spending 35 million reais per month, having maintained the workforce at Petrobras' request.

Despite these challenges, Unigel plans to retain the assets with hopes of resuming operations once they become economically viable. In the absence of a deal, Petrobras and Unigel have entered a confidential arbitration process since December over clauses in their gas supply contract. These arbitration processes can take around two years to resolve, but in some cases, they extend up to five years.

The resolution of this dispute remains critical for Brazil's ambition to become less dependent on imported fertilizers and fortify its agricultural sector. As stakeholders look for a feasible pathway forward, the situation underscores the complexities and stakes involved in the management and negotiation of key industrial assets.