Beyond Brazil

In early February, Lins and four additional Petrobras lubricants executives, all based in Rio de Janeiro, met with LubesnGreases in their companys So Paulo office to talk about Petrobras lubricants business.

We need to consolidate our presence in South American markets first, said Lins. We need to integrate many local companies into a regional company. The challenge for 2009 is consolidation. Our strategy is to go into a market first as a fuel distributor, and the lubes follow. And in Brazils domestic market, added Paulo Jorge Esteves Batista, production manager at South Americas largest blending plant, we want lubricants to reach the same market share as fuels in five years: 35 percent, up from 20 percent today.

Lubrax: 36 Years Along

Petrobras launched its Lubrax branded lubes business in 1973, under a technical agreement with Chevron International Oil Co. that terminated 12 years later when Petrobras developed its own formulations. In 1977, it built the Duque de Caxias blending plant. By 1983, Lubrax was market leader in Brazil, a spot it has relinquished only twice since then (in 87 to Shell and in 96 to Texaco).

Petrobras began exporting finished lubes in the 1990s, and in 1999 acquired Bolivian refineries and a blending plant. But we had to leave that country in 2007, noted Marco Antonio Gonzalez de Almeida, technology and product development coordinator, just when Lubrax had reached a 34 percent market share there.

In 2002, Petrobras exchanged assets with Repsol in Argentina and began blending there, increasing the Lubrax share of Argentinas finished lube market from 4 percent to 12 percent. More recently, Petrobras began blending in Colombia and distributing lubricants in Paraguay and Uruguay. Last year it acquired Esso assets in Chile. We did not acquire their lubes business, said Lins, but were free to convert fuel customers to Lubrax.

Today, Latin America is a 3.15 million metric ton lubricants market, about 9 percent of worldwide demand. Brazil is by far the regions largest national market, at 1.25 million tons. Through October 2008, it was a fast-growing market too, but like the rest of the global economy, demand sank at year end.

Blending in Brazil

Our lube plant was built 30 years ago, said Paulo Batista of the Duque de Caxias facility. Capacity of the plant is 22,500 metric tons a month, and we reached capacity by mid-2008. We are now planning an expansion. The timing and scope will depend on the [global economic] crisis, but we must expand.

The plant employs hundreds of workers in production, maintenance and laboratories. Its principal lubricant lines are Lubrax automotive and industrial oils, Marbrax branded marine oils, Ferbrax railroad oils, Lubrax aviation oils and Lubrax Syntesis industrial and marine synthetic oils.

Petrobras is particularly proud of Cenpes, the Leopoldo Americo Miguez de Mello Research and Development Center, in Rio. Cenpes provides research and technical support to all Petrobras activities, explained Lins. On the lube side, it studies potential crudes for base oil production, and does base oil evaluations and special lab tests for finished oils and greases, including bench tests and long-term performance tests. The center also provides technical support for product development, including racing oils. Overall, Cenpes has 30 pilot units, 137 labs and nearly 2,000 employees, including 178 with doctorates and 478 with masters degrees.

We are also maxing out on packaging one-liter plastic bottles, and must expand our packaging capacity, Batista continued. Brazil is a do-it-for-me country, he said, and do-it-yourself oil changes are uncommon. But even lube centers and other outlets buy motor oils in one-liter bottles.

Lubricants are linked to service-station networks, added Lins. Fifty percent of Petrobras retail automotive sales are through the companys 7,000 service stations. It recently acquired 1,000 gas stations in northern Brazil from competitor Ipiranga; all these will be rebranded with the Petrobras BR brand and will sell Lubrax lubricants.

After gasoline service stations, lube centers are Brazils second-largest outlet for automotive lubricants, followed by auto dealers. Lube centers are a new focus for Petrobras. We now have 1,300 Lubrax quick-lube centers, or boxes, in our service stations, and the lube center channel is growing faster than service stations, said Lins.

Most Brazilian automakers use American Petroleum Institute or ACEA engine oil specs, explained Marco Almeida. He participates in Europes ACEA meetings to stay current with these, and he is Petrobras main contact with the OEMs. Fiat, Peugeot, Renault and Ford use ACEA requirements, while Honda, Toyota, GM and others use API standards, he said. Factory fill is not a big market for Petrobras, but our goal is to meet OEM requirements for new cars.

Multigrade engine oils dominate in Brazil; mono-grades are now less than 25 per cent of the market, and their share is shrinking.

Motorcycle oils are another large and critical market for Petrobras, totaling some 54,000 to 63,000 tons a year. The Honda plant in Amazonas makes 7,000 motorcycles a day for Brazils domestic market, noted Almeida, and Lubrax has launched its first JASO-approved four-cycle oil.

Focus on B2B

In November, Petrobras Distribuidora, the companys distribution arm, launched a business-to-business lubricants direct marketing program headed by Joo Vicente Ardovino Ribeiro. The goal, said Ribeiro, is to make this activity stronger.

Petrobras has over 10,000 direct customers, including giants like Vale, Weg Equipamentos, Veracruz Celulose, Braskem and Petrobras itself. Power generation, general industry, transportation and government are all Lubrax targets.

Nowadays, lubricant manufacturers and distributors face a period of great expectation and caution in relation to the effects of the global economic crisis, said Ribeiro. Several industrial sectors, mainly steel, are leading the decline in lubricant consumption. In spite of the current scenario, Lubrax is implementing a strategic marketing plan to increase market share in key sectors, he emphasized.

Lubricant production capacity, product differentiation and brand positioning are important elements of Ribeiros plan to gain market share and open new market niches. Industrial customers, he noted, want a much higher level of service. They want training and lab support.

Brazilian Base Oil

Petrobras produces base oils at three refineries, with total capacity of 715,000 tons per year. The Duque de Caxias, or Reduc, base oil refinery in Rio de Janeiro opened in 1972 and was expanded with a second train in 1979. Reduc has capacity to produce 585,000 tons of API Group I paraffinic base oils a year. The feedstock is imported Arabian Light crude oil.

In Salvador, the Landulpho Alves de Mataripe refinery, dubbed RLAM, processes domestic crude to produce up to 90,000 t/y of Group I oils. And in Brazils far northeast, in Fortaleza, Lubrificantes e Derivados do Petroleo do Nordeste, or Lubnor, hydrotreats domestic crude to produce 40,000 t/y of naphthenic base oils.

But domestic refinery capacity is not sufficient to meet Petrobras base oil needs. Petrobras imports Group I from Europe, and now Group II from the United States, said Ricardo Falck V. Palagi, specialty products trader. The lubricants business must develop alternate formulations to meet OEM requirements. For example, Mercedes has tight Noack limits that Group I alone cannot meet, Palagi noted.

What are Petrobras biggest base oil challenges? Quantity, quality, price and logistics, asserted Plant Manager Batista with a chuckle.

Petrobras base oil managers have long hoped to upgrade its refinery units. Lubricants wants to upgrade to Group II and III, said Palagi, but its competing with other projects. Officially, the project is still under evaluation, but we cannot count on it. As a result, he said, Petrobras is importing 15,000 metric tons a month of base oils.

Now were a customer, even for bright stocks, added Lins. Last year Petrobras stopped exporting bright stock; it is all used in the domestic market now. And as we move to lighter-viscosity product grades now, we need lighter base oils. New products require more imports, since Brazil itself has no Group II production.

Room to Grow

In September 1997, Brazils lubricants sector was deregulated, price controls ended and third parties began to import and export base oils and finished lubricants. Today, said Batista, Brazils lubricants business is entirely market driven. The market is free; anyone can compete.

Where does Petrobras plan to grow its lubricants business? Domestic growth is a high priority: Witness Joo Ribeiros high-profile direct-sales initiative. Within five years, reiterated Batista, Lubrax wants to increase its domestic market share to 35 percent.

Beyond Brazils borders, Petrobras is eagerly eyeing its neighbors lubricant markets. Our strategy, said Lins, is to go into a market first as a fuel distributor, and lubes will follow.

In Argentina, Petrobras has a big foot in the door with its 680 service stations and 14 percent market share in retail fuels. Lubrax currently has over 11 percent of Argentinas lubricants market, but projects a decline in lubricants demand this year to 2005 levels.

In Colombia, Petrobras has 63 service stations and a lube blending plant to serve the local market. While its lubricants market share is still under 2 percent here, Petrobras is developing new industrial products, taking advantage of global contracts with Brazilian companies, and seeing growth in heavy-duty diesel engine oils and lower tier brands.

In Paraguay, where Petrobras has a 20 percent share of the fuels market, Lubrax, all imported from Brazil, enjoys a 17 percent market share. Some 17 importers of autos and motorcycles recommend Lubrax, and Lubrax has replaced many Shell products, it says. But on the down side, new-car imports into Paraguay plummeted 40 percent in the last three months of 2008.

Petrobras is in second place in lubricants market share in Uruguay, with 35 percent of the market. It has a strong marine presence with its Marbrax brand, and sees growing demand for services.

In Chile, where Lubrax is toll-blended, Petrobras sees a very competitive market where Copec and Shell together dominate. But Petrobras is optimistic that its acquisition of 230 service stations from ExxonMobil will provide opportunities to expand Lubrax sales.

What does Petrobras see for the regions lubricants markets in the current downturn? Expect Brazils market to decline about 3 percent, said Lins. Argentina will contract more sharply, perhaps by 7 percent. Colombia will drop one or two percent, and Uruguay and Paraguay are question marks.

Were a strong regional player, Lins concludes. One day well be global.