Plastic fantastic: Petrobras wants to control its products from well to tank to table, and it has the cash to do so.

Having spent most of the 1990s jettisoning petrochemical assets, Brazil's state-owned Petroleo Brasileiro (Petrobras) is now poised to again become a major petrochemical player.

In the 1990s, however, Petrobras sold most of its stakes in petrochemical companies as part era wave of privatizations to help a cash-strapped government slash spending and to allow the private sector to consolidate the sector to make it more competitive.

But with Petrobras' US$1.07 billion purchase in 2002 of a 58.6% control stake in Argentina No. 2 oil producer Perez Companc (Pecom), it again began to invest in petrochemicals. That's because Petrobras also took over Pecom's stakes in numerous Argentine thermoplastic producers, along with Pecom's control stake in Innova, a major Brazilian producer of styrene and polystyrene.

Petrobras also in early May agreed to buy part of a Dew Chemical stake in Petroquimica Triunfo, a producer of polyethylene. Petrobras did not disclose terms, hut market estimates put the total value of the company at $160 million. It also spent $144 million for a stake in a nearly completed $1 billion petrochemical complex in Rio de Janeiro state, called Rio Polimeros. Petrobras is expected to double its investment there.

Petrobras certainly has the capital to make big petrochemical purchases. The company posted record net operating, profits of $6.1 billion, record net operating revenues of $33 billion and consolidated cash flow generation of $11.2 billion in 2003.

Petrobras CEO Jose Eduardo Dutra says that the company is likely to continue to make petrochemical and other acquisitions besides oil production.

In May the company said it was holding talks with Italian energy giant Eni about the purchase of its assets in Brazil, including Agip do Brasil's approximately 1,700 Brazilian gas stations and Eni's liquified petroleum gas distribution. Those activities are reportedly worth $200 million.

With such an acquisition, Petrobras, one of the country's four top oil-product distributors--along with Royal Dutch Shell Group, Chevron Texaco, and the Companhia Brasileira de Petroleo Ipiranga--could increase its share of the oil-product distribution market and make vertical its liquified petroleum gas production activities, Dutra says.

"We also want to make major investments in petrochemical companies that will make us part of their control group, thus allowing us take part in running them," Durra says.

Three possible Petrobras petrochemical investment targets, according to Dutra, are a co-control stake in Braskem, owner of Brazil's No. 1 cracker--which turns naphtha into the base chemicals need to make plastic--and Brazil's No. 1 thermoplastics producer Braskem had $4.48 billion in gross sales, $74 million in net profits in 2003. Petrobras could buy Ipiranga Petroquimica, another big thermoplastics producer, which is co-controller of Copesul, Brazil's No. 2 cracker.

Finally, Petrobras could buy Ipiranga Petroquimica's 29.5% co-control stake in Copesul itself. Copesul had $1.84 billion in gross sales and $70 million in net profits in 2003.

Restructuring. In a 2001 shareholders' agreement, Odebrecht and Mariani, Braskem's largest controlling shareholders with a combined 43% stake, agreed to give Petrobras the right to buy enough of their own shares in Braskem to equally divide control of the company between Petrobras and the two other shareholders. Petrobras has until April of 2005 to exercise that option. It now has an 11% minority stake in Braskem.

Buying co-control of Braskem would also give Petrobras indirect control of Copesul because Braskem and Ipiranga Petroquimica each own a 29.5% co-control stake in that company

Ipiranga Petroquimica refused to comment on whether it or its co-control stake in Copesul was for sale, although Durra says Petrobras has had acquisition talks with Ipiranga. Still. were those assets not for sale, the co-control stake in Braskem would become the state oil company's major acquisition target.

Braskem, by far Brazil's largest petrochemical group, is not, however, anxious to see Petrobras as a co controller of the company. Nevertheless, the National Development Bank (BNDES), now coordinating and financing the restructuring of Brazil's petrochemical sector, is interested in reducing Braskem's grip over the petrochemical sector by making Petrobras a second big player.

"Petrobras will be a very important player, perhaps the key player, in this restructuring," says Mauricio Lemos, industrial director for BNDES.