Brazilian chemical company Unigel is seeking compensation from state-run Petrobras for losses incurred at two leased fertilizer plants, as revealed in a legal letter obtained by Reuters. These plants are crucial to President Luiz Inacio Lula da Silva’s strategy to reduce Brazil’s reliance on imported fertilizers, but they have been non-operational since the latter half of last year.
In December, Unigel and Petrobras entered a “tolling” contract where Petrobras was to supply natural gas in exchange for fertilizer, allowing Unigel to restart production without worrying about fuel costs. However, this agreement fell apart in June after Brazil’s federal audit court (TCU) indicated it could result in a loss of 487 million reais (approximately $87 million) for Petrobras.
In a letter dated June 20, Unigel’s lawyers expressed that the delay in implementing the tolling contract had worsened Unigel’s financial situation. They demanded full reimbursement from Petrobras for losses incurred since the contract was signed, estimating total losses to be in the “hundreds of millions” of reais.
Petrobras has not responded to inquiries regarding Unigel’s demands, but both companies are reportedly still working towards a resolution to resume production. The letter indicates that negotiations are strained, with Unigel labeling Petrobras’ actions as “abusive.”
Increasing fertilizer production is a priority for Lula’s administration. Since taking office in 2023, Petrobras has shifted its stance on fertilizer divestments, announcing plans to resume operations at one of its plants in June.
Brazil is a major fertilizer consumer, importing over 80% of its needs. The government aims to reduce this import dependency to 45% by 2050 under a plan introduced in 2022. However, the two plants in Sergipe and Bahia, leased by Unigel since 2019, have remained idle this year. When operational, these facilities made Unigel the largest Brazilian producer of nitrogen fertilizers.
Unigel is currently incurring costs of around 13 million reais ($2.4 million) monthly for the plants, which is exacerbating its financial struggles as it seeks to restructure 4.1 billion reais of debt with bondholders. Previously, the company was spending 35 million reais per month until March when it laid off plant employees, having kept them on staff at Petrobras’ request.
The ongoing dispute has led to a confidential arbitration process that began in December, focusing on clauses in their gas supply contract. Such arbitration can take between two to five years to resolve, according to corporate law expert Marcelo Godke.