Annual Fuel Retail Report 2016

Annual Fuel Retail Report

2016

MASTHEAD AND AFFILIATED UNIONS

FECOMBUSTÍVEIS Federação Nacional do Comércio de Combustíveis e de Lubrificantes (National Federation of Fuel and Lubricant Commerce) www.fecombustiveis.org.br Av. Rio Branco 103/13° andar. Centro-RJ. Cep.: 20.040-004 Telephone: (21) 2221-6695

ACRE

Delano Lima e Silva Rua Pernambuco nº 599 - Sala 4 Bairro: Bosque Rio Branco-AC Fone: (68) 3226-1500 sindepac@hotmail.com www.sindepac.com.br

Fecombustíveis nationally represents 34 unions and Abragás while

DISTRITO FEDERAL

Fernando Ramos SHCGN-CR 704/705, Bloco E entrada 41, 3º andar, sala 301 Brasília-DF Fone: (61) 3274-2849 Fax: (61) 3274-4390 sindicato@sindicombustiveis-df.com.br www.sindicombustiveis-df.com.br

defending the legitimate interests of nearly 38,000 service stations, 370 TRRs and almost 40,000 resellers of LPG, in addition to the resale of lubricants. The federation is affiliated with the National Confederation of Commerce of Goods, Services and Tourism (CNC) and is part of the Latin American Committee of Fuel Entrepreneurs (Claec).

Circulation: 4,500 copies President: Paulo Miranda Soares Honorary President: Gil Siuffo

ALAGOAS

James Thorp Neto Av. Jucá Sampaio, 2247, Barro Duro Salas 93/94 Shopping Miramar Maceió-AL Fone: (82) 3320-2902/1761 Fax: (82) 3320-2738/2902 scvdpea@uol.com.br www.sindicombustiveis-al.com.br

ESPÍRITO SANTO

Nebelto Carlos dos Santos Garcia Rua Vasco Coutinho, 94 Vitória-ES Fone: (27) 3322-0104 Fax: (27) 3322-0104 sindipostos@sindipostos-es.com.br www.sindipostos-es.com.br

1st Vice President: Mario Luiz Pinheiro Melo 3rd Vice President: Adão Oliveira da Silva 4th Vice-President: Walter Tannus Freitas 5th Vice-President: Maria Aparecida Siuffo Schneider 6th Vice-President: José Camargo Hernandez 1st Secretary: Roberto Fregonese 2nd Secretary: Emilio Roberto C. Martins 3rd Secretary: José Augusto Manuel Costa 1st Treasurer: Ricardo Lisbôa Vianna 2nd Treasurer: Manuel Fonseca da Costa

AMAZONAS

Luiz Felipe Moura Pinto Rua Rio Içá, 26 - quadra 35 Conj. Vieiralves Manaus-AM Fone: (92) 3584-3707 Fax: (92) 3584-3728 sindcam@uol.com.br

GOIÁS

José Batista Neto 12ª Avenida, 302 Setor Leste Universitário Goiânia-GO Fone: (62) 3218-1100 Fax: (62) 3218-1100 sindiposto@sindiposto.com.br www.sindiposto.com.br

3rd Treasurer: Armando Matheussi Fiscal Council Member: Luiz Felipe Moura Pinto Fiscal Council Member: Julio Cezar Zimmermman Fiscal Council Member: João Victor C. R. Renault TRR Director: Álvaro Rodrigues Antunes de Faria

BAHIA

Director of Service Stations: Ricardo Hashimoto

José Augusto Melo Costa Av. Otávio Mangabeira, 3.127 Costa Azul Salvador-BA Fone: (71) 3342-9557 Fax: (71) 3342-9557/9725 sindicombustiveis@sindicombustiveis.com.br www.sindicombustiveis.com.br

Environmental Director: João Batista Porto Cursino de Moura CNG Director: Gustavo Sobral Director of Convenience Stores: Paulo Tonolli Editorial Board: Emilio Martins, José Antônio Rocha, José Camargo Hernandes,

MARANHÃO

Orlando Pereira dos Santos Av. Colares Moreira, 444, salas 612 e 614 Edif. Monumental São Luís-MA Fone: (98) 3235-6315 Fax: (98) 3235-4023 sindcomb@uol.com.br www.sindcombustiveis-ma.com.br

Mario Melo, Paulo Miranda Soares, Ricardo Hashimoto, Ricardo Lisbôa Vianna and Roberto Fregonese.

Editor: Mônica Serrano Assistant Editor: Gisele de Oliveira Reporters: Adriana Cardoso and Rosemeire Guidoni Economist: Isalice Galvão Graphic design: Girasoli Soluções Printing: Edigráfica

2 Annual Fuel Retail Report 2016

CEARÁ

Antonio Machado Neto Av. Engenheiro Santana Junior, 3000/6º andar - Parque Cocó Fortaleza-CE Fone: (85) 3244-1147 sindipostos@sindipostos-ce.com.br www.sindipostos-ce.com.br

MATO GROSSO

Aldo Locatelli R. Manoel Leopoldino, 414, Araés Cuiabá-MT Fone/Fax: (65) 3621-6623 contato@sindipetroleo.com.br www.sindipetroleo.com.br

SÃO PAULO - CAMPINAS MATO GROSSO DO SUL

Edemir Jardim Melo Rua Bariri, 133 Campo Grande-MS Fone: (67) 3325-9988 / 9989 Fax: (67) 3321-2251 sinpetro@sinpetro.com.br www.sinpetro.com.br

PIAUÍ

Robert Athayde de Moraes Mendes Av. Jockey Club, 299, Edificio Eurobusines 12º, sala 1212 Teresina-PI Fone: (86) 3233-1271 Fax: (86) 3233-1271 sindpetropi@gmail.com www.sindipetropi.org.br

Rafael Alexandre Figueiredo Gomes Travessa Guaporé, Ed. Rio Madeira, 3º andar, salas 307/308 Porto Velho-RO Fone: (69) 3229-6987 Fax: (69) 3229-2795 sindipetrorondonia@gmail.com www.sindipetro-ro.com.br RORAIMA

MINAS GERAIS

Carlos Eduardo Mendes Guimarães Rua Amoroso Costa, 144 Bairro Santa Lúcia Belo Horizonte-MG Fone/Fax: (31) 2108- 6500/ 2108-6530 minaspetro@minaspetro.com.br www.minaspetro.com.br

RONDÔNIA

RIO DE JANEIRO

Ricardo Lisbôa Vianna Av. Presidente Franklin Roosevelt, 296 São Francisco Niterói–RJ Fone/Fax: (21) 2704-9400 sindestado@sindestado.com.br www.sindestado.com.br

Abel Salvador Mesquita Junior Av. Surumu, 494 São Vicente - Boa Vista - RR Fone: (95) 3623-8880 sindipostos.rr@hotmail.com

Ovidio da Silveira Gasparetto Av. Duque de Caxias, 1.337 Bairro Marco Perímetro: Trav. Mariz e Barros/Trav.

Timbó - Belém-PA Fone: (91) 3224-5742/ 3241-4473 secretaria@sindicombustiveis-pa.com.br www.sindicombustiveis-pa.com.br

RIO DE JANEIRO - MUNICÍPIO

Maria Aparecida Siuffo Pereira Schneider Rua Alfredo Pinto, 76 - Tijuca Rio de Janeiro-RJ Fone: (21) 3544-6444 secretaria@sindcomb.org.br www.sindcomb.org.br

Reinaldo Francisco Geraldi Rua Porto União, 606 Bairro Anita Garibaldi Joinville-SC Fone: (47) 3433-0932 / 0875 Fax: (47) 3433-0932 sindipetro@sindipetro.com.br www.sindipetro.com.br

SANTA CATARINA - BLUMENAU PARAÍBA

Omar Aristides Hamad Filho Av. Minas Gerais, 104 Bairro dos Estados João Pessoa-PB Fone: (83) 3324-1600 Fax: (83) 3221-0762 sindipet@hotmail.com www.sindipetropb.com.br

PARANÁ

Rui Cichella Rua Vinte e Quatro de Maio, 2.522 Curitiba-PR Fone/Fax: (41) 3021-7600 diretoria.sindi@sindicombustiveis-pr.com.br www.sindicombustiveis-pr.com.br

RIO GRANDE DO NORTE

Antônio Cardoso Sales Rua Raposo Câmara, 3588 Candelária - Natal-RN Fone: (84) 3217-6076 Fax (84) 3217-6577 sindipostosrn@sindipostosrn.com.br www.sindipostosrn.com.br

SÃO PAULO - SANTOS

José Camargo Hernandes Rua Dr. Manoel Tourinho, 269 Bairro Macuco - Santos-SP Fone: (13) 3229-3535 Fax: (13) 3229-3535 secretaria@resan.com.br www.resan.com.br

SERGIPE

SANTA CATARINA PARÁ

Flávio Martini de Souza Campos Rua José Augusto César, 233 Jardim Chapadão - Campinas-SP Fone: (19) 3284-2450 recap@recap.com.br www.recap.com.br

Julio César Zimmermann Rua Quinze de Novembro, 550/4º andar Blumenau-SC Fone: (47) 3326-4249 Fax: (47) 3326-6526 sinpeb@bnu.matrix.com.br www.sinpeb.com.br

Mozart Augusto Oliveira Rua Raimundo Fonseca, 57 Bairro Treze de Julho - Aracaju-SE Fone: (79) 3214-4708 Fax: (79) 3214-4708 sindpese@infonet.com.br www.sindpese.com.br

SINDILUB

Laércio dos Santos Kalauskas Rua Trípoli, 92, conj. 82 Vila Leopoldina São Paulo-SP Fone: (11) 3644-3440/ 3645-2640 sindilub@sindilub.org.br www.sindilub.org.br

TOCANTINS

Eduardo Augusto Rodrigues Pereira 103 Sul, Av. LO 01 - Lote 34 - Sala 07 Palmas-TO Fone: (63) 3215-5737 sindiposto-to@sindiposto-to.com.br www.sindiposto-to.com.br

SANTA CATARINA FLORIANÓPOLIS RIO GRANDE DO SUL

Adão Oliveira Rua Cel. Genuíno, 210 - Centro Porto Alegre-RS Fone: (51) 3930-3800 Fax: (51) 3228-3261 presidencia@sulpetro.org.br www.sulpetro.org.br

Paulo Roberto Ávila Av. Presidente Kennedy, 222 - 2º andar Campinas São José Florianópolis-SC Fone: (48) 3241-3908 sindopolis@gmail.com

TRR

Álvaro Rodrigues Antunes de Faria Rua Lord Cockrane, 616 8º andar, salas 801/804 e 810 Ipiranga-SP Fone: (11) 2914-2441 Fax: (11) 2914-4924 info@sindtrr.com.br www.sindtrr.com.br Entidade associada

PERNAMBUCO

Alfredo Pinheiro Ramos Rua Desembargador Adolfo Ciríaco,15 - Recife-PE Fone: (81) 3227-1035 Fax: (81) 3445-2328 recepcao@sindicombustiveis-pe.org.br www.sindicombustiveis-pe.org.br

RIO GRANDE DO SUL – SERRA GAÚCHA

Luiz Henrique Martiningui Rua Ítalo Victor Berssani, 1.134 Caxias do Sul-RS Fone/Fax: (54) 3222-0888 sindipetro@sindipetroserra.com.br www.sindipetroserra.com.br

SANTA CATARINA - LITORAL CATARINENSE E REGIÃO

Giovani Alberto Testoni Rua José Ferreira da Silva, 43 Itajaí-SC Fone: (47) 3241-0321 Fax: (47) 3241-0322 sincombustiveis@sincombustiveis.com.br www.sincombustiveis.com.br

ABRAGÁS (GLP)

José Luiz Rocha Fone: (41) 8897-9797 abragas.presidente@gmail.com www.abragas.com.br

Annual Fuel Retail Report 2016

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TABLE OF CONTENTS

05 • Letter from the President 06 • THE UNITED STATES Stronger economy 12 • SCENARIOS Lower sales 20 • GasolinE Decelerating 28 • ETHANOL Record sales 38 • Diesel Mirroring the GDP 46 • Biodiesel Growing 52 • CNG Declining 58 • LPG Slowing sales 64 • LUBRICANTS Sharp drop 68 • ENVIRONMENT Licensing underway 74 • LEGISLATION A tense year 82 • CONVENIENCE Trend toward diversification 86 • Fecombustíveis Retail concerns 94 • Supply chain 95 • Acronyms 96 • List of Tables 98 • Glossary 100 • Research Sources and Acknowledgments

4 Annual Fuel Retail Report 2016

LETTER FROM THE PRESIDENT

As a businessman in the fuel retail segment, I’ve already been through many different experiences and crises in the country. In early 2015, my hope was that the federal government could put the country back on track through a fiscal adjustment. However, as the situation worsened, the political crisis deepened and expectations for improvement in the country were dashed. Last year, the economic indicators dominated the pages of newspapers and websites, notable for the negative results being posted. The signs were clear: the crisis was far from being contained. We took some steps backwards in almost all the wealth generation segments. And our industry was not spared.

Total fuel sales fell 1.9% in 2015 compared to 2014. Even though, historically, the sector has been averaging 5 percent growth per year, we must recognize that this result was not one of the worst. Viewing other segments of the economy, it is not difficult to find examples of two-digit drops. That was the case of the automotive industry, for example, where car sales declined 26.6%, going from 3.5 million units in 2014 to 2.5 million in 2015.

The 2016 Annual Fuel Retail Report presents the main facts that marked the retail sector in a year when the country saw a 3.8% fall in GDP. The recent steady growth of gasoline consumption was interrupted in 2015, which for the first time in years suffered a reduction — of 7% — in relation to the previous year (2014), as was also the case for diesel sales (down by 4.7%). Reduced fossil fuel consumption was due to several causes, particularly an economic scenario that reflected the decrease in household income and a slowdown in company economic activity, with a subsequent falloff in demand felt by the freight hauling segment of the logistics sector. This slowdown led to decreased consumption of diesel fuel by trucks and industrial machinery and equipment. Also significant was the raising of the PIS/Cofins taxes and the return of the Cide tax charges. In addition, Petrobras adjusted the prices of diesel and gasoline upward by 4% and 6%, respectively, at its refineries.

On the other hand, ethanol was the highlight of the year. During most of 2015, the biofuel once more was the preferred fuel at the pump and posted growth of 37.5% between 2014 and 2015. Even though the price of hydrous ethanol increased in the last quarter of the year, losing competitiveness, many consumers continued to fill up their tanks with the product be-

cause its price (per liter) is lower than gasoline.

For fuel retailers, 2015 was a year of challenges.

Taxes on products increased, costs skyrocketed, sales slowed and we had to scurry hard to obtain permits to meet the conditions of ANP Resolution 57/2014.

Through the resolution, the ANP set a deadline of one year — which ended on October 20 — for resellers to obtain an environmental operating license (LO) and a Certificate of Inspection from the Fire Department (AVCB), mandatory documents for continuing to stay in business.

According to a survey by Fecombustíveis, conducted in 2014, almost 50% of the service stations in the country did not have either one or both of the documents. This situation required urgent action. The Federation offered support to Affiliated Unions who sought help from the ANP itself to establish agreements with the public agencies responsible for issuing the LOs and the AVCBs to expedite the issuing of the documents.

At the end of the term, the scenario had improved and, approximately, 20% of the stations were still pending compliance.

The ANP began to monitor the stations at the end of last year and we are hoping to avoid license revocations, ensuring that retailers meet all the requirements of the regulatory agency, which are not few.

The fuel reselling activity is one of Brazil’s most highly inspected sectors. We must satisfy regulations and standards required by a number of different oversight bodies. The changes are so many that we have dedicated a full chapter devoted to the legislation in this Report. We discuss the updates to the rules and new obligations implemented last year. Reading this chapter is absolutely essential if you want be well informed on this subject.

Another feature in this report is a discussion of the U.S. fuel market. Despite having characteristics that are different than Brazil’s domestic market, one can find business difficulties common to both countries’ sectors, such as credit card fees and taxes.

I hope the articles in this Report will help expand your perception of the functioning of our sector and deepen your knowledge of fuel sales, a most peculiar market.

Enjoy your reading!

Paulo Miranda Soares President of Fecombustíveis Annual Fuel Retail Report 2016

5

UNITED STATES

Stronger economy The economy of the United States has been recovering year-by-year in the wake of the economic crisis of 2008. In 2015, the country’s economy grew 2.4%, the same as in 2014, driven by consumer spending. Company profits last year rose 3.3% compared to the previous year.

Last year, consumption of gasoline and diesel fuel amounted to 711 million cubic meters. While in Brazil gasoline sales fell 7%, in the U.S. they rose 4% in 2015 over 2014, reaching 499 million cubic meters.

Diesel sales were up by 1% over the same period.

1.1 SALES OF GASOLINE AND DIESEL (In millions of m3)

Gasoline

Diesel

2014 2015

2014 2015

479 499 209 212

Source: EIA Note: The diesel data refer to Ultra Low Sulfur, because there is no data for Low Sulfur and High Sulfur

The unemployment rate fell from 5% in December 2015 to 4.9% in January 2016, its lowest level since February 2008, according to data from the U.S. Department of Labor.

The optimism also spread to the 39 million U.S. fuel consumers, who sought service stations offering better prices and more convenience to fuel their vehicles. For its part, 2016 began with gas prices at US$ 2.00 per gallon, trending downward to the satisfaction of American consumers. Similarly, the price of crude oil also reached the lowest levels since the beginning of 2000.

Biofuels Biofuel consumption in the U.S. grew in 2015.

Sales of ethanol and biodiesel increased 4% compared to 2014. Some 52.8 million cubic meters of ethanol were sold in 2015, while in 2014 the figure was 50.9 million cubic meters. Biodiesel consumption went from 5.36 million cubic meters in 2014 to 5.59 million cubic meters in 2015.

1.2 BioDIESEL

1.3 ETHANOL

(In millions of m3)

(In millions of m3)

PRODUCTION

CONSUMPTION

2014 2015

2014 2015

Source: EIA Note: 2014’s data was revised

4.84 4.78

PRODUCTION

5.36 5.59

CONSUMPTION

2014 2015

2014 2015

54.2 56.0 50.9 52.8

Source: EIA Note: 2014’s data was revised

Annual Fuel Retail Report 2016

7

UNITED STATES

Prices Fuel prices in the U.S. retail market are

affected by five factors: crude oil, taxes, refining costs, distribution and sales expenses (which represents all costs after the fuel leaves the refinery).

In 2015, the decline of oil prices in the

1.4 retail gasoline price breakdown OIL

REFINING

United States influenced the percentage re-

duction of the commodity in the breakdo-

MARGINS

wn of the final cost of both gasoline and

diesel fuel. In contrast, the other components (refining, margins and taxes) posted

higher percentages in the final cost of the product.

As happens in Brazil, in the United

TAXES

PRICE (In US$ per liter)

2014 2015

2014 2015 2014 2015

2014 2015 2014 2015

65% 48% 10% 19% 12% 14% 13% 19% 0.888 0.640

Source: EIA

States fuel retailers pay taxes that vary ac-

cording to the location their facilities. Sometimes, there are significant tax disparities

between service stations located in the same

region, although in different cities or states.

For example, in New Jersey, the gasoline tax is 32.9 cents per gallon, while in neighbo-

1.5 retail diesel price breakdown OIL

ring Pennsylvania it is 68.8 cents per gallon.

In 2015, the average price of gasoline

REFINING

sold was US$ 0.64 per liter, while in 2014

the average price was US$ 0.88 per liter. On

MARGINS

the other hand, the average price of diesel

fuel fell US$ 1.01 per liter in 2014, to US$ 0.71 per liter in 2015.

When converted to gallons, the unit

of measure in the United States, the

average cost of gasoline last year was US$ 2.40 per gallon.

8 Annual Fuel Retail Report 2016

TAXES

PRICE (In US$ per liter)

Source: EIA

2014 2015

2014 2015 2014 2015

2014 2015 2014 2015

57% 42% 12% 16% 18% 22% 13% 19% 1.011 0.715

Who sells fuel in the United States?

There are over 154,000 convenience stores in the United States, of which more than 124,000 sell fuel. That is, the fuel retailers, along with convenience stores, sell 80% of the fuel consumed by Americans, who fill up the tanks of their vehicles approximately four to five times per month.

Unlike Brazilian fuel retailers, the anchor of the U.S. fuel reselling business is the convenience store.

Fuel retailing in the United States is dominated by single-store retailers, which account for 59% of the total market. Those with between two and ten establishments represent 4%, resellers with 11 to 50 stores account for 9%, up to 200 stores corresponds to 6% of the market and more than 501 represent 17% of the total market.

Most oil companies have gotten out of the fuel retail market, although their retail brand names are often displayed. Approximately 50% of service stations in the United States are branded by one of the 15 major fuel refiners/suppliers, giving the impression that the oil company remains the owner of the outlet; however, in fact, it is merely a brand franchise.

Even with market verticalization, which permits oil companies to resell fuels, the major companies left the retail business to focus their activities on the upstream market (refining or oil production). Only Chevron and Shell remain of the oil companies that operated in the reselling market, representing a total of 443 service stations, the same number of establishments as in 2014.

1.6 SERVICE STATIONS OWNED

BY OIL COMPANIES 2014 2015

2014 2015

423 423 20 20

Source: NACS

1.7 OWNERSHIP OF CONVENIENCE STORES SELLING FUEL

58% 59%

1 store 2-10 stores 11-50 stores 51-200 stores 201-500 stores as of 501 stores

4% 4% 9% 9% 5% 6% 6% 6%

17% 17%

2014 2015

Source: NACS

Annual Fuel Retail Report 2016

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UNITED STATES

Brand value Obviously, displaying a brand to millions of consumers every day has its value, which is why there are oil companies that do not withdraw from the market. In addition, the relationship with the brand offers assurance of the habit of consumption for their product.

Another reason is that when oil companies themselves supply fuel, there is guaranteed supply of the product at predictable volumes.

For retailers, the brand means consumer recognition. Thus, maintaining a contract with a major refiner or known brand fuel supplier offers instant identification of the fuel quality.

Although the price of gasoline continues to be the crucial element for Ame-

rican consumers when they choose their supply point-of-sale, one out of every 11 drivers decides to purchase gasoline based on the brand. There are also other benefits to branded resellers due to the know-how of sales tools offered, technical support and employee training. The retailers also can receive financial assistance to support store image.

For retailers who prefer to be independent, with no ties to a brand, the filling station uses the same name of the store.

As in Brazil, in most cases, unbranded gasoline has a lower wholesale price because it does not incorporate the benefits of the brand, which include marketing support or market intelligence.

Hypermarkets as resellers The resale of fuel by hypermarkets in the United States went from 5,236 stores in 2014, to 5,445 in 2015, representing an increase of 4% over the period. The Kroger hypermarket chain led the market in 2015, one percentage point ahead of its competitors compared to 2014. The other principal competitors maintained their places in the ranking while some hypermarkets saw their shares decline.

10 Annual Fuel Retail Report 2016

1.8 HYPERMARKETS RETAILING FUEL

Safeway Costco Sam's Club Walmart Kroger Others Source: NACS

6.6% 6.2% 7.3% 7.4% 9.6% 9.5%

2014 2015

19.1% 19.0% 23.3% 24.3% 34.1% 33.6%

Consumers decide with their pocketbooks

Credit card at the pump

Price remains the main reason when it comes time for the American consumer to decide about purchasing fuel. This was true both when gas prices peaked at US$ 4 per gallon in 2008, as well as when costs fell to US$ 2 a gallon in January 2016.

This is because fuel purchases represent approximately 4%-5% of overall household expenditures, according to the EIA. Prices may vary from place to place based on wholesale costs, expenses and business strategies. For the consumer, saving a few cents per gallon represents a victory. Because they have been conditioned by force of habit to make their purchases based on lowest price, in 2016 there will be no change in behavior.

Thus, understanding how consumers behave with regard to gasoline prices can help resellers make better plans regarding their marketing strategies. This analysis also includes assessment of what happens at the moment a consumer fills up his tank. Consumers are more likely to fuel their vehicles in the morning, probably for practicality reasons; along the way to work; taking the kids to school, etc. However, because morning traffic has been growing over the past few years, fuel retailers might now be considering implementing small promotions at lunchtime in view of the fact some consumers have opted for alternative schedules to avoid the morning traffic jams.

have been using debit and credit

Since 2003, most Americans

cards rather than cash or checks to purchase fuel, according to the

American Bankers Association. Du-

ring the last decade, this trend has

accelerated, especially as a means of payment attached right on the fuel

pump. Today, 72% of consumers use credit cards at the pump to pay for

their fuel purchases, according to a

survey on consumption conducted

by NACS.

With approximately three quar-

ters of consumers no longer paying for fuel with cash, most resellers

have no choice but to accept credit and debit cards. However, card

transactions incur fees that cost, on

average, between 2% and 3% of the

total purchase, but can reach 4%.

Therefore, these costs are passed on to the consumer through increases in fuel prices.

Comparatively,

since

2006,

U.S. fuel retailers’ profits were lo-

wer than the fees paid to the credit

card companies. In 2014, the reseller industry posted profits of US$

10.4 billion, while credit card fees totaled US$ 11.4 billion.

Annual Fuel Retail Report 2016

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SCENARIOS

Lower sales The worsening economic and political crisis marked the year of 2015 in Brazil. A number of the country’s economic sectors saw negative growth and the result was a 3.8% decline of GDP, representing the largest slowdown in the historical series since 1990.

In 2015, the overall GDP result was impacted by the weight of the industrial and services sectors, which saw declines of 6.2% and 2.7%, respectively; the decrease only was not worse because the agricultural sector grew 1.8% on the year.

The projections for 2016 are for continuation of the economic crisis: the GDP should shrink another 3.54%, inflation (as measured by the official IPCA index) should come in at 7.46%; and the prime interest rate would remain at 14.25% per annum.

Early in 2015, the government announced a package of measures that raised the PIS/ Cofins tax rates for the fuel sector and saw the return of the Cide tax contribution on gasoline and diesel sales. As the months passed, resistance to the Dilma Rousseff government increased and continuity of the fiscal adjustment did not gain the approval of Congress, and thus stalled. The higher tax rates were not enough to balance the government’s accounts; and for its part, the government, which should have cut spending, did not do so. In the assessment of analysts, there were two difficulties: lack of conviction about the importance of the adjustments to be made, aggravating the problem; and lack of a clear vision by government about what spending cuts to make and when to make them. With lower tax collections due to the slowdown of economic activity, the government’s accounts at the end of 2015 closed with a deficit of R$ 111.2 billion (revenues less expenditures excluding interest expenses), the worst result of the historical series since 2001.

Most of 2015’s economic data and historical indicators painted a picture of a country in the midst of a grave economic situation, including: the unemployment rate, inflation, exchange rate, businessmen and consumer confidence indexes and industrial performance, among others.

The auto industry was one of the sectors that most suffered the impacts of the economic downturn. The production of cars, light 2.1 MARKET EXPECTATIONS – 2016 commercial vehicles, trucks and buses in BraGDP (% growth) -3.54 zil ended 2015 with a decline of 22.8%, totaSelic Target – end of period (% p.a.)

14.25 ling 2.4 million units compared with the 3.1 IPCA (%) 7.46 million the previous year. In the same period, IGP-M (%) 7.77 total car sales were down 26%, going from 3.3 Exchange Rate – end of period (R$/US$$) 4.25 million in 2014 to 2.5 million units in 2015.

Source: Focus Newsletter (Central Bank) 3/11/2016

Annual Fuel Retail Report 2016

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SCENARIOS

Consumption 2.2 LICENSING OF LIGHT VEHICLES

Total (millions of units):

3.3

Flex Fuel

88.2%

Diesel

6.2%

Gasoline

5.5%

2014

Total (millions of units):

2.5

Flex Fuel

88.5%

Diesel

6.0%

Gasoline

5.5%

2015

Fonte: Anfavea

2.3 SHARE OF LIQUID FUELS IN THE GDP (Gasoline + Ethanol + Diesel)

2015

5.79%

2014

5.64%

Source: Fecombustíveis

Accrued fuel sales (gasoline, diesel and ethanol) totaled R$ 341.6 billion, representing and increase of 10% over 2014 14

Annual Fuel Retail Report 2016

In view of the weakened economic environment, the fuel industry also saw a slowdown; however, the fall was not as sharp as occurred in other sectors of the economy. Total fuel sales declined 1.9%, from 144.5 million cubic meters in 2014 to 141.8 million cubic meters in 2015.

The share of liquid fuels as a percentage of the GDP showed a slight increase, from 5.64% in 2014 to 5.79% in 2015.

Despite lower consumer spending, the fuel trade is still regarded as one of underpinnings of consumption. The country’s vehicle fleet continued to sustain demand, even in the face of the decline seen in gasoline and diesel oil consumption, which suffered the impact of tax increases throughout 2015. Also contributing to braking the overall descent in fuel consumption was ethanol, which delivered an impressive sales performance, rising 19.6% (anhydrous and hydrous) on the year. The gasoline price increases recorded in 2015, as a result of higher taxes directly contributed to the migration of vehicle fuel consumption from gasoline to hydrous ethanol, even in markets where the biofuel had no parity with gasoline — such as in the North and

Northeastern states. Minas Gerais was one of the states notable for higher ethanol sales, resulting from the state government’s stimulus package to reduce the biofuel’s ICMS rate to 14%; however, at the end of 2015, hydrous ethanol ceased to be competitive there due to price hikes at ethanol-producing sugar mills. Regarding anhydrous ethanol, the increase in the mandatory blend with gasoline from 25% to 27%, which entered into force on March 16, 2015, guaranteed part of consumption. In service stations, diesel and gasoline sales were down compared with 2014, to 36% and 45%, respectively, of total sales.

For its part, ethanol sales at service stations went from 14% to 19% of total fuel consumption.

Fuel sales (gasoline, diesel and ethanol) posted accrued revenues of R$ 341.6 billion, representing an increase of 10% compared to 2014, attributed mainly to higher federal and state taxes and the increase in the price of gasoline and diesel by Petrobras’ oil refineries of 6% and 4%, respectively. The tax increases were also reflected in the 22% growth of tax collections last year over 2014, totaling R$ 95.3 billion, considering gasoline, diesel and ethanol products.

2.4 SALES (Gasoline + Diesel + Ethanol) In billions of R$ 2015

341.6

2014

311.5

Source: Fecombustíveis

2.5 BREAKDOWN OF SALES AT SERVICE STATIONS Gasoline

Diesel

48%

37% Ethanol

14%

2014

Diesel

36%

Gasoline

45%

Ethanol

19%

2015

Source: Fecombustíveis

2.6 TAX COLLECTIONS (Gasoline + Diesel + Ethanol) In billions of R$

2015

95.3

2014

78.2

Source: Fecombustíveis

Annual Fuel Retail Report 2016

15

SCENARIOS

Market agents Although fuel sales declined, the segment saw the entry of new players into the market.

In 2015, the number of market agents rose to 116.770, which represented an increase of 3% compared to the 112.993 registered agents in 2014. The segments that grew the most last year were LPG resellers, at 5%; and liquid fuels, at 2%, on the same basis of comparison.

2.7 MARKET AGENTS Refineries Ethanol plants Biodiesel producers Liquid fuel distributors LGP distributors TRR Service stations Points of Supply LPG resellers

2014

2015

17 384 58 205 22 382 39.993 13.469 58.463

18 383 50 187 19 380 40.894 13.408 61.431

Source: National Petroleum Agency (ANP)

Vehicle consumption matrix Despite the reduction in consumption last year, diesel oil continued as the leading fuel in the country, with 45.8% total share of the matrix, down 0.5 percentage point in 2015 over 2014. Gasoline, which remained in second place, fell 3.4 percentage points due to the downturn in sales. Hydrous ethanol went in the other direction, rising 3 percentage points, with consumption of 17.8 million cubic meters. Biodiesel was another highlight of the matrix, boosting its position by 1 percentage point as a result of the increase in the blend with diesel to 7% at the end of 2014. CNG remained unchanged.

16

Annual Fuel Retail Report 2016

2.8 VEHICLE CONSUMPTION MATRIX

Biodiesel CNG Hydrous Ethanol Anhydrous Ethanol

2.3% 3.3% 2.1% 2.0% 8.6% 11.6% 7.7% 7.5%

2014 2015

Diesel A-Gasoline Source: ANP

33.1% 29.7%

46.3% 45.8%

Natural gas Natural gas consumption increased 10%, to 54.4 billion cubic meters in 2015 over the previous year. Domestic production was benefited by the increase in pre-salt layer offshore field operations, which contributed to the generation of 35.1 billion cubic meters of the product.

Last year, Petrobras gradually reduced distributors’ discounts on the price of natural gas to zero by the end of the year. The discount policy, in force since 2011, had aimed to encourage consumption of the product and prevent higher prices.

2.9 PRICE OF NATURAL GAS (US$/MMBTU)

12,0

40% 35%

10,0

30%

8,0

25%

6,0

20% 15%

4,0

10%

2,0 Nov/15

Sep/15

Jul/15

May/15

Mar/15

Jan/15

Nov/14

Sep/14

Jul/14

May/14

Mar/14

Jan/14

5%

0,0

0%

Contract: New Firm Policy Mode (1) Contract: Imported Gas Petrobras Discount Source: MME Note (1): Price with Petrobras discount

2.11 NATURAL GAS BALANCE

2.10 NATURAL GAS CONSUMPTION

In billions of m3 Domestic

65%

Imported

35%

2014

Domestic

2014

2015

PRODUCTION

31.9

35.1

IMPORTS

17.4

19.3

APPARENT CONSUMPTION

49.3

54.4

65%

Imported

35%

2015 Fonte: ANP

Source: ANP

Annual Fuel Retail Report 2016

17

SCENARIOS

Petroleum 2.12 OIL BALANCE

2014

2015

130.8 22.9 30.1 123.7

141.4 19.0 42.8 117.7

In millions of m3 Production Imports Exports

Apparent Consumption Source: ANP

2.13 PRICE OF THE BRENT OIL IN THE SPOT MARKET (US$/barrel)

130 120 110 100 90 80 70 60

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

30

Jan/14

40

Mar/14

50

Source: EIA

Resale market share In 2015, so-called white flag

(unbranded) service stations ob-

tained 39.8% share of the total market. BR remained the market

leader among the major brands, with a 19.7% share, followed by Ipiranga (14.6%) and Raízen in third place, at 11.2%.

18

Annual Fuel Retail Report 2016

Regarding oil, there was an increase of 42% in export volume against a 17% drop in imports in 2015, compared to 2014. Last year, because of higher international market sales, which totaled 42.8 million cubic meters, the trade balance surplus (exports minus imports) totaled 23.8 million cubic meters, which resulted in gross revenue of US$ 11.8 billion.

The price of Brent oil continued to fall on the international market, ending the year at its lowest level in December, when the average price was US$ 37.97. The main factors generating this price drop included the oil supply surplus, the increase in oil production, especially shale oil in the U.S., and lower demand in Europe and Asia.

2.14 FUEL RETAIL STATIONS PER BRAND Alesat

3.1%

Raízen

11.2%

Others

11.6%

Ipiranga BR Unbranded

Source: ANP

14.6% 19.7% 39.8%

Supervision In 2015, the ANP’s

Supervisory Department conducted

18,019

ins-

pections, resulting in the

notification of 4,115 infractions (23% of total ins-

pections). Liquid fuel and LPG resellers were the main focus of the ANP’s

inspections of the ma-

rket players. The 12,056 inspections conducted at

2.15 INFRACTIONS AND INSPECTION ACTIONS Segment Fuel reselling LGP reselling Fuel Distributor LGP Distributor TRR Point of Supply Ethanol Producer Finished Lubricating Oil Producer Biodiesel Producer Used or contaminated lubricating oil collector Lubrificating oil re-refiner Others

Infraction Notices 2,446 965 368 92 51 54 72 14 4

Inspection Actios 12,056 4,054 804 240 204 166 77 57 29

% Infractions 20% 24% 46% 38% 25% 33% 94% 25% 14%

7

22

32%

3 39

21 289

14% 13%

4,115

18,019

23%

TOTAL Source: ANP

service stations generated

2,446 infractions (20% of the total); and inspections

of 4,054 LPG resellers resulted in 965 violation no-

tices, or 24% of total audits of this group.

On the list of the most

common infractions, first

place in the ranking was failure to provide infor-

2.16 INFRAÇÕES NA REVENDA DE COMBUSTÍVEIS Infraction Failure to give information to consumers

In units 596

In % 19%

Sell/store product that does not comply with specification

463

14%

Build/operate non-compliant installations and/or equipment

448

14%

Acquire or send product from/to a source that is not authorized

395

12%

Failure to comply with notification

381

12%

Others

943

29%

TOTAL

3.226

Source: ANP

mation to consumers. The second cause was sale or storage of product that did

not conform to the specifications. Regarding infrac-

tions issued to distributors, the top cause was acquiring from or earmarking

the product for unauthorized sources.

2.17 INFRACTIONS IN THE DISTRIBUTION OF LIQUID FUELS Infraction

In units

In %

159

35.3%

Test-sample [not supplied/wrongly supplied]

91

20.3%

Failure to have minimum mandatory stock of the product

67

14.9%

134

29.5%

Acquire or send product from/to a source that is not authorized

Others TOTAL

451

Source: ANP

Annual Fuel Retail Report 2016

19

GASOLINE

Decelerating After five years of record results, demand for gasoline felt the braking impact of the Brazilian economy’s slowdown. The gasoline resale volume registered its first drop and lost market to its main competitor: hydrous ethanol. In 2015, 41.1 million cubic meters were sold, down 7.3% compared to the previous year.

The lower volume was a reflection of the deepening economic crisis in the country. With its accounts out of control, the federal government was forced to adopt a package of measures to increase public revenues in order to balance the books. In the case of fossil fuels, the solution was to raise the PIS/Cofins rates, which went from R$ 0.2616 per liter to R$ 0.3816 per liter, as well as the return of the Cide tax, in the amount of R$ 0.10 per liter. The tax increase was also reflected at the state level by constant readjustments to the basis for calculating the ICMS, impacting through small increments over the year by Brazilian state governments.

Finally, on September 29, 2015 Petrobras announced a 6% adjustment for the fossil fuel from its refineries.

In 2015, the industry registered sales of R$ 137.5 billion, representing growth of 4.2% in comparison

with the previous year. The higher sales volume was due to the tax adjustments and gasoline price hikes by Petrobras’ refineries.

Despite offering higher prices in comparison with the unbranded stations, branded establishments continued to merit consumer preference for fuel purchases. In 2015, the brand-named stations accounted for 71.9% of sales of “C” gasoline while the unbranded facilities represented 28.1% of total sales.

With higher gasoline prices, consumers opted to reduce consumption, use other means of travel or replace gasoline with ethanol (whose price in some states proved to be more competitive). The substitution of gasoline by ethanol also takes into account that the economic crisis was at it most latent point, with high inflation and unemployment and a decline in average household income. Even in states where the biofuel was not

With higher gasoline prices, the consumer has chosen to reduce consumption, use other means of locomotion or replace gasoline with ethanol, whose price in some states proved to be more competitive

3.1 SALES (In billions of R$)

2014 2015

132.0 137.5

Growth of

4.2%

Source: Fecombustíveis

Annual Fuel Retail Report 2016

21

GASOLINE

as advantageous from the point of

3.2 RETAIL SALES VOLUME (In millions of m3)

view of competitiveness, lower pri-

44.4

ces tipped the balance in favor of the

41.1

consumer’s pocketbook, with many more motorists buying hydrous ethanol in view of tighter family budgets.

It is worth remembering that for a

2014

number of years, the federal govern-

2015

ment intervened directly in the gaso-

Source: ANP

line market, freezing fossil fuel prices as a way of controlling inflationary

3.3 SALES BY TYPE OF STATION branded

71.7%

unbranded

28.3%

2014

pressures; this led to an imbalance with respect to the competitiveness of the two fuels.

If for the retail reseller the higher taxes resulted in lower sa-

unbranded

branded

28.1%

71.9%

les, for the federal government the measures had significant impacts.

PIS/Cofins receipts rose 36.8%, re-

2015

aching R$ 11.9 billion. In terms of

Source: ANP

ICMS collections, the gasoline market brought in R$ 37 billion, an in-

3.4 TAX REVENUES (In billions of R$) ICMS

35.2 PIS/Cofins

8.7

Cide

2.0 Source: Fecombustíveis

22 Annual Fuel Retail Report 2016

responsible for movement of some ICMS

37.0

11.9 2015

returning, the Cide tax — which had been zeroed out as of 2012 — was

2014

PIS/Cofins

crease of 5.1%. In the first year after

R$ 2 billion in receipts. Taken together, the collection of the three taxes generated R$ 50.9 billion in revenues for the government.

Rising oil companies imported the remaining 13%, totaling 333,8 cubic meters. Meanwhile, production of oil products by Petrobras’ refineries fell 7% in 2015 in comparison to 2014, due to lower domestic market demand.

3.5 A-GASOLINE IMPORTS (In millions of m3)

2014

2.2 2.5

2015

Source: ANP

3.6 A-GASOLINE IMPORTS BY COMPANY

Petrobras

Other companies

87%

13% 2015 Source: ANP

3.7 MISMATCH OF PRICES BETWEEN BRAZILIAN AND U.S. GASOLINE 70%

Nov-15

Set-15

Jul-15

Mai-15

Mar-15

Jan-15

Nov-14

Set-14

Jul-14

Mai-14

-35%

Mar-14

0%

Jan-14

Despite the decline in gasoline consumption, the volume of imports began growing again in 2015, totaling 2.5 million cubic meters, up 13.6% in comparison to 2014. This growth can be explained by the fall in the price of “A” gasoline in foreign markets, becoming more advantageous in comparison with Petrobras’ selling price — both for the state-run oil company, which is the product’s main importer, as well as for other companies, which took advantage of the opportune moment to buy fossil fuel directly from abroad. In 2014, in most months Brazilian “A” gasoline’s price remained lower than U.S.-sourced gasoline, being 20% more advantageous for Brazil in the month of June. However, in 2015, the movement was the opposite. The fall of the price of oil in the international market did not influence the price of oil products in Brazil, because Petrobras maintained the price of fossil fuels at its refineries at levels that were higher than those practiced abroad.

In January of last year, Brazilian gasoline was 65% more expensive than the equivalent American product. In December, 55%the variation in prices between domestic40%and 25% U.S. gasoline decreased to 20%, while 10%the -5% lower price was maintained in the inter-20% national market.

Petrobras’ imports of “A” gasoline in 2015 represented 87% of the overseas purchases of the product. The other

Note: Price of the product at the refinery excluding taxes.

Source: Fecombustíveis

Annual Fuel Retail Report 2016

23

GASOLINE

Prices surge The gasoline price composition in

Brazil has undergone a change as a re-

3.8 PRICE BREAKDOWN

sult of the increase in the tax rates, whi-

ch boosted their share from of the cost

Freight 2% Anhydrous 12%

breakdown from 33% in 2014 to 37%

Margins 17%

in 2015. Other items in the price com-

A-gasoline 32%

position that changed were margins,

Taxes 37%

which fell 1 percentage point, and “A” gasoline, down by 4 percentage points

Source: Fecombustíveis

on the same comparison basis.

The distribution and resale chain

was unable to absorb the double effect

of higher taxes and the 6% gasoline pri-

ce hike practiced by Brazilian refineries.

3.5

3.9 AVERAGE UPSTREAM AND DOWNSTREAM PRICES (In R$/L) Refining

3.8

Distribution

Retail

Anhydrous (SP)

3.1 Average prices applied by distributors 2.8

in 2015 increased 12.7% compared2.4to 2.1

Another factor that contributed

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

distribution level.

Mar-14

point below the increase imposed at the

1.0 Jan-14

1.4 also rose, but still was 0.3 percentage

May-14

2014. At the fuel pump, average prices 1.7

Note: The average refining price does not include ICMS Source: ANP

to the surge of the average price at

the pump was the change in the price of anhydrous ethanol, because “C” ga-

soline is mixed with the biofuel (27%

3.10 AVERAGE RETAIL MARGIN 16%

15.5%

ethanol blend). Considering the mon15.0% 14.5%

thly average prices between October 14.0%

13.5% and December, there was an increase 13.0%

compared to 2014.

24 Annual Fuel Retail Report 2016

Source: ANP

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

with small drop of 0.2 percentage point

12% Mar/14

lers remained virtually stable in 2015,

Jan/14

12.5% of 12%. The average margin of resel-

ICMS With the deepening of the economic crisis, several states have chosen to change the ICMS tax rates on various products and services to increase revenues and, therefore, generate more funds to face expenses. In 2015, three states changed the ICMS rate on gasoline with this goal in mind. The biggest hike was in Minas Gerais, whose rate went from 27% to 29%. In Bahia, the ICMS went from 27% to 28% and in Paraná it was 28% to 29%.

The state of Rio de Janeiro continues to have the highest ICMS rate for gasoline in the country: 31%. In early 2016, several other states also altered their gasoline tax rates.

3.11 state tax

RR

AP

AM

MA

CE

PA

RN PB

PI

PE

AC TO

RO

SE

AL

BA

MT DF GO

31% 29% 28% 27% 25% Source: Fecombustíveis

MG ES

MS SP

RJ

PR

SC RS

Market share With regard to the distributors’ market share, there were no significant changes in consumer preferences. BR remains at the top of the ranking, despite a 0.8 percentage point reduction in its market share. Ipiranga and Raízen remained in second and third places, respectively.

3.12 DISTRIBUTORS MARKET SHARE

28.5% 27.7%

BR

Ipiranga

Raízen Other distributors

20.7% 20.8% 19.5% 19.6%

2014 2015

31.2% 31.9%

Source: ANP

Annual Fuel Retail Report 2016

25

GASOLINE

26 Annual Fuel Retail Report 2016

(In %)

12.5 9.2 6.8

1.9

2015

2014

1.3 1.2 2013

2012

1.9 1.9

2011

2010

1.3 1.3 2009

2.0

2008

2.8

2007

3.6 3.9

2006

2004

2003

2002

4.9

2005

7.3

2001

Last year, as a result of the economic crisis, the number of ANP-accredited laboratories used to monitor fuel quality declined significantly; however, the rate of non-compliance remained within the pattern presented in developed countries. In 2015, non-compliance was 1.9%, a rate 0.7 percentage points higher than in 2014.

It should be remembered that the fuel quality monitoring program is not intended as direct oversight but rather is considered an important tool for the ANP to orient the agency’s enforcement actions. That means that upon learning about the reduction in the number of accredited laboratories, any market player could become less committed to product quality.

As in 2014, the main non-compliance detected by the ANP was with regard to anhydrous ethanol, going from 41% to 50%. Non-conformities related to octane levels also rose in 2015, reaching 22%. For their part, distillation non-compliance decreased by 12 percentage points, and was at 18%, the lowest rate yet recorded.

Petrobras was at the top of the service station non-compliance ranking, with a 3.2% rate; followed by the unbranded stations, with 3.1%. Raízen and Ipiranga presented low rates of non-compliance: 0.9% and 1% respectively.

3.13 NON-COMPLIANCE RATE

2000

Within the standards

Source: ANP

3.14 NON-COMPLIANCE PER BRAND

1.6%

BR

1.5%

Unbranded

1.1%

Alesat Ipiranga Raízen

3.2%

0.4%

3.1% 2.4%

1.0% 2014

0.7% 0.9%

2015

Source: ANP

3.15 NON-COMPLIANCE SPECIFICATION

41%

Anhydrous

Octane level

Distillation

Others

Source: ANP

14%

22%

18% 15% 10%

30% 2014 2015

50%

More space “A” gasoline sales to distributors

year was the entry of new suppliers into

ground in 2015. This means that com-

Trading, an Ipiranga company, 0.25%.

outside the Petrobras system gained panies have sought alternatives to ob-

tain the product at more competitive

conditions in the market since the price of the fossil fuel sold by Petrobras’ refineries was higher than what was being

the market: Tricon, with 0.32%, and Oil

Copape was the only supplier that decreased its supply of “A” gasoline.

3.16 A-GASOLINE SUPPLY BY PETROBRAS

practiced in the international market.

Among the main suppliers of “A”

2013

gasoline, only the Manguinhos and

2014

Riograndense refineries increased deli-

veries in 2015. Another feature of the

2015

99.4% 98.8% 96.1%

Source: ANP

KEEP AN EYE ON… 3 Monitoring of the developments of the regular gasoline additive program, postponed to July 1, 2017;

3 The behavior of “C” gasoline consumption between competitors over the course of the year, given the economic and political crises;

3 Monitoring of the movement of the distributors regarding the importation of A gasoline in view of the product price difference charged

in domestic and international markets and the logistics infrastructure in place to receive imported cargoes.

Annual Fuel Retail Report 2016

27

ETHANOL

Record sales In the Pro-Alcohol Program’s 40th year, the ethanol market had a lot to celebrate. The sales volume of the biofuel in 2015 hit 17.9 million cubic meters, up 37.5% over 2014.

That means the country has never consumed as much ethanol since the advent of the flex-fuel vehicle. By way of comparison, the best period of biofuel consumption in the country was 2009, when it reached 16.5 million cubic meters.

The surprising result is mainly attributable to the increase in the price of gasoline in light of the impacts of federal and state taxes. Early in 2015, the federal government announced a package of measures that raised the PIS/Cofins tax rates for fossil fuels and, on May 1, saw the return of the incurrence of the Cide tax contribution on gasoline sales. In a scenario of economic crisis combined with higher prices, C-gasoline was losing market to ethanol. With high inflation, lower income and risk of unemployment, consumers cut “extra” expenses to try to traverse the critical period by opting for products with prices more suited to their tight household budgets, substituting gasoline with ethanol. The result was higher ethanol sales in almost every

state, including in regions in where the biofuel is less competitive, such as in the North and Northeast.

Also contributing to the record sales was the adoption of public policies by state governments in order to encourage the consumption of the biofuel. The main measure was the change in ICMS rates in Minas Gerais. The Minas Gerais state government not only reduced the ICMS rate for ethanol from 19% to 14%, but also boosted the percentage of this same tax for C-gasoline, which led to a tax difference of 15 percentage points between the two fuels, considered the widest in Brazil. Such incentives led consumers back to the ethanol pump and transformed Minas Gerais into one of the Southeast region’s ethanol sale highlights in 2015.

Another measure that favored the productive sector, long awaited by the sugar-energy sector and satisfied by the federal government in 2015, was

In 2015, ethanol was the major highlight in sales, growing 37.5% compared to 2014

4.1 SALES (In billions of R$)

2014 2015

26.9 39.8

Growth of

48%

Source: Fecombustíveis

Annual Fuel Retail Report 2016

29

ETHANOL

4.2 TAX REVENUES In billions of R$

ICMS 2014

4.3 6.5

2015

Source: Fecombustíveis

4.3 RETAIL SALES VOLUME In millions of m3

17.9 13.0

2014

2015

Source: ANP

the increase in the blend of anhydrous ethanol with gasoline, which rose from 25% to 27%, beginning on March 16.

The decision came after pressure exerted by the sugar-energy producers, who have been battling a financial crisis since 2008; they saw the increased percentage of ethanol in the blend as a way to guarantee the sale of a portion of their production.

With the significant sales volume posted in 2015, the R$ 39.8 billion earned represented an increase of 48% over 2014.

Ethanol sales also generated a 52% increase in tax collections in 2015 in comparison to 2014, reaching R$ 6.5 30 Annual Fuel Retail Report 2016

billion, representing R$ 2.2 billion more just in ICMS revenues (in view of the fact that the sector has been exempt from PIS/Cofins since 2013).

Despite the good news, the sugar-energy sector still faces uncertainty that has put a check on the possible expansion of the biofuel’s share of the Brazilian fuel matrix. This is because the industry’s problems remain the same. There is still no long-term policy to assure the predictability of investments. The fuel market needs stable and predictable rules to develop. Some factors, such as no gasoline price subsidies and a stable fiscal policy over time (Cide, PIS/Cofins and ICMS), are important elements to ensure that the ethanol-producing sector continues to invest in productivity through the introduction of enhanced sugarcane varieties.

Another issue that remains is sugar mill indebtedness. In 2015, average commercial debt in the sugar-ethanol sector continued rising. The situation is delicate and does not exclude the possibility that more mills will enter judicial reorganization or shut down operations in 2016. Weather conditions also have influenced the industry. In 2015, excessive rainfall due to the El Niño weather phenomenon interfered with the sugarcane-crushing timetable, leading to higher production costs.

4.4 state tax

RR

AP

AM

MA

CE

PA

PE

AC TO

RO

SE BA

MT DF

27% 26% 25% 24% 22% 19% 18% 14% 12%

RN PB

PI

GO MG ES

MS SP

RJ

PR

SC RS

Source: FecombustĂ­veis

AL

In Minas Gerais, the ICMS rate fell from 19% to 14%. With the change, the state featured the second lowest rate in the country

Exports on the rise After registering a decline in the volume of Imported ethanol volumes also rose, ethanol exported in 2014, in 2015 the biofuel’s ex- registering an increase of 17.8% in 2015 in ports once again were on the rise. Last year, the ex- comparison with the previous year. Imports ported volume reached 1.78 million 4.5 EXTERNAL MARKET totaled 530,000 cubic meters, cubic meters, an increase of 28.1% In millions of m compared with 450,000 cubic in comparison with the previous meters that were imported in 2015 0.53 year. The result can be justified, in 2014. In this case, the larger part, by the adoption of a low carbon volume was due to a drought 2014 0.45 fuel program in California (United in the Northeast, which imStates). In addition, also driving hipacted the production of etha2015 1.78 gher exports was the recovery of the nol in this region as well as the 2014 1.39 dollar against the Brazilian real, geheating up of consumption in Source: MME nerating more revenues. the country.

EXPORTS

IMPORTS

3

Annual Fuel Retail Report 2016

31

ETHANOL

More hydrous With a positive 2015/2016 crop year for the sugar-energy sector — some Center-South region mills saw sugarcane crushing operations extending beyond the end of 2015 — and with the scenario not so attractive for sugar production, producers maintained their ethanol output. As a result, the production mix earmarked for ethanol represented 58.7% of the total.

In 2015, ethanol fuel production totaled 30 million cubic meters, an increase of 7.1% in comparison with the previous year. Of this, 18.7 million cubic meters of hydrous ethanol were produced, 14.7% more than in 2014. The result was a clear and rapid response to changing consumer market conditions due to the increase in gas prices. The same effect was not felt in the anhydrous ethanol market, where production declined by 3.4% compared to 2014, due to the lower consumption of regular gasoline. The decrease only was not greater due to the authorization of a higher blend of anhydrous ethanol with regular gas, going from 25% to 27%.

Among the producing states, São Paulo was responsible for most production: 46.7% was intended for hydrous and 45.9% for anhydrous ethanol. Besides São Paulo, the states with the most ethanol production in 2015 were Goiás, Minas Gerais, Mato Grosso do Sul, Paraná and Mato Grosso.

32 Annual Fuel Retail Report 2016

4.6 ETHANOL FUEL PRODUCTION In millions of m3

11.7

Anhydrous

2014

11.3

2015

16.3

Hydrous

18.7

Source: MME

4.7 ETHANOL FUEL PRODUCTION BY STATE ANHYDROUS

Others

23.6% SP

45.9%

MS

8.1% MG

10.4%

GO

12.0% HYDROUS

Others

20.7% SP

46.7%

MS

9.0% MG

9.6%

GO

14.0% Source: ANP

4.8 DESTINATION OF SUGARCANE FOR ETHANOL IN THE CENTER-SOUTH 2015

58.7%

2014

56.8%

Source: Cepea/Esalq

Branded service stations In 2015, brand linked or branded service stations that sold hydrous ethanol accounted for 61.8% of the total, up 1.9 percentage point over 2014. Unbranded stations saw a drop in share over the same period, from 40.1% to 38.2%. With regard to the market share of the distributors, 40.9% of

the total is dispersed, divided between regional distributors. The Big Three distributors concentrated 59.2% of total market share.

Raízen was the only one that expanded its share of hydrous ethanol market sales, rising from 19% to 19.5%. BR Distribuidora and Ipiranga remained stable.

The three large

4.9 SALES BY TYPE OF SERVICE STATION 2014

distributors

unbranded

40.1%

have 59.2%

branded

59.9%

of the ethanol

2015

unbranded

38.2%

market branded

61.8%

Source: ANP

4.10 DISTRIBUTORS’ MARKET SHARE BR

20.4% 20.4%

Ipiranga

19.1% 19.3%

Raízen

19.0% 19.5%

Other distributors

2014 2015

41.6% 40.9%

Source: ANP

Annual Fuel Retail Report 2016

33

ETHANOL

Escalation of prices The price variation is another factor that influences the competitiveness of ethanol. The increased consumption of biofuel was due mainly to relatively low prices until the end of September. Prices rose as of early October, reflecting the view that consumption would have to adapt to supply until the beginning of the next harvest in April 2016.

The hike in the price of gasoline by Petrobras’ refineries in September had a limited impact on the competitiveness of ethanol, since it coincided with the product’s own increase in price due to the adjustment required between supply and demand.

Significant highs were seen in the last quarter of the year. The average price of hydrous ethanol in São Paulo in 2015, excluding taxes, was R$ 1.362 per liter, a change of more than 7.9% in comparison to 2014. The average

4.11 PRICE BREAKDOWN

Freight 2%

Margins 21% Taxes 16% Plant 61%

Source: Fecombustíveis

annual price of anhydrous ethanol in São Paulo, also excluding taxes, surged 8.4%, to R$ 1.531 per liter. It is worth noting that the price of anhydrous ethanol reached its peak in November: R$ 1.969 per liter.

Resale and distribution were affected by these increases. As a result, the average annual prices of distribution and resale posted increases of 6.4% and 7.9%, respectively. Monthly resale margins varied throughout the year, going into decline as of September 2015.

4.12 AVERAGE RETAIL MARGIN 20% 19,0% 18,0% 17,0% 16,0% 15,0%

Source: ANP

34 Annual Fuel Retail Report 2016

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

12%

Mar/14

13,0%

Jan/14

14,0%

4.13 AVERAGE PRICE OF ANHYDROUS ETHANOL AT THE PLANT In R$/L

2,4 São Paulo

Alagoas

Goiás

2,1 1,7

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

Mar/14

1,0

Jan/14

1,4

Source: Cepea/Esalq

4.14 AVERAGE PRICE OF HYDROUS ETHANOL AT THE PLANT In R$/L

1,9 São Paulo

Alagoas

Goiás

1,7

1,4

1,2

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

Mar/14

Jan/14

0,9

Source: Cepea/Esalq

Hydrous ethanol prices recorded significant increases in the last quarter of the year. The average price of the product in São Paulo, in 2015, totaled R$ 1.362 per liter, a 7.9% change compared to 2014

4.15 DOWNSTREAM AVERAGE PRICES In R$/L

2,8

Distributors

Service Stations

2,4 2,1 1,7

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

Mar/14

1,0 Jan/14

1,4

Source: ANP

Annual Fuel Retail Report 2016

35

ETHANOL

Low parity The price relationship between the hydrous ethanol and gasoline was favorable in four producer states until October: Goiás, Mato Grosso, Paraná and São Paulo.

Minas Gerais was one of the highlights in terms of last year’s sales, due to the reduction in the ICMS tax rate incurring on ethanol. Thus, this tax benefit allowed the biofuel to remain competitive with gasoline from April to October.

Particularly notable was the permanence of the level of consumption of hydrous ethanol, which had been expected to decline more after September.

This behavior has been attributed to the “income effect,” i.e., the economic crisis is so severe that consumers continued to choose hydrous ethanol, even when it was less competitive than gasoline in the final months of 2015, because it was easier on the pocketbook at the moment of purchase at the pump.

4.16 PRICE PARITY BETWEEN GASOLINE AND ETHANOL

Acre Alagoas Amapá Amazonas Bahia Ceará Distrito Federal Espírito Santo Goiás Maranhão Mato Grosso Mato Grosso do Sul Minas Gerais Pará Paraíba Paraná Pernambuco Piauí Rio de Janeiro Rio Grande do Norte Rio Grande do Sul Rondônia Roraima Santa Catarina São Paulo Sergipe Tocantins Source: Estimate by Fecombustíveis based on ANP data Note: Ethanol is more advantageous when its price represents up to 70% of the price of gasoline Advantageous to consume ethanol.

36 Annual Fuel Retail Report 2016

December

November

October

September

August

July

June

May

April

March

February

January

December

November

October

September

2015

August

July

June

May

April

March

February

UF

January

2014

Stability In %

12.6 9.6 6.5 3.1

fell five percentage points, from

2007

2006

2005

2003

2004

2002

from 55% to 59%. Conductivity

2001

ethanol sold in the country, rising

2000

covered non-compliance issue for

2.3 1.7 2.2 2.5 2.1 1.6 1.6 1.5 2015

3.8

2013

has continued to be the most dis-

2014

7.4

7.3

2012

the last two years. Alcohol content

10.3

2011

the biofuel has stayed the same in

2010

The quality standard indicator for

2009

mained stable — 1.5% — in 2015.

4.17 NON-COMPLIANCE RATE

2008

The non-compliance rate re-

Source: ANP

20% to 15%.

The ANP implemented chan-

ges in ethanol specifications in 2015, designed to improve product

quality issues. Conductivity was

one of them. Pursuant to Resolu-

4.18 NON-COMPLIANCE SPECIFICATION

Conductivity

tion 19/2015, the acceptable etha-

nol conductivity limit sold in the country was set at 300 µS/m as of

July 1, 2015. Previously, the allo-

wed limit was 389 µS/m. Fecom-

55% 59%

Alcohol content

pH

Others

20% 15% 12% 8%

2014

14% 18%

2015

Source: ANP

bustíveis and the distribution sector were against the change in the

tolerance index because it could provoke variations in the product if stored for too long. Regarding

non-compliance by brand, unbranded service stations represented the highest percentage of cases, with

3.9%; they were followed by Alesat (3.6%), Ipiranga (1.9%); Petrobras (1.7%) and Raízen (1.4%).

4.19 NON-COMPLIANCE PER BRAND Petrobras Unbranded Alesat Ipiranga Raízen

1.3% 1.7% 2.0%

3.9%

1.3%

3.6%

1.3% 1.9% 1.0% 1.4%

2014 2015

Source: ANP

Annual Fuel Retail Report 2016

37

diesel

Mirroring the GDP In 2015, the diesel market in Brazil shrank, reflecting the decline in the GDP. According to data released by the ANP, the consumption of diesel fuel totaled 57.2 million cubic meters, an amount that was 4.7% lower than that reported in 2014, when 60 million cubic meters were sold.

Sales of diesel fuel by segment reflected the reduced consumption at the service stations, which registered a 3.3% drop; at the TRRs. the decline was 4%; and end consumers, there was a reduction of 7.7%.

Despite the reduction in consumption, 2015 saw an increase of 8% in revenues compared to 2014, reaching R$ 164.2 billion, due to the adjustments in PIS/Cofins taxes and the return of the Cide tax on fossil fuels, along with the readjustments in diesel prices up and down the fuel chain. In September 2015, Petrobras announced a 4% modification in the price of diesel fuel at its refineries.

Sales of S10 (low sulfur) diesel rose 8% in 2015 compared to 2014, from 14.6 million cubic meters to 15.9 million cubic meters. Also last year, the share of S10 diesel sales in the total diesel market grew to 29.1%. The entry into operation of part of the Rnest refinery in Pernambuco accounted for

47% of the increase in S10 diesel in 2015. The ANP’s projection is that by 2020, half of the diesel fuel consumed in the country will be S10.

The share of service stations that resell the product increased 14% in 2015 compared to 2014, and the number of retailers who voluntarily market it rose 17%. In 2014, 21,580 service stations were selling S10, 4,740 for compulsory reasons and 16,840 doing so voluntarily. In 2015, the number of retailers who were selling S10 totaled 24,557, of which 4,859 were mandated and 19,698 that did so voluntarily. This higher adherence of retailers was due to several reasons, from the prospect of an increase in new customers (such as SUVs and other vehicles that require a cleaner product that leads to improved performance) to the expectation of a renewal of the country’s diesel fleet, which would lead to much greater demand for S10.

In September 2015, Petrobras announced an adjustment of 4% for the price of diesel fuel at its refineries

5.1 sales (In billions of R$)

2014 2015

152.6 164.2

Growth of

8%

Source: Fecombustíveis

Annual Fuel Retail Report 2016

39

diesel

The main resellers of the product are the service station retailers, with 58.1% of the total; TRRs represent 13%; and end-use consumers (Points-of-Supply and large consumers), which are at 28.9%. Service stations showed a slight increase compared to 2014 and the TRRs remained at the same level, while

large consumers purchased less diesel fuel. The explanation for this is both the decline in the level of economic activity of truck cargo companies, as well as the reduction in the number of agents in the segment. Comparing 2014 and 2015, the ANP reported the closure of 61 Points-of-Supply.

5.4 S10 SALES BY Service stations

5.2 SALES BREAKDOWN

BY SEGMENT

In units Total (millions of m3): 60 End Consumer

Total: 21,580

Service station

Voluntary

57.3%

29.8%

16,840

Mandatory

4,740

TRR

12.9%

2014

2014

Total (millions of m3): 57,2 End Consumer

29%

58.1%

Voluntary

19,698

Mandatory

4,859

TRR

13%

Total: 24,557

Service station

2015

2015

Source: ANP

Source: ANP

5.3 SALES BY TYPE OF SERVICE STATION

5.5 BREAKDOWN OF SALES BY TYPE OF DIESEL S500

branded

72.3%

unbranded

27.7%

72.9%

S10

25.8% Marine

1.3%

2014

2014

S10

29.1%

branded

73.6%

unbranded

26.4% Source: ANP

40 Annual Fuel Retail Report 2016

2015

S500

67.9%

Marine

1.5%

Non-highway

1.5%

Source: ANP

2015

Taxes With the package of fiscal measures announced in early 2015 by the federal government, there were adjustments to the PIS/ Cofins rates, on February 1 and from May 1, and the Cide taxes once again were applied to diesel sales. The result was a 26% increase in tax revenues in 2015 to R$ 37.9 billion, compared to 2014 when tax revenues were R$ 30 billion.

Another factor influencing the tax collections on diesel oil came was the PMPF, based on the ICMS tax base, which was separated by product with different rates for S500 diesel and S10 diesel beginning in August 2015.

Last year, in the state of Mato Grosso, the ICMS rate was changed from 17% to 12% effective July 1. The other states maintained the same rates as 2014, with the lower rate of 12% in the states of São Paulo, Paraná, Santa Catarina, Rio Grande do Sul, Espírito Santo and the Federal District. In 2016, ten states increased their VAT rates.

5.6 state tax RR

AP

AM

MA

CE

PA

PE

AC TO

RO

RN PB

PI

SE

AL

BA

MT DF GO

17% 15% 13% 12%

MG ES

MS SP

RJ

PR

SC

Source: Fecombustíveis RS

5.7 TAX REVENUES In billions of R$ ICMS

21.7 PIS/Cofins

8.4

Total: 30.0

2014

ICMS

PIS/Cofins

22.7

13.4 Cide

1.8

Total: 37.9

2015

Source: Fecombustíveis

Market share BR Distribuidora continues ahead of the other competitors, but lost 1.3 percentage point in 2015 compared to 2014. In the same period, Ipiranga and Raízen saw a slight increase in market share of 0.6 percentage point and 0.7 percentage point, respectively.

5.8 DISTRIBUTORS’ MARKET SHARE 38.5% 37.2%

BR

Ipiranga

Raízen Other distributors

22.2% 22.9% 18.4% 19.0% 21.0% 20.9%

2014 2015

Source: ANP

Annual Fuel Retail Report 2016

41

diesel

International trade Imports of diesel fuel, 11.3 million cubic meters in 2014, fell to 6.9 million cubic meters in 2015, which represents a fall of 38% during the period.

Even with the reduction in imports, the price of crude oil in the United States dropped significantly in the closing months of 2015, which impacted the price drop in the price of imported diesel from in relation to domestically produced diesel. This opened a window of opportunity for diesel imports by distributors, whose price in the international market more than compensated than buying from Petrobras, which maintained prices high in an attempt to contribute to a recovery in its cash position.

The ANP reported five new registered import registration applications in 2015. To get an idea, in January 2014, the price of diesel in the U.S. was US$ 0.7581 per liter, while in Brazil, the price was US$ 0.6518 per liter, a difference of 14% for the domestic product. In December 2015, the price in the U.S. was US$ 0.2561 per liter and, in Brazil, it was US$ 0.4311 per liter, that is, the price was 68% higher in the Brazilian domestic market.

Even though diesel imports were advantageous in the closing months of 2015 it cannot be said that this was a market trend, or that new fuel importers emerged in Brazil, in addition to Petrobras. This is because to become an importer, large investments are needed in infrastructure and, therefore, companies need to be confident that international prices will remain at a favorable level over a long period. In addition, in Brazil there are many bottlenecks to the increase of imports, including the lack of sufficient port infrastructure, and Petrobras’ market dominance in the distribution segment and the impact of the U.S. dollar exchange rate.

In any event, Petrobras continues to make the bulk of imports to the domestic market and accounts for almost all of the country’s refining capacity, allowing its pricing policy to set domestic fuel prices and, consequently, refining profitability margins.

5.10 MISMATCH BETWEEN BRAZILIAN AND U.S. DIESEL PRICES 70%

5.9 IMPORTS

Source: ANP

42 Annual Fuel Retail Report 2016

Source: FecombustĂ­veis Note: Price of the product at the refinery excluding taxes

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

6.9

-20%

Mai/14

2015

11.3

Mar/14

2014

Jan/14

In millions of m3

Prices 5.11 PRICE BREAKDOWN

Freight 2% Biodiesel 5% Margins 14% Taxes 24% Diesel 55%

Source: FecombustĂ­veis

5.12 AVERAGE UPSTREAM AND DOWNSTREAM PRICES In R$/L

3.5

Refining

3,1

Distribution

Retail

B100

2,8 2,4 2,1 1,7

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

1.0

Mar/14

1,4 Jan/14

Note: The average refining price does not include the ICMS tax Source: ANP

5.13 AVERAGE RETAIL MARGIN

15% 14% 13% 12% 11% 10% Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

Mar/14

9% Jan/14

There was no change in the percent share of some components in the composition of the price of diesel. The tax burden increased and rose to 24% in 2015 compared with 2014. And the price of biodiesel rose from 4% to 5%. The share of diesel fuel and the margins for the agents in the industry fell. Freight costs remained unchanged in 2015.

In the downstream segments, the annual average price of diesel practiced by retailers increased by 12.5%, and by distributors rose 13.4% in 2015 during 2014. Over the past year, average resale margins suffered fluctuations, but followed a downward trend in most months. The annual margin fell from 11.9% in 2014 to 11.3% in 2015.

Source: ANP

Annual Fuel Retail Report 2016

43

diesel

Quality In 2015, the ANP reported an

increase in the diesel non-complian-

5.14 NON-COMPLIANCE RATE In %

6.7 6.5

5.9 4.9

ce rates, which jumped from 2.6% in

3.8

2014 to 3.5% in 2015. It was the hi-

3.4

ghest reported since 2011.

2.6

1.9

2.2

3.6

3.0

2.3

2.7 2.9 2.6

3.5

ting that, in 2010, when the B5 (5% biodiesel mixture in fossil diesel) took

2015

2013

2014

2011

2012

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

was 3.6% - however, it is worth no-

2000

In 2010, the non-compliance rate

Source: ANP

effect, several issues with fuel storage became evident with regard to the

biodiesel mixture, which elevated the non-compliance levels.

In 2015, the main non-confor-

mity found in the samples analyzed

by the Agency was regarding biodiesel content (36%), followed by the

flash point and the quantity of sulfur,

5.15 NON-COMPLIANCE BY BRAND

2.5% 3.5% 2.9%

Petrobras Unbranded

2.0%

Alesat

2.2% 2.6% 2.3% 3.3%

Ipiranga RaĂ­zen

6.6%

4.5% 2014 2015

Source: ANP

each at 21%. There was a reduction in the number of problems related

to appearance (from 33% in 2014 to

7% in 2015) but, on the other hand, there was an increase in terms of the

biodiesel blend (from 21% in 2014 to 36% in 2015). In December of last

year, overall diesel quality showed

improvement. Some 99% of total diesel samples collected through the

ANP’s quality monitoring program were in compliance.

44 Annual Fuel Retail Report 2016

5.16 NON-COMPLIANCE SPECIFICATION

13%

Sulfur Aspect Dye

33%

7%

3% 4%

Flash Point Biodiesel Content Others Source: ANP

21%

21% 21% 4%

11%

27%

2014

36% 2015

Consumption of Arla 32 not commensurate with diesel Since the implementation of the P7 stage of Proconve, all vehicles equi-

pped with Euro 5 engines must use S10 diesel and use Arla 32. However, there are some variables: the drivers who skip Arla 32 consumption. Many

vehicles that do not have the Euro 5 technology refuel with S10 and the other group of those who should use S10 continue to use S500 diesel. The

fact is that the consumption of Arla is far short of the sales of S10 diesel. In 2014, the so-called informal market for Arla 32 corresponded to 30% of the volume of diesel fuel; in 2015, the informal market was 50%.

To avoid the use of the product, drivers resort to the use of contrivances,

such as homemade solutions of water with urea added, pure water, “bapti-

zed” Arla 32 (that is, with water added), electronic chips that circumvent the self-diagnosis system of OBD vehicles, or even skip the use of the product

altogether. All these activities are harmful to the performance of the vehi-

cles, in addition to causing pollution (without Arla, toxic gases are released).

Therefore, the failure to use the proper product, or circumvent the system of the vehicle, is considered a crime against the environment, liable to punishment by environmental agencies and Ibama.

KEEP AN EYE ON… 3 Marine diesel will soon be regulated and will have a blend of up to 7% biodiesel.

Only emergency diesel will be exempted; 3 The market is expected to start discussing a new tax framework for Arla 32, giving the product the same taxation as urea used for agricultural purposes, in order to eliminate the advantages of unlawful use;

3 The vote on the proposed legislation on the use of diesel for light vehicles is in process; 3 The forecast is for increased consumption of low sulfur diesel fuel; 3 The production of diesel from pre-salt sources.

Annual Fuel Retail Report 2016

45

biodiesel

Growing Despite the decline in the sales of diesel fuel (see more in the chapter on Diesel), biodiesel fuel grew 17.4% in 2015, from 3.4 million cubic meters in 2014 to 4 million cubic meters last year.

This was due to the increase in the biofuel content in the mixture with fossil diesel, in 2014. That year, on July 1, the mix was increased from 5% (B5) to 6% (B6) and then on November 1, to 7% (B7). So, over 2015 diesel was rated B7, which explains the increase in demand for biodiesel.

However, despite these positive results, biodiesel producers were not satisfied, since the drop in consumption of diesel ended up thwarting the expectations for leveraging biofuel sales. The industry had hoped that sales of biodiesel would reach 4.3 million cubic meters, but that did not occur. According to data from the Ministry of Mines and Energy (MME), excess capacity in 2014 was 54% and in 2015 it fell to 46%, as a function of the increase of the mixture to 7%. The ratio of installed capacity to production improved. In 2014, while installed capacity was 7.5 million cubic meters and production was 3.4 million cubic meters, in 2015, capacity declined slightly to 7.2 million cubic meters; and production rose to 3.9 million cubic meters, reducing the excess capacity index.

The auctions held during the year reflected this excess capacity. In early 2015, between January and February, the volume sold at the B100 auction was 667,876 6.1 PRODUCTION X INSTALLED CAPACITY (1.000 m3) Production Installed capacity

6,019

5,256

2,661

2,350

2010

7,504

6,853

2,930

2,708

2011

2012

7,502

3,414

2013

7,263

3,937

2014

2015

Source: ANP

6.2 B100 AUCTION RESULTS Mix Percentage

Period Jan to Feb/14 Mar to Apr/14 May to Jun/14 Jul to Aug/14 Sep to Oct/14 Nov to Dec/14 Jan to Feb/15 Mar to Apr/15 May to Jun/15 Jul to Aug/15 Sep to Oct/15 Nov to Dec/15

5% 5% 5% 6% 6% 7% 7% 7% 7% 7% 7% 7%

Average price

Volume Sold

2.090,45 1.965,37 1.880,25 1.884,15 1.913,71 2.100,38 2.194,47 1.975,15 2.021,78 2.171,77 2.162,46 2.406,20

485.636 549.666 463.870 638.455 625.732 701.414 667.876 699.354 671.288 661.545 696.852 657.752

(R$/m3)

(m3)

Source: ANP Note: The average price of each period is the weighted average of prices and volumes involved in each lot of the auction.

6.3 B100 REGIONAL INFORMATION Region

No. of Plants

Dist. Of inst. Cap. (mil m3)

(mil m3)

Auction average price

Vol. sold in auctions

(R$/m3)

North Northeast Center-West Southeast South

3 4 21 9 13

3% 7% 39% 13% 38%

77 340 1.789 301 1.548

2.303,39 2.406,98 2.138,47 2.212,02 2.095,63

BRAZIL

50

7.263

4.055

2.153,19

Source: MME e ANP

Annual Fuel Retail Report 2016

47

biodiesel

cubic meters. At the next auction, this volume increased to almost 700,000 cubic meters, but then fell again at the end of the year (November and December) to 657,752 cubic meters.

The average price of biodiesel sold at the auctions also increased. In January and February 2015, the price was R$ 2,194.47 per cubic meter, while in the same period of the previous year (when B5 was still in effect), the price was R$ 2,090.45 per cubic meter. At the end of 2015, between November and December, the price was R$ 2,406.20 per cubic meter, compared to R$ 2,100.38 per cubic meter in the same period last year (when the mix was 7%).

Although the price of the product is higher than that of fossil diesel, the environmental gains and less reliance on imports, in theory,

should compensate in the equation. However, the big problem with this segment is that the basic assumptions — that it is based on family agriculture, employment, income generation and social inclusion – are not being confirmed. Despite having been in existence for more than a decade, 25% the producers still have not qualified for the Social Fuel Seal. The National Plan for the Production and Use of Biodiesel has a major issue that remains to be resolved, which is the insertion of family agriculture in the North and Northeast of Brazil. Through the end of 2015, there were 50 plants authorized to produce and market biofuels for public auctions. Of this total, 42 plants (76%) had the Social Fuel Seal and, together, they accounted for 92% of the production capacity and 99% of the production of biodiesel.

Boost in content Forecasts indicate that the market for diesel will not improve in 2016, as a function of the country’s poor economic performance. Even so, according to statistics from the MME, the deficit between demand and supply of fossil diesel fuel in Brazil should be on the order of 10 million cubic meters to 12 million cubic meters through 2024, which represents a growth opportunity for biodiesel. That is, the prospect of growth in the segment must necessarily be accompanied by an increase in the content of the mixture. The productive sector must manage to obtain approval of a further gradual increase of biodiesel in the diesel mixture by the Federal Government in March 2016, which will increase from the cur48

Annual Fuel Retail Report 2016

rent 7% to 8% by 2017, with an increase of 1 percentage point per year until reaching 10% in 2019. In addition to the approval of the increase in the mixture, there are several challenges that still need to be overcome, such as logistics (since, despite the fact that the increase in the biodiesel content displaces a like amount of diesel, the biodiesel is delivered by Petrobras to distributors via pipelines and the biofuel arrives by truck), and tax and quality assurance issues for B diesel with a higher percentage of biodiesel content.

Furthermore, the discussions cover markets for soybean by-products and also the prospects for the introduction of new raw materials, as well as the effects of new content on air quality.

Authorized use Authorized biodiesel (the use of biodiesel blends between 20% and 30% for fleet vehicles, railway companies and industrial and/or agricultural activities), mandated on November 12, 2015 by MME Decree 516, was the subject of controversy on the part of the segments involved. This issue concerns the resale of fuels, such as through Sindicom, which represents the principal fuel distribution companies that are responsible for the mix and who fear the possibility of using the authorization as a loophole for fraud, which could create problems in competition. The measure may also lead to a decline in the collection of state ICMS taxes and Federal taxes, such as Cide and PIS/Cofins. In the opinion of the organization, there is a risk of loss of revenues to the states, because biodiesel is taxed at lower rates than diesel. However, despite all the concerns, no authorized diesel had been purchased at auction up to early March 2016, according to figures released by the ANP. Despite the use of authorized B20 or B30 diesel, increases of more than 7% in content is still viewed with reservations by the automobile industry, which is based on an international recommendation (Worldwide Fuel Charter) that ensures the safety of the use up to B7 and recommends testing to approve concentrations above this percentage. That doesn’t mean that higher concentrations will necessarily lead to engine problems, but that before they can be used, field-testing should be carried out to ensure safety. The main concern in Brazil is the fact that a large portion of the truck fleet is old and the

manufacturers claim that some parts might deteriorate after prolonged contact with biodiesel.

In fact, the risk of deterioration of the product in the vehicle is precisely the reason why diesel for use in waterborne craft, unlike on shore, has not yet been agreed upon with regard to biodiesel.

Since, for example, in many situations, the fuel might remain in the tank for long periods (if the vessels are used sporadically for with recreational purposes), there is a risk of the formation of microorganisms and the loss of the biofuel’s characteristics. This issue is the subject of international standard ISO 8217, which stipulates that fuel used in boats should be free of bio-derivatives.

It is worth noting, however, that this standard is being reviewed and some countries have already positioned themselves in favor of the addition of up to 7% biodiesel in diesel fuel. For this reason, the ANP is also reviewing the current guidelines and outlook is that only diesel fuel for emergencies should remain without the biodiesel additive.

The marine diesel market represents only 1.5% of diesel sales in Brazil. According to the ANP, only 129 service stations are registered with the agency for selling marine diesel, plus another 58 floating stations.

Another situation that raises concerns on the part of automakers is called the “first fueling” of new vehicles. Since they tend to remain idle for long periods, waiting for assembly or even to be sold, the risk of changes in the characteristics of the fuel is very high. This situation is even worse with the economic crisis due to the sharp drop in sales.

Annual Fuel Retail Report 2016

49

biodiesel

Raw materials The specifications 6.4 RAW MATERIALS USED IN B100 PRODUCTION for biodiesel in Brazil 74.7% Soy oil are very rigorous. The 77.4% ANP has set up a se20.4% Beef fat 18.5% ries of regulations to 2.3% minimize potential for Cotton oil 2.0% problems arising from 2014 2.6% Others the formation of micro2015 2.1% organisms. In addition Source: ANP to the reduction of the water content, which currently has a maximum value of 350 ppm at the distributor (and up to 200 ppm at the producer), the raw materials used are also being more carefully monitored (77.4% come from soybeans and 18.5% from beef tallow. In 2014, soybeans accounted for 74.7% and tallow, for 20.4%).

In the Southeast, the share of animal fat was an important factor throughout the year. One of the peaks in the use of this raw material occurred in November 2015, when it was 60% of the total, although in the following month it fell to 40%, when the use of soybean oil was most prevalent in December.

Monitoring The ANP reduced its monitoring activities of biodiesel-producing units drastically in 2015. Five units were audited of which 80% were fined because the sales/storage of the product was not in compliance with the specifications. The other producing units, 20% of the total, were fined for failing to comply with notifications.

50

Annual Fuel Retail Report 2016

6.5 RANKING OF INFRACTIONS IN BIODIESEL PRODUCTION

01

Sell/store product that does not comply with specification

02

Failure to comply with notification

Source: ANP

80% 20%

Market share The biodiesel market is notable for many small producers, which account for more than half the market. Last year, small producers increased their share of the sector from 52.2% to 53.8% between 2014 and 2015. In the ranking of large companies that operate

in the segment, all maintained their positions.

Granol holds the lead, but lost 2 percentage points from 2014 to 2015, falling to 11.7% of the total. The only company that rose slightly was BSBIOS, from 8.7% in 2014 to 9.5% of the total in 2015.

6.6 PRODUCER MARKET SHARE Caramuru

8.0% 7.6%

Petrobras BiocombustĂ­vel

7.9% 7.8%

BSBIOS

8.7% 9.5%

Oleoplan

9.5% 9.5%

Granol

More than 50% of the total sector is comprised of small

2014 2015

biodiesel producers

13.7% 11.7% 52.2% 53.8%

Other producers Source: ANP

Fique de olho 3 Agents must be ready for the increase in the blend to 8% in March 2017. The change in the content is linked to a series of tests and trials that will validate the use of the mixture. The deadline for completion of these tests is up to 36 months after the date of approval of the law, which took place in March 2016; 3 In 2016, there may be new regulations for marine diesel, which, in principle, will contain a mix of 7% biodiesel. There will only be an exception for emergency diesel fuel; 3 The ANP will also regulate the rules for the BX mix (analyzing the impact and the results of the B8 to B20 mixtures), with the revision of Resolution 2/2011.

Annual Fuel Retail Report 2016

51

CNG

Declining CNG (compressed natural gas) con- crease in several sectors — industrial (1.2%), sumption decreased 2.8%, from 4.9 million residential (0.41%) and commercial (2.9%). cubic meters per day in 2014 to 4.8 million Meanwhile, according to Abegás, electricity cubic meters per day in 2015. However, late generation fell 1.6%. last year, the CNG market showed signs of It is noteworthy that the industrial sector recovery. With garegistered a decrease 7.1 NATURAL GAS SALES BY soline and ethanol STATE CONCESSIONAIRES of 12.2% in December (In 1.000 m /day) price increases, con2015 compared to the 2014 2015 sumers have come to same period last year.

Automotive 4.961 4.820 view CNG as a new Industrial Moreover, contributing 28.467 28.816 965 969 option. In December, Residential to the improved perforCommercial 769 791 fuel sales grew 3.3% Electricity Generation mance of the industrial 33.410 32.881 compared to Novem- Cogeneration sector over the course of 2.570 2.501 Others 6.975 6.418 ber, with a notable the year was the incluTotal 78.117 77.197 recovery in Brazil’s Source: Abegás sion of the volume sold South region, whiby Copergás to RNEST, ch saw an increase of 8.4%; the Northeast, following the conclusion of negotiations and 5.6%; and the Southeast, 2%. signing of an agreement with Petrobras.

Similar to the CNG segment, natural gas Due to the slowdown of the national ecosales also decreased by 1% to 78.1 million cubic nomy, lower demand for electricity from thermeters per day in 2014 to 77.1 million cubic mal generation was also reflected in the reducmeters per day in 2015. Consumption did in- tion of natural gas consumption.

3

Environmental impact Despite being a fossil fuel, CNG is less harmful to the environment. According to Cetesb-approved testing, it emits, on average, 15% less CO2 compared to ethanol and 20% less compared to gasoline.

Support for the environment will be given a boost if draft legislation pending before the Legislative Assembly of São Paulo is approved. Bill 187/2015, sponsored by Deputy Carlos Giannazi (Socialism and Liberty Party-PSOL), allows for a 75% discount to be granted on the payment of the motor-vehicle ownership tax (IPVA) to those who opt to convert to CNG, provided that it is combined with another fuel in dual-fuel model.

Annual Fuel Retail Report 2016

53

CNG

Conversions

Incentive campaigns

The number of vehicles converted to CNG use decreased from 23,849 in 2014 to 22,869 in 2015, down 4%.

In this regard, as it is the consumer who must bear the cost to install the conversion kits, the decline is not surprising, especially during a period of economic crisis, which has accentuated the general public’s loss of purchasing power.

The investment pays off for those traveling an average of 2,500 km per month (or 100 km per day).

Although more modern kits, which are safer and feature more advanced technology (such as those of the 5th generation), are available in the marketplace, there are few incentives to stimulate their consumption.

Another factor that weighs heavily upon drivers considering the conversion option is the fact that, in some localities, there are relatively few filling stations that sell CNG. For the reseller, the cost reflected in an electric bill to maintain a compressor is quite high if the sales volume is not significant.

Although the overall number of vehicle conversions remains on a downward trend, in São Paulo, Comgás registered 504 vehicle conversions in November alone, which was one of the concessionaire’s best results in recent years. In December, the number of conversions dropped to 444. The distributor set a record in February 2016, with 532 conversions.

To increase conversions in São Paulo, a Comgás campaign offered taxi drivers a R$ 900 bonus as an incentive to convert vehicles with 2,000 km or less on their odometers to CNG. For vehicles over 2,000 km, the bonus was R$ 700.

The campaign took place, from October 2015 through February 2016, within the company’s concession area (São Paulo and Campinas metro areas, Alto Tietê, Vale do Paraíba and Baixada Santista).

Similar to the Comgás initiative, Copergás in Pernambuco also sponsored a campaign, in January 2016, to promote CNG use in that state, offering a R$ 1,000 conversion bonus to owners of passenger vehicles.

It’s worth noting that Pernambuco’s ICMS is zero.

7.2 CONVERSIONS In units

23,849

2014 Source: IBP

54

Annual Fuel Retail Report 2016

22,869

2015

Prices

7.4 CNG SAVINGS

Between Petrobras’ September in-

CNG x Gasoline

CNG x Ethanol

-53% -43% -55% -54% -48% -45% -48% -49% -49% -43% -42% -50% -48% -50% -51% -37% -46% -45%

-59% -45% -60% -55% -50% -55% -56% -53% -52% -49% -47% -52% -54% -54% -56% -37% -41% -49%

Espirito Santo

crease in the price of gasoline sold from

Minas Gerais

its refineries and, particularly, the high

Rio de Janeiro

price of hydrous ethanol by the close of

São Paulo Paraná

last year, CNG became somewhat more

Rio Grande do Sul

competitive in relation to its competitors.

Santa Catarina

This was especially evident in six states:

Alagoas

São Paulo, Rio de Janeiro, Espírito Santo,

Bahia

Pernambuco, Sergipe and Amazonas.

Ceará

generates savings equal to or as much

Pernambuco

According to Abegás, use of CNG

Paraíba

Rio Grande do Norte

as 50% more than the use of ethanol in

Sergipe

16 states and the use of gasoline in six.

Amazonas

In the state of Rio de Janeiro,

Goiás

CNG’s competitive advantage genera-

Mato Grosso

ted savings of up to 55% compared to

Mato Grosso do Sul

Source: Abegás Note: Data refers to the second week of November/2015

gasoline and 60% compared to ethanol.

7.5 AVERAGE DOWNSTREAM PRICES In R$/L

7.3 AVERAGE RETAILER MARGIN

2.8

29%

2,5

Distributors

2,3

Service Stations

2,0 1,8 1,5

Source: ANP

Nov/15

Sep/15

Jul/15

May/15

Mar/15

Jan/15

Nov/14

Sep/14

Jul/14

May/14

Mar/14

1.0

Jan/14

Nov/15

Set/15

Jul/15

Mai/15

Mar/15

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

Mar/14

20%

Jan/14

1,3

Source: ANP

Annual Fuel Retail Report 2016

55

CNG

Taxes In 2015, there were no changes to ICMS rates for CNG. In the state of Pernambuco, ICMS was not levied at all. The states of São Paulo, Rio de Janeiro, Bahia, Rio Grande do Norte, Mato Grosso do Sul, Paraná, Santa Catarina and Rio Grande do Sul maintained a low, 12% rate. On the opposite end, the highest percentage charged was 25% in Amazonas and the Federal District.

7.6 State tax RR

AP

AM

MA

CE

PA

TO

SE BA

MT DF GO

0% 25% 18% 17% 12%

MG ES

MS SP

RJ

PR

Source: Fecombustíveis

SC RS

Market share CEG, responsible for gas distribution to 874,000 customers in the Rio de Janeiro metropolitan area, is in first place, accounting for 43% of the total market.

CEG is controlled by Gás Natural Fenosa, which also operates CEG Rio, responsible for the distribution of gas to 56,000 consumers in the interior of the state of Rio de Janeiro, which currently ranks in third place.

Comgás holds the second-largest market share in Brazil’s natural gas distribution network.

56

Annual Fuel Retail Report 2016

PE

AC RO

7.7 CNG MARKET SHARE Other concessionaires

35%

Ceg

43%

Ceg Rio

10%

Comgás

11%

RN PB

PI

Source: ANP

AL

Fewer stations With each passing year, there are more filling stations opting out of the sales of CNG due to low demand and the high costs of maintaining the supply structure.

In 2015, the number of fuel retailers fell to 1,618, representing a 0.8% decline, which was slightly lower than that registered for the previous period (a 2% decline for the 2013-2014).

In terms of the number of filling stations in the several states, Rio de Janeiro remained the growth AC leader, rising from 556 in 2014 to 563 in 2015, which represented a 1% increase. That result was due to incentives offered by the state government, such as a 62.5% IPVA discount, which, in turn, generated increased demand for stations that sell the product.

Alternatively, the largest drop in the number of stations offering CNG was in Minas Gerais, which experienced a 17% decline in 2015 compared to 2014.

7.8 CNG POINT OF SALE OUTLETS BY STATE

RR

AP

2014 = 69 2015 = 71

AM

MA

2014 = 3 2015 = 6

CE

PA

PB

PI

PE

TO

RO

SE

AL

BA

2014 = 2 2015 = 2

MT 2014 = 1 2015 = 3

RN

2014 = 61 2015 = 65

DF

SP

2014 = 31 2015 = 31

ES

2014 = 33 2015 = 34

RJ

PR

2014 = 335 2015 = 317

2014 = 556 2015 = 563

SC RS

2014 = 71 2015 = 71

MG 2014 = 71 2015 = 59

MS

2014 = 38 2015 = 37

2014 = 38 2015 = 38

2014 = 33 2015 = 35

GO 2014 = 2 2015 = 2

2014 = 10 2015 = 9

2014 = 61 2015 = 61

2014 = 136 2015 = 134

2014 = 80 2015 = 80

TOTAL: 2014 = 1,631 2015 = 1,618

Source: Abegรกs

Fique de olho 3 CNG competitiveness in comparison to ethanol and gasoline;

3 Impact of CNG consumer incentive campaigns in Brazilian states;

3 Impact of lower natural gas prices from CEG and CEG Rio, as from May 10, 2016; and 3 Ramifications of ANP Resolution 11/2016, which regulates third-party access to pipelines and strengthens the regulatory framework for natural gas.

Annual Fuel Retail Report 2016

57

LPG

Slowing sales The impact of the economic crisis on the industrial and commercial sectors has affected the LPG segment, which had been recording low, but stable growth in recent years. However, in 2015, segment sales declined by 1.5% compared to 2014, a reflection of low gas consumption for industry and trade. Meanwhile, consumption of 13-kg gas cylinders (P13) remained stable.

In the industrial sector, the decrease in activity reduced consumption of fuel for boilers and forklifts, while service sector decreases were seen in businesses such as restaurants.

Increasing unemployment and income reductions within the general population was reflected in a decline in consumption in this sector.

The drop in sales influenced Petrobras’ decision to adjust prices for 13-kg cylinders and bulk gas, which is sold to industry, commerce and condominiums. In December, another LPG price adjustment was announced for industrial, commercial and bulk sales. The decision of the state-owned firm — which is facing a serious crisis of its own and is in need of raising cash —was reflected throughout the supply chain, causing the product to lose competitiveness against natural gas, its main competitor.

On the other hand, the price adjustment placed downward pressures on total sector revenues, which nevertheless rose 15%, from R$ 27.9 billion in 2014 to R$ 32 billion in 2015.

One of the complaints of sector agents is that LPG continues to remain outside of the

Brazilian energy matrix. This is considered to be an impediment to LPG market growth, which is restricted to the household realm, with little room to grow, as it is already widely in use in Brazilian residences. The main obstacle to LPG consumption growth can be found in Brazilian Law 8.716/1991, which prohibits the product’s use in engines of any kind, as well as saunas, boilers and swimming pool heating, or for automotive purposes.

These restrictions were not expected to be lifted anytime soon.

8.1 CONSUMPTION (In 1,000 tonnes) Total: 7.421

P13

5.260

71%

Others

2.161

29%

2014

Total: 7.309

P13

5.265

Others

2.043

28%

72% 2015

Source: ANP

8.2 SALES (In billions of R$)

2014 2015

27,9 32,0

Growth of

15%

Fonte: Fecombustíveis

Annual Fuel Retail Report 2016

59

LPG

(In R$/L)

nov/15

set/15

Retail

jul/15

mai/15

mar/15

Distribution

nov/14

set/14

jul/14

mai/14

mar/14

15

Production

jan/15

65

jan/14

Source: ANP

8.4 AVERAGE DOWNSTREAM MARGIN

Nov/15

Set/15

Jul/15

Mai/15

Retail

Jan/15

Nov/14

Set/14

Jul/14

Mai/14

25%

Distribution

Mar/15

50%

Mar/14

LPG market pricing remained rela60,0when tively stable until September 2015, 55,0 Petrobras announced an adjustment in 50,0 45,0 gas prices. The state-owned company 40,0 35,0 had not made any such adjustments sin30,0 25,0 mace 2002 and the decision took the 20,0 rket by surprise since, in the international marketplace, the per barrel price of oil had been trending downward.

In September, Petrobras adjusted its industrial, commercial and bulk LPG prices by an average of 11%, 45%by while 13 kg cylinders were adjusted around 15%. In 2015, the average 40% price for distribution stood at R$ 33.40; 35%resale, R$ 48.29.

30% In December, Petrobras announced a new adjustment of 3.8% on average in the price of gas for industrial and commercial use.

8.3 AVERAGE UPSTREAM AND DOWNSTREAM PRICES

Jan/14

Prices

Source: ANP

Regulatory framework Also in 2015, discussions moved forward towards the implementation of a new regulatory framework for the LPG industry, something it has been waiting for since 2013. On August 19, the ANP held two public hearings, which reviewed Ordinance 297/2003 (retail) and Resolution 15/2005 (distribution).

Controversial issues regarding the segment were discussed, such as non-verticalization of the sector and independent retailers.

As regards both subjects, resale and distri60 Annual Fuel Retail Report 2016

bution were on opposite sides. For the most part, retailers advocated for an end the vertical system (where LPG distributors may also act as retailers to end consumers), as well as implementation of the independent fuel retailer model, while LPG distribution representatives were against such moves.

As of the publication of this report, the ANP had not issued new retail and distribution regulations. Their release is expected to be one of the highlights of the LPG segment in 2016.

More volume

8.5 TAX REVENUES

Tax revenues grew 12% in 2015 to R$ 5.2 billion. From the ICMS alone, the increase was 17%, bringing in R$ 4 billion. The collection of PIS/COFINS taxes remained stable at R$ 1.2 billion.

The increase in revenue was driven primarily by price increases. In relation to the rate change, Paraná was the only state that adjusted its ICMS from 12% to 18%. With this initiative, Paraná and Minas Gerais are levying the highest rates among the nation’s states. The lowest rate, 12%, is being levied in 11 states, as well as the Federal District.

(In billions of R$) ICMS

3,4

PIS/Cofins

1,2

2014

ICMS

PIS/Cofins

4,0

1,2 2015 Source: Fecombustíveis

8.6 State tax

RR

AP

AM

MA

CE

PA

PE

AC TO

RO

RN PB

PI

SE

AL

BA

MT DF GO

18% 17% 12%

8.7 PRICE BREAKDOWN 13-kg canister

MG ES

MS SP

RJ

PR

Source: ANP

SC

Producer 25%

RS

Taxes 17% Retail Margin 31% Distribution Margin 27% Source: ANP

Annual Fuel Retail Report 2016

61

LPG

Oversight 8.8 RETAIL INFRACTIONS RANKING

Of the 12,200 complaints received by the ANP’s Consumer Relations Center, 12% were focused on the LPG market.

Of this total, 44% were complaints related to illegal sales and 33% to irre-

01

Does not satisfy safety rules

45.9%

02

Does not provide information to consumers

14.2%

03

Build/operate facilities and/or equipment outside of specifications

11.7%

04

gular sales of the product.

In both fuel retailing

Total: 1,658 units Source: ANP

and distribution, the main infraction was not adhe-

8.9 DISTRIBUTION INFRACTIONS RANKING

ring to safety standards, which resulted in 761 and 73 fines, respectively.

In 2015, the number of full, 13-kg cylinders seized grew 41% over the previous year, from 2,064

01

Does not satisfy safety rules

76%

02

Acquire or send product from/to an unauthorized source

12%

03

Others

12% Total: 96 units

to 2,921 units.

Source: ANP

8.10 PRODUCT SEIZURES 27.6%

P13 (Full) P13 (Empty) Others (Full) Others (Empty)

56.2% 64.8%

28.9% 3.2%

13.5%

4.4% 1.4%

Source: ANP

62 Annual Fuel Retail Report 2016

28.2%

Others

2014 2015

In 2015, full 13-kg canisters seized represented 56.2% of the total products

Market share Almost nothing has changed in relation to market concentration of the top four companies operating in the distribution segment. Together, they account for 85.4% of the total LPG market.

Supergasbras registered a 0.7 percentage point decrease in 2015 compared to 2014, while Nacional increased its share by 0.4 percentage points over the same period.

8.11 DISTRIBUTORS MARKET SHARE Ultra Liquigรกs Supergasbras

Recertification

Nacional Other Companies

14.4% 14.6%

23.1% 23.1% 22.5% 22.6% 21.2% 20.5% 18.9% 2014 19.3% 2015

Source: ANP

KEEP AN EYE ON...

Distribution companies inves-

3 Economic indicators that influence LPG segment dynamics;

the acquisition of new receptacles. In

3 Publication of regulatory frameworks for the retail and distribution segments, and their impact on the LPG sector; and

ted R$ 570 million in upgrades and

2014, these expenses stood at R$ 540 million. Last year, 20-kg bottles were

prioritized, with 115,947 units recertified (55% more than in 2014), while

45-kg cylinders totaled 480,602 (up 101%). As for 13-kg bottles, maintenance was carried out on 13.4 million

units. To satisfy ANP safety standards, LPG cylinders must be serviced 15 years after their manufacture and

10 years following their last recertification.

3 The impact of rules implemented in 2015 by ANP Resolution 26/2015, which regulates sales in urban and rural areas, and the delivery of transportable LPG bottles to consumer households; and ANP Resolution 5/2015, which sets forth the establishment of minimum stocks for the distribution sector.

Annual Fuel Retail Report 2016

63

lubricants

Sharp Drop The economic crisis was reflected strongly in the lu- 9.1 SALE OF FINISHED LUBRICATING OILS bricating oils sector last year where sales dropped from In thousand m 1.5 million cubic meters in 2014 to 1.3 million cubic me1.518 ters in 2015, representing an 8.6% decline. The fall can be 1.388 attributed to dwindling industrial production, a reduction in truck hauling operations, the slowdown in the demand for diesel cycle lubricants and lower household income that resulted the postponement of vehicle oil changes.

3

This result did not correspond with the expectations 2014 2015 of the sector’s agents since, historically, the demand for Source: ANP lubricants sits slightly above the GDP, which declined by 3.8% last year. The expectation was for a reduction of 4% at most for lubricant sales.

In addition, 2015 was a year when the market was adapting to ANP Resolution 22/2014, which set the criteria for the registration of lubricants, greases and additives, including the definition of responsibilities and obligations of producers and importers. Because they are considered outdated, new maximum time limits were established for distribution and marketing of lubricants in the API SF, API CF, API SJ, API CG4 and ACEA categories by June 30, 2015 and June 30, 2017, respectively.

For this year, one of Sindilub’s main concerns is regulation of bulk lubricant sales, especially at the retail level, since it opens up a window for the marketing of this type of product without any control.

Fewer agents Last year, the total number of agents in the 2014 9.2 SECTOR AGENTS market declined by 6% from 2014, to 335 parProducers 125 ticipants between producers, re-refiners-collectors Collectors 30 and importers. The import segment alone added Re-refiners 15 new companies, to a total of 205; i.e., 21 new parImporters 184 ticipants. However, according to the registration Source: ANP records with the ANP, there was no information about whether the imported products were intended to be sold or for own consumption. The number of collecting companies and producers decreased and the number of re-refiners was stable.

2015

94 21 15 205

Annual Fuel Retail Report 2016

65

lubricants

Market share The ranking of lubricating oil producers remained unchanged as to market share. BR is in first place, followed by Cosan, Ipiranga and Shell. Despite the decline in the domestic economy, some companies have increased their share in the sector. BR gained 2.5 percentage points in 2015 against 2014 and Ipiranga (in third-place) improved its market share by 0.8 percentage point in the period. Cosan and Shell fell 2.8 percentage points and 2 percentage points, respectively.

Collection In 2015, the collection of used and contaminated oil (OLUC) by collecting companies exceeded its national target of (38.5%), with 38.9%. The total volume collected throughout the country was 439,7 cubic meters.

Market concentration is a characteristic of the segment. Among the collecting companies, Lwart leads the market, with 35.8% of the total, well ahead of the runner-up, Lubrasil, with 9.7%, followed by Petrolub, with 9.3%.

66 Annual Fuel Retail Report 2016

9.3 MARKET SHARE OF THE PRODUCERS/IMPORTERS BR Cosan Ipiranga Shell Chevron Other companies

17.1% 14.3% 12.9% 13.7% 10.1% 8.1% 9.2% 8.6%

FĂŞnix Proluminas Other companies

2015

28.6% 30.8%

31.2% 35.8%

Lwart

Petrolub

2014

Source: ANP

9.4 MARKET SHARE OF THE COLLECTORS

Lubrasil

22.1% 24.6%

12.7% 9.7% 10.2% 9.3% 10.0% 8.6% 9.4% 8.4%

2014 2015

26.6% 28.3%

Source: ANP

9.5 COLLECTION OF USED OR CONTAMINATED PRODUCT NORTH

NORTHEAST

Collected: 29.883 m3 (31%) Target: 31%

Collected: 59.661 m3 (33%) Target: 32%

CENTER-WEST

Collected: 44.420 m3 (36%) Target: 35% SOUTHEAST

Collected: 221.597 m3 (44%) Target: 42%

Brazil

Collected: 439.755 m3 (38,9%) Target: 38,5%

SOUTH

Collected: 84.194 m3 (40%) Target: 37%

Source: ANP

Re-refining After collection, the OLUC is sent to the re-refining process, and is then returned to the market as basic oil. Last year, 235,8 cubic meters were sold by the re-refining industry a reduction of 15% compared to 2014.

In the re-refining sector, Lwart remains far ahead of the other competitors, with 43.8 % of the total market, increasing the difference between itself and its competitors by 1.5 percentage points in 2015 compared to the previous year. Lubrasil holds second place and Petrolub

9.6 RE-REFINING MARKET SHARE 42.3% 43.8%

Lwart Lubrasil Petrolub Proluminas

13.7% 12.2% 10.7% 11.1% 9.0% 9.1%

Others

2014

24.3% 23.8%

2015

Source: ANP

was in third place, positions remained which remained stable during the period.

Play Clean The Play Clean Institute, responsible for the implementation of the reverse logistics in packaging lubricating oils, sent 96 million used packages to the recycling plant in 2015, representing an increase of 17% against 2014.

Since the start of operations in 2005, more than 435 million used packages and plastic containers were collected and sent to recycling.

The Play Clean Institute operates in more than 3,250 municipalities in 14 states and the Federal District. There are currently more than 42,000 registered generators and 21 central collecting points.

It is still necessary to expand the program into the North and Center-West regions, but the Institute is proposing a new format for collection with the installation of fixed PEVs in existing establishments, such as service stations, supermarkets and other retail outlets. Initially, this model would be installed in the North. In the next stage, it would be expanded throughout Brazil.

The proposal has generated controversy and fuel retailers did not approve the model for several reasons, mainly because of the risk of contamination when collecting waste and packaging from a third parties (See more in Environment).

KEEP AN EYE ON‌ 3 The monitoring of the development of the sector in the midst of the economic crisis; 3 The discussions of regulatory issues with the lubricant sector;

3 The introduction of new products designed to reduce emissions and boost energy efficiency.

Annual Fuel Retail Report 2016

67

ENVIRONMENT

Licensing underway

Freeimages

From an environmental perspective, 2015 was marked mainly by an atmosphere of expectation and concern over the end of the deadline for the ANP to begin inspection of environmental Operation Licenses (LOs) and Fire Department Inspection Certificates (AVCBs). The deadline – October 20 – was established by ANP Resolution 57/2014, which was published in Brazil’s Official Gazette.

Although the ANP granted a period of one year before the start of these inspections, concerns in the retail market were inevitable. This is because of an older regulation, Ordinance 116/2000, which established fuel retail operating rules, which stipulated no such inspection requirements, and many service stations were only able to operate with registration documents attesting to their request for authorizations from appropriate governmental bodies. These entities, in turn, with few exceptions, were not able to expedite the completion of these processes. As of the ANP’s establishment of a deadline for inspections, there was an increased demand from fuel stations for these documents and great trepidation on the part of retailers that the bureaucracy or public agency employee restrictions would complicate the process of issuing the required documents. Although there was no official number, the estimate at the end of the period was that at least 20% out of 40,000 fuel stations were operating without licenses. Under such circumstances, the risk of not having required documents available to present during an inspection could be the loss of a station’s operating license.

The great concern of fuel retailers about obtaining licenses was the bureaucracy involved or even restrictions regarding public servants making the issuance of these permits more difficult

Annual Fuel Retail Report 2016

69

ENVIRONMENT

Inspection

As of October 20, the ANP began to inspect

fuel stations around the country. “However, in practice, there is no specific inspection regime regarding

licensing because oversight visits are considered to

be routine occurrences.” In the absence of an LO and/or AVCB, as per Article 21, paragraph 3 of

ANP Resolution 41/2013, the agency must notify the retailer, granting a thirty (30) day period to

present one or both documents. In the case of non-

-compliance with such notification, a notice of violation will be issued, which will lead to an administrative procedure for the definitive revocation of the fuel retail activity authorization. It is worth noting

that, since a 2013 process refinement, inspections

also include checking whether a fuel station’s business license is current.

In the case of administrative proceedings, if a

retailer presents a proof of request/application that has been sent to the fire department and/or envi-

ronmental agency, the ANP will formally consult with one or both of these entities to verify whether

an establishment in question is able to remain in

operation and for what period. Assuming a positive response, the administrative procedure will be suspended for the period indicated by one or both

entities. In the case of a negative response(s), the revocation process will continue.

As of the publication of this report, there were

no reported cases regarding the loss of an opera-

ting license due to the absence of these documents.

According to the ANP, fines levied due to the non-

-submission of an LO and/or AVCB are in the same

category as others related to any other type of docu-

mentation problem, hence the difficulty in obtaining 70 Annual Fuel Retail Report 2016

specific data related to discrete types of licenses. As well, Fecombustíveis has not recorded any occurrence of a license revocation among its members.

Actions and results

Across Brazil, the associations representing

fuel retailers have mobilized to educate their mem-

bers about the urgency of obtaining these licenses.

At the same time, in states where the execution

of such processes tends to be slow, meetings were held with representatives of environmental agen-

cies and fire departments, along with the ANP, to seek solutions to expedite the issuance of these documents.

In most cases, these activities have had a po-

sitive impact. In the coverage area of the associa-

tion for the Santa Catarina state coastal region, for example, retailer representatives requested that the

state environmental department (Fatma) provide

service stations with a statement allowing them to continue in operation until the issuance of definitive LOs. A new ordinance was even established to regulate the situation.

A similar situation existed in the state of Es-

pírito Santo, where there were stations that had no

pending matters before the environmental agency, yet had not received a license. These businesses

received a letter authorizing their regular operations. In the state of Maranhão, its environmen-

tal regulatory agency (SEMA) issued Ordinance

119/2015, which made possible the preparation of a booklet containing complete information regar-

ding environmental licensing procedures. The local association sent this out to all fuel stations.

In Recife, Pernambuco, the city’s stations sig-

ned a commitment agreement with the municipal

Department of the Environment pledging to take obtain an authorization, a fuel service has 30 (thirout environmental insurance. The agreement also ty) days to present a set of eight to ten documents. provided for the simplification of licensing pro- After these documents are filed with the environcedures, allowing for the issuance of licenses with mental agency, an authorization is issued within terms of one- to five-years, according to the tech- 30 (thirty) days. There are also positive results to nical classification received by any given station. report from the state of São Paulo, where its enviBy September 2015, the assessment in the sta- ronmental department (Cetesb) was the first such te of Rio de Janeiro was that approximately 40% of agency in Brazil to require the regularization of its resale establishments were fueling stations and conduct operating without environa mapping of contaminated The ANP began to mental permits. In the city of areas. According to Cetesb’s inspect service stations Technical Support division, Rio de Janeiro, the rate was lower, at around 25%. Due as of January 2016, there were around the country as to this situation, the idea 12,146 registered stations, of of October 20.

However, of a Conduct Adjustment which 7,986 stations had enin practice, there are Agreement was proposed, vironmental LOs. which would be signed by The environmental deno specific inspection the state’s Department of the partment of the state of Ceará actions regarding Environment and its enviassembled a task force to exlicensing because they ronmental oversight division pedite the issuance of licenses.

(INEA and SEA, respectiA similar initiative was execuare requested as part vely), the Retail Trade Assoted in the state of Mato Grosof the agency’s routine ciation for Fuels, Lubricants so do Sul, where more than activities and Convenience Stores for 30 licenses were issued prior the state and city of Rio de to the start of inspections. In Janeiro (Sindestado-RJ and the state of Rio Grande do Sindcomb-RJ, respectively), and the ANP, which Sul, licensing in the capital city of Porto Alegre is paved the way for stations to achieve environmental carried out by the Municipal Environmental Secrelicensing compliance with INEA. As of the publica- tariat (Smam), while the responsibility for licensing tion of this report, the proposal itself has not yet been in the rest of the state rests with State Department drawn up. of the Environment and Sustainable Development.

The state of Minas Gerais streamlined its li- There were no problems involving lengthy delays censing process for stations with capacities of up with the state agency but, in the case of Porto Aleto 90,000 liters. The Environmental Authorization gre, the situation with Sulpetro resulted in the refor Operations is a document that regulates the en- gularization of only 40% of service stations in the vironmental situation of these establishments. To state capital. With the exception of Porto Alegre, Annual Fuel Retail Report 2016

71

ENVIRONMENT

Self-declaration As a way of expediting the is-

suance of documents, a new self-

-declaratory licensing format has

been proposed by the Brazilian Association of State Environmen-

tal Entities (Abema). The idea is to have information provided by a

technical manager with the station being subject to inspection. If the-

re are discrepancies between data

provided and the actual situation of an establishment, a station may

be fined or closed, and the responsible technician reported to their

professional board. This self-declaratory licensing format, called an Adhesion and Commitment Li-

cense, has already been adopted by the state of Bahia and, in Septem-

ber 2015, on the eve of the start of inspections, the index of licensed

stations in the state stood at 90%.

Nevertheless, despite positive results, the self-declaratory model

approximately 95% of this state’s stations have regularized their licensing.

In the coverage area of the Capuava Refinery

(Recap), which includes 90 cities in the state of São Paulo, there are also no major problems. Nevertheless, one particular difficulty, which arose from bure-

aucratic requirements (i.e., ANP asking for an environmental license before granting an LO and Cetesb

only providing an environmental license to stations with ANP-issued LOs) was resolved.

In the state of Pará, the main difficulty was the

fact that the licenses issued by its environmental

agency (Semma) carried only a one-year term. Follo-

wing an appeal from the Pará State Fuel, Oil Product and Natural Gas Retailers Union (Sindicombustíveis-PA), the document is now valid for four years.

Indeed, validity periods for documents are a pro-

blem. In most states, the AVCB is valid for only one year. Considering the slow pace at which licenses are

issued, the solution to not running the risk of being

without a valid AVCB seems only to be to apply for

a renewal shortly after receiving a new document. This was a problem in Mato Grosso, where, following nego-

tiations with the state association, the fire department created a detailed memorandum to facilitate the review process. Prior to this, a review process took approximately six months or more to complete, whereas now approvals are being secured within three to four months.

Despite all of these efforts, there are still diffi-

is being questioned in Brazil’s Su-

culties, such as exist in the capital of the state of Goi-

tors who believe that this licensing

working hours for public agencies (until May 2016,

preme Court by federal prosecu-

model does not guarantee adequate environmental protection.

72 Annual Fuel Retail Report 2016

ás, Goiânia. The city passed a law, which reduced the

such offices were required to close at 1 p.m.). In the midst of this situation, retailers are concerned about a mounting backlog.

Electric car incentives Although still beyond the average Brazilian’s budget, thanks to a variety of incentives, electric, hybrid and hydrogen-powered vehicles made gains in 2015. One of these was introduced in November, with the exemption of the import duty – where the previous tax rate paid by importers was 35%. To offer but one example of how this measure impacted the marketplace, three days after the tax exemption notice was issued, the price for a BMW i3 (an electric-powered passenger vehicle) was reduced from R$ 221,9 to R$ 169,9. Despite this still-high price tag, there are other stimuli that could contribute to the expansion of the nation’s electric car fleet. OIne example are the actions taken in São Paulo of a 50% IPVA (Automotive Vehicle Tax) refund, where such vehicles are licensed for intra-city travel.

Brazil’s National Association of Automotive Vehicle Manufacturers (Anfavea) reported that, by the end of 2015, 846 hybrid/ electric vehicles had been sold. In that year, BMW sold 50 electric vehicles in the country, a decidedly small number compared to the total number of registrations nationwide. However, industry projections indicate that, by 2030, Brazil should have anywhere from 5 to 11 million electric vehicles on the road.

At the same time, several initiatives are beginning to take shape to satisfy the needs of this potential electric fleet. In December of last year, the first charger in Brazil for cars powered by unconventional sources, such as hydrogen and electricity, was installed at a Graal network fuel station along the Anhanguera Highway in São Paulo.The equipment for the electric station – which was developed

by CPFL Energia, Graal and CCR AutoBAn, the latter being the concessionaire responsible for managing the Anhanguera-Bandeirantes System – was supplied by ABB.The equipment can replenish 80% of battery capacity in half an hour and can charge up to two cars simultaneously. The initiative is part of CPFL Energia’s Electric Mobility Program, which is studying the impact of the use of electric vehicles financed with funds from the Research and Development program at the National Electric Energy Agency (Aneel).

The PEV controversy

A controversial subject in 2015 re-

lated to a proposal by the Jogue Limpo Play Clean) Institute to install Collection Stations for the Voluntary Delivery

Points (PEVs) at fueling stations and other establishments. Basically, upon

installing a PEV, a service station becomes a location at which individuals can discard third-party packaging (such

as that which comes from auto repair shops, for example). Initially, the system

is to be deployed in Brazil’s North region as a way to simplify collection lo-

gistics. In the second stage of the project, PEVs would be extended nationwide.

On the one hand, as justifica-

tion for the project’s implementa-

tion, Play Clean defends the concept of shared responsibility across all links in the chain and also mentions the difficulty of collection from all

points of waste generation. However, for the retailer, the proposal is com-

plex, because the stations that install PEVs must take responsibility for waste generated by third parties and bear the risks of contamination.

The issue is still under discus-

sion, but retailers remain opposed to the project.

Annual Fuel Retail Report 2016

73

LEGISLATION

A tense year tial. This news was not well received by the fuel retailers, since the economic crisis had already slowed all the country’s economic sectors. With the publication of the ordinance, the new amounts came into effect in the fourth quarter of 2015.

Collection of the fee, introduced on December 27, 2000 under Law 10.165, has always been controversial within the industry. One of the complaints is about its aims. The fees collected are intended for the environmental agency Ibama to control

Shutterstock

Throughout most of 2015, the fuel retail segment was focused on compliance with Resolution 57/2014, which determined a period of one year, to October 20, 2015, for the submission of the operating licenses issued by environmental bodies and Fire Department inspection certificates for the country’s functioning fuel service stations. The cause for concern was that, without up-to-date documents, the penalties applied could lead to the revoking of the establishment’s right to operate.

To that end, the segment enjoyed the support and tireless efforts of Fecombustíveis and its affiliated unions, working in partnership with the ANP (the regulatory body) to streamline the release of those documents by the responsible bodies and thereby avoid any major problem over fuel supplies in Brazil (see the Environment and Fecombustíveis chapters).

In addition to the difficulties in relation to Resolution 57/2014, the dealers also had to face a federal government decision on the Environmental Control and Inspection Fee (TCFA).

Interministerial Ordinance 812, published on September 29, 2015, brought about TCFA adjustments of up to 158%, charged quarterly to companies whose activities have pollution poten-

Annual Fuel Retail Report 2016

75

LEGISLATION

and monitor activities that have a pollution potential, although the agency does not license or supervise fuel retailers. Another problem is the amount set for the filling stations, which, for the most part, are classified in the medium-sized category (R$ 3.6 million to R$ 12 million). Although the filling stations handle large volumes of fuel, most are family businesses operating on a very different scale to the companies operating in this segment, whose earnings are much higher. The filling station risk classification also has a significant effect on the cost of the TCFA, since fuel retailing is rated at the same level as the refineries, which is a disproportionate scale.

As a result, the TCFA charges have had a significant impact on the retailers.

It should be remembered that non-payment of the TCFA incurs penalties such as fines of up to 40% of the fee plus monetary correction, in addition to the risk of lawsuits and having the company name in the Cadin (Federal Public Sector Registry of Unpaid Credits).

For years now, fuel retailers have been seeking a solution in the courts to resolve the situation, but without much success. Soon after the publication of Law 10.165/2000, which

76 Annual Fuel Retail Report 2016

introduced the TCFA in March 2001, Fecombustíveis filed for a preventive injunction from the Federal Court of Brasília against the requirement that filling stations must pay the fee. At the time, the justification was that the charge is unconstitutional, since Ibama neither licenses nor supervises the fuel retail segment. Initially, the request for an injunction was denied, but after hearing the Federation’s arguments, the court in Brasília granted the retailers the right not to pay the TCFA. Ibama then filed an application, in the same court, for a stay of order, on the grounds that non-payment of the fee by the filling stations could harm public order, health, safety and the economy. Based on that argument, the Federal Court of Appeals of the 1st Region decided in favor of the environmental agency. Fecombustíveis appealed against the decision, but its appeal was denied.

In September 2003, with regard to the preventive injunction filed by the Federation, the Federal Court of Appeals of the 1st Region, responding to an appeal, reversed the decision previously granted to the retailers.

The matter is currently pending judgment by the superior courts.

Another issue whose resolution is awaited by the industry and took on new features in 2015 was an obligatory additive in the regular gasoline sold in Brazil. Under Resolution 30/2015, published on June 30, the deadline for the compulsory addition of dispersants and detergents to the gasoline was extended to July 1, 2017. The deadline set under the previous Resolution 40/2013 had been July 1, 2015. The reason for the postponement cited the difficulties encountered in the first stage of the program in defining the reference base gasoline to be used for the ratifying and registration of the additives.

In addition to the difficulties during testing in defining the reference base gasoline, the decision of the ANP was also influenced by external factors that have a direct impact on the implementation of the additive program, such as the environmental licensing of the additive facilities, the licensing of additive suppliers by Petrobras (the country’s main gasoline producer) and uncertainties relating to certain port concessions, since the distributors will be responsible for putting the additives in the gasoline carried by coastal shipping.

AgĂŞncia Petrobras

Mandatory additive

More anhydrous ethanol in the gasoline In the first quarter of 2015, the federal government authorized an increase in the proportion of anhydrous ethanol contained in the standard C-class gasoline sold in Brazil. Under Cima Resolution No. 1, of March 4, the percentage was increased from 25% to 27% anhydrous ethanol in the C-class gasoline, which came into effect as of March 16th.

The increase in the ethanol content came at a good time for producers in the sugar and ethanol sector, who have been struggling with a financial crisis that began in 2008. With the biofuel’s loss of competitiveness compared to gasoline, which regained its share of the fuel matrix following the pricing policy adopted by the federal government to control inflation, the mill owners saw an increase in the anhydrous ethanol content in gasoline as a way to ensure the sale of part of their production.

Annual Fuel Retail Report 2016

77

LEGISLATION

Quality

Under the new regulations, the product can only be considered to fall short, in terms of appearance, if the evaporation residue parameter does not meet the requirements

Another noteworthy regulation issue was the revising of the specification criteria for anhydrous and hydrous ethanol. On April 15, the ANP issued Resolution 19/2015, setting out the specification details and the quality control requirements for biofuel that are to be met by the various agents that sell the product in Brazil.

Among the changes made by the regulator are the inclusion of ethanol terminal and terminal operator, as well as adjustments to the rules governing the issuing of quality certification and refinement of the standards for the addition of dye at the ethanol terminal. One of the most important issues for retailers, the item Appearance, has also undergone modifications.

Prior to the publication of Resolution 19/2015, a small particle in the ethanol was sufficient justification for the filling station to be reported. Under the new regulations, the product can only be considered to fall short, in terms of appearance, if the evaporation residue parameter does not meet the requirements. Note that this parameter may be replaced by the non-volatile material content, according to ABNT NBR 15559: Fuel Ethanol - Determination of the non-volatile material content by evaporation, whi-

78 Annual Fuel Retail Report 2016

ch is acceptable up to the limit of 5 mg/100 ml.

Also introduced in the new regulation was a mandatory analysis of the sulfur content in fuel ethanol, as of July 1, 2015. The measure aims to ensure the quality of gasoline with low sulfur content (50 mg/kg), which has been in effect since the beginning of 2014.

Diesel fuel - The ANP changed the notes to the table determining the specifications for on-road diesel fuel, with regard to appearance, as provided for in Resolution 50/2013. In Resolution 13/2015, published on March 9, the new wording states that, in the event of disagreement, the product shall only be considered unspecified if one of the parameters, water content or water and sediment content, in the case of S500 diesel fuel, and water content or total contamination, for S10 diesel fuel, fails to meet the requirements.

The regulations also determine that, for monitoring purposes, in the case of fines for non-compliance in terms of appearance, analysis must be performed of the water content and water and sediment content in S500 diesel fuel and of the water content and total contamination in S10 diesel fuel; and the product will only be rejected if at least one of these parameters fails to meet the specifications.

The ANP has taken another step in the quest to increase fuel security in Brazil. On December 2, the regulatory body issued Resolution 53/2015, which set standards to ensure the continuity of logistics flows for the supply of fuel derivatives in situations that could potentially restrict or interrupt the country’s supplies. One of the new rules is that parties involved in the supply chain must alert the ANP of any situation that could represent a supply risk.

The logistics flow has always been an industry concern. Towards the end of December 2015, service stations in the Northeast, Espírito Santo and part of Minas Gerais had problems in receiving products, due to the delayed arrival of coastal shipping at certain ports, such as Suape, in Pernambuco, Cabedelo, in Rio Grande do Norte, and Tubarão, in Espírito Santo. In addition to shortcomings in the coastal shipping logistics infrastructure, supplies were also affected by maintenance problems at the Cubatão refinery, in São Paulo state, which reduced its production volume.

The truth of the matter is that the fuel segment has, over the years, been facing supply difficul-

Pixabay

Fuel supplies

ties due to the limitations of the logistics infrastructure, particularly in transportation by coastal shipping, which operates at a low level of tank storage volume. The distributors, who are responsible for the port operations, argue that the weak coastal shipping transport

infrastructure is partially due to the legal uncertainties surrounding Law 12.815, known as the Ports Law, which was enacted in June 2013 and affected the companies’ decision to invest in expanding the tank storage at the ports. Moreover, the lack of advance warning about possible delays in the delivery of products by the main supplier (Petrobras) also influences the distributors’ operations.

Resolution 53/2015 defined the rules to guarantee the continuity of the logistical flows of fuel products in events with a potential to disrupt supply in the country

Annual Fuel Retail Report 2016

79

LEGISLATION

LPG

Currently, the LPG retail business model operates with sales and prompt delivery by vehicles. With outsourcing, the vehicle may only carry product that already has been sold, not allowing quickdelivery sales

In May 2015, the ANP issued Resolution 26/2015, which defined the trade rules for urban and rural areas and the delivery of portable LPG containers to consumer residences and commercial and industrial establishments, own consumption and that among the retailers authorized by the ANP. Under the new regulations, retailers are allowed to outsource the transportation of LPG deliveries, provided that the vehicle registered for that purpose meets the ANTT regulations for the transportation of such products. The move provoked great concern among the LPG retailers, since it creates a loophole for illegal trade, given that the regulatory body is unable to inspect the vehicles during their operations, unless it sets up a task force working alongside other supervisory bodies. Currently, the LPG retailing business model operates on the basis of door-to-door selling from authorized vehicles. With outsourcing, the vehicles will only be able to transport products that have already been sold, with door-to-door selling no longer permitted.

In other words, unauthorized retailers could transport the products in vehicles that have been authorized by ANTT. Although the resolution is already in force, Abragas comtinues to seek an agreement with the ANP to reverse the measure and the matter is likely to remain on

80 Annual Fuel Retail Report 2016

the entity’s agenda during the course of 2016. It is important to emphasize that the rules apply to vehicles carrying loads with a total gross weight of up to 16,000 kilos, such as trucks, semi-trailers, trailers for use exclusively with motorcycles or mopeds, pick-up trucks, tricycles, motorcycles and scooters. Bear in mind that the LPG transportation regulations were revised as a result of questions raised by the São Paulo Public Prosecution Service, which asked the ANP to define the minimum safety requirements for the transportation of this type of product.

The ANP also issued new regulations for LPG producers and distributors. Resolution 05/2015, published in January, deals with the developing of average weekly inventories. The measure followed the same course of action implemented in other fuel segments to guarantee the supply logistics flow. Under the new regulations, LPG producers and distributors must maintain an average weekly volume of liquefied petroleum gas throughout the current month of the present year, in a storage location, so as to avoid the sort of product shortages that have occurred in the past, notably in 2013.

Last year the ANP also held two public hearings to review the rules of the regulatory frameworks for LPG retail sale and distribution. In May 2016, the new rules had still not been published.

New wording The ANP altered Resolution 64/2014 with regard to the criteria for the disregarding of any relapse, in response to the requests of certain economic agents, including FecombustĂ­veis. Under Resolution 12/2015, published on February 27, the new wording of Article 3 disregarded, in the case of relapse, the final sentences whose monetary penalties had been full complied with by April 13, 2015, including the penalties complied with prior to the publication date of Resolution 12/2015, but only in the cases of full cash payment. In the cases of fines paid in installments, the deadline of February 27, 2015 was maintained.

Also relating to Resolution 64/2014, the ANP included a new paragraph in Article 1, which is now governed by paragraph 4, which states that, in case of installments, a period equal to or greater than two years shall be counted from the date of approval of the request to pay the debt in installments. It should be remembered that Resolution 64, also published towards the end of 2014, was considered a setback for the sector, because the ANP excluded important criteria for the disregarding of the relapses provided for in the previous legislation, such as a timespan of two years between the final sentencing and the committing of a new offense and the exclusion of every economic agent that has been registered with the Cadin by the ANP.

KEEP AN EYE ON...

3 Monitor the impact of ANP scrutiny of the filling stations with regard to environmental licensing and the Fire Department Inspection Certificate; 3 During 2016, the ANP should publish the new regulations covering LPG distribution and retail sales activities; 3 Also related to the LPG segment, follow the discussions regarding the revision of Resolution 26/2015, which defines the regulations governing the outsourcing of LPG transportation for deliveries in Brazil; 3 Monitor the developments in the process of putting additives in standard gasoline, the obligation of which has been postponed to 2017.

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81

CONVENIENCE

Trend toward diversification

Divulgação/ Rede Vip

Divulgação/Rede Vip

Divulgação/Bob’s

With the decline in fuel sales, the convenience store has become the focus of attention for retailers seeking to minimize the impact of the economic crisis on the business as a whole. One strategy that has been gaining momentum in this area is to link up with strong franchise brands, by either taking out a direct franchise or making room for an outsourced franchisee.

The figures reflect this expansion. In 2015, the franchise sector earned R$ 139.6 billion, an increase of 8.3% over the previous year, from a total of 138,000 units, according to the Brazilian Franchising Association (ABF). Among the fastest growing brands are Ipiranga’s am/pm and BR Distribuidora’s BR Mania, as well as Cacau Show, Subway and Jet Oil. The distributors are also seeking to diversify and invest in the convenience store market. In 2015, Ipiranga introduced a new urban store project, the am/pm SuperStore, which brings together in a single environment everything that is available in the small neighborhood retailers (mini-marts, bakeries). It has also added new product categories, such as fruits, vegetables, organic vegetables and meat. BR Mania has increased the number of stores to over 1,200 units, launched new own-brand products and set up the Integrated Media Project, which encompasses digital menu, radio station (Rádio BR Mania) and free wi-fi. Meanwhile, Raízen continues to invest in its gourmet coffee shop concept and Ale – although it uses the brand licensing model, not franchises – is increasingly investing to convert its fuel retailers into retail entrepreneurs.

As it is considered to be a complex business operation, the convenience store has tended to be overlooked by most fuel retailers. The focus of domestic sales, up

Annual Fuel Retail Report 2016

83

CONVENIENCE

until now, has always been fuel sales. But there before Brazil reaches the level of the United is every indication that some retailers are star- States, where the convenience store culture ting to take a closer look at the convenience sto- is widespread and present at about 80% of all re option, having noticed the growth potential filling stations. According to a survey conducand that this side of the buted by consultants CVA Sosiness can help them through lutions, the convenience store the present crisis. was the third most commonly Although still not the The growth potential of utilized service for those stomain driver of business the segment is substantial. As pping to refuel at a service at service stations, it is a comparison, in 2014, Brastation last year (49.3%), afzil had 7,203 stores at cloimportant to note that ter checking the tires (81.5%) se to 40,000 filling stations, and cleaning the windows diversifying services equivalent to 18% of the to(50.9%). At highway service could be the way to tal. Meanwhile, in Chile and stations, it takes second plaattract consumers Uruguay, which are much ce (63.8%), especially among smaller countries than Brazil, those that have restaurants. there were, respectively, 583 Although it is still not stores at 1,698 stations (34%) and 394 at 484 the main attraction of the service station, the (81%), according to the Fuels, Lubricants and store continues to be a place to visit for stopConvenience Stores 2015 Annual Report, pu- ping to refuel and it is important to consider blished by Sindicom (National Fuels and Lu- that diversifying the services provided may be a bricants Distributors Union). good way to keep the business turning over and This means that there is a long way to go to attract consumers.

Focus on management With the sluggish Brazilian economy, the climate of uncertainty regarding consumption has required a higher quality of business management in the convenience store segment. Many entrepreneurs have had to make spending cuts and reassess their inventories, offering products with higher store turnover. It has also been necessary to reevaluate the staff, reorganize the team and improve training, in order to ensure high quality service. The uncertainties have yielded the benefit of management focused on efficiency, in order to keep the business going.

84 Annual Fuel Retail Report 2016

Changes ahead The changes in course indicate, according to experts, that convenience stores along the lines we are familiar with – mini-marts or delis – are going to change even more, based on an even broader concept.

Convenience will not be limited to just the store, but will embrace other convenient services for the customers, aimed at simplifying their lives and providing them with comfort and well being.

One indication of this trend is that stations increasingly are offering other services, such as laundry and oil changes, which leads us to believe that, very soon, they will also function as mini-shopping centers, along the lines of existing models run by large networks and very common in other countries, such as the U.S. These changes are aimed at meeting the needs of customers who are increasingly demanding, always in a hurry, whose lifestyles do not follow the traditional patterns and who are looking for higher added value products along with variety and impeccable service.

Healthy food Despite this being a crisis year, the food service remains a growing market trend, particularly for fast foods such as snacks, which does not always mean high calorie foods with low nutritional value. On the contrary, consumers are becoming increasingly more demanding and businesses and brands in the healthy, sustainable and clean products lines are growing. It is now very common to find natural sandwiches, products with fresh and organic ingredients and natural juices on the shelves and in the refrigerators.

Annual Fuel Retail Report 2016

85

fecombustĂ­veis

Retail concerns to bring the documentation up to date. Aware of the retailers’ problem, the ANP granted a one-year period for the stations to normalize their situation in regard to the documents specified in Resolution 57/2014. And so there began a race against time. Throughout 2015, the Federation worked actively in support of the affiliated unions that sought a partnership with the public bodies responsible for issuing LOs and AVCBs, as well as calling attention to the issue through its communication ouIvaldo Bezerra/Lumen

Throughout 2015, Fecombustíveis remained vigilant in its protection of the legitimate interests of fuel retailers with regard to important issues, both in relation to the workings of the Brazilian Congress and to compliance with new rules issued by the regulatory bodies. One of the most prominent issues in the past year, and certainly the most worrying, was the deadline set by the ANP for the country’s filling stations to submit their Environmental Operating License (LO) and Fire Department Inspection Certificate (AVCB), which under Resolution 57/2014 expired on October 20. The subject has been a headache ever since the publication of Resolution 41/2013, which made the two documents obligatory, but did not set a time limit, thus stopping short of a potentially catastrophic scenario across the country, with one fuel retailer after another prevented from operating had the ANP begun its inspections. Due to the urgency of the situation, Fecombustíveis conducted a survey of affiliated associations to determine the precise situation nationwide with regard to licensing.

The results were alarming in nine states plus the Federal District, with about 50% of the country’s service stations lacking at least one of the documents. The main reason given was the length of time required to obtain a license, due to both the bureaucratic process and the lack of staff at the responsible public bodies.

Fecombustíveis forwarded the study to the ANP and requested a period of two years

Paulo Miranda Soares, president of Fecombustíveis, defending the interests of fuel retailers

tlets. The ANP has offered broad support to the retailers and participated in meetings with the responsible bodies in the states where there were longer delays and they would be unable to meet the deadline.

Through the combined efforts, it has been possible to improve the outlook in places where the situation was more serious. Nevertheless, as the deadline drew near, around 20% of the country’s fuel service stations still had licenses pending (see the Environment chapter).

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87

fecombustíveis

The Truckers’ Law Another focus of Fecombustíveis activity during 2015

Biodiesel content Since last year, Fecom-

was Law 13,103/2015, enacted on March 2, which is known

bustíveis has been expressing

Federation has been involved in the matter since the first dis-

of Resolution 3/2015, which

as the Truckers’ Law and raised the issue of truck stops. The

cussions about revising the old law, for the purpose of introducing new legislation. Even after the enactment last year of Law 13.103/2015, the efforts have continued, with Fecombustíveis participating in meetings with the government and stakeholders for the implementation of designated truck stops.

Over the course of the year, the government implemen-

ted two administrative rulings: the first, Ordinance 944/2015, for the regulation of designated stopping and resting places

(PPDs); and the second, Ordinance 326/2015, to determine the general procedures for the designation of truck stops along federal highways. Both rulings introduced new obligations and stricter rules for establishments that apply for approval as de-

signated truck stops. Additionally, the government launched a pilot project with the vehicle dealership Auto Pista Planalto Sul, in partnership with Fetrancesc (Santa Catarina Federa-

tion of Cargo and Logistics Companies), which demonstra-

ted a lack of transparency in the rules governing stakeholders

its concern over the adoption

allows the use of up to 20%

of biodiesel in diesel fuel, for captive vehicle fleets, and up to 30% for agriculture, rai-

lway and industrial use. At the same time, the biodiesel

production sector managed to obtain government approval for a staggered increa-

se in the compulsory biodiesel content in diesel fuel, to 10%. The Federation’s view if

that allowing the sale of two different biodiesel fuel contents can pave the way for il-

legal operations, if strict and

interested in obtaining ratification as PPDs, which would be

effective fiscal control regu-

In dealings with the government, Fecombustíveis has ar-

to prevent the development

market and defended the fuel retailers to enable the segment’s

would lead to losses and

as equals. In Brazil, the service stations have always played the

chain, with consequences for

there are around 2,500 highway service stations, with appro-

segments. The situation will

favoring one segment over another.

lations are not implemented

gued for clear rules governing the proper functioning of the

of a black market, which

entrepreneurs to work together with other market participants

instability at the end of the

role of truck stops. According to a survey by SOS Estradas,

the retail and distribution

ximately 170,000 parking spaces, that are suitably equipped to

continue to be monitored by

serve the truckers.

88 Annual Fuel Retail Report 2016

Fecombustíveis.

Regional gatherings SOUTH

Foto Julius

The work of Fecombustíveis was also manifest in the traditional Fuel Retailers’ Meetings in the country’s five major regions. The calendar’s opening event took place in the south of the country, with the 3rd South of Brazil Meeting of Fuel and Convenience Store Retailers, in Gaspar (Santa Catarina state), on March 13 and 14. Important retail topics were discussed and presentations given at the event.

SOUTHEAST

Gustavo Lovalho

That was followed by the 14th Minas Gerais Convention of Fuel Retailers and the 4th Southeastern Brazil Meeting of Fuel Retailers, which were, once again, notable successes, with more than 1,300 participants, only exceeded by the ExpoPostos. The traditional Minas Gerais convention took place in Contagem, in the metropolitan area of Belo Horizonte, in order to accommodate the growing number of exhibitors, which was double the number in 2013, with 49 stands.

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fecombustíveis

MIDWEST Manuel Torres

The National Meeting and 4th Midwest Meeting of Fuel Retailers was held on June 17 and 18. Important issues were at the heart of the discussions, as the deadline for the regularization of retail licenses drew nearer, with the participation of Meeting in the Center-West was notable for the important deparliamentary authorities and bates held and the release of the noted journalists, such as Carlos Alberto Sardenberg and AleAnnual Fuel Retail Report – 2015 xandre Garcia.

One of the highlights of the event was the launching of the 2015 Fuel Retail Annual Report, with its new design and new Fecombustíveis 2015 logo.

Fecombustíveis took advantage of this important event in Brasília to hold a Lawyers’ Meeting, which brought together the legal teams of the affiliated unions to discuss laws and regulations that affect the segment.

RELATÓRIO ANUAL

DA REVENDA

VEIS DE COMBUSTÍ

TÍVEIS 2015 • FECOMBUS

AL DA RELATÓRIO ANU BUSTÍVEIS COM REVENDA DE

NORTH

90 Annual Fuel Retail Report 2016

Célio Andrade

The municipality of Rio Branco (Acre state) hosted the 12th North of Brazil Meeting of Oil Product and Convenience Store Retailers, which took place on August 27 and 28.

The event brought together union leaders from all over the country, as well as local political authorities, ANP representatives, distributors and suppliers. The successful gathering was well attended by Acre retailers, both from the capital and from elsewhere in the state, and stimulated discussion about defending open competition, labor law and inspection.

NORTHEAST

Ivaldo Bezerra/Lumen

The cycle of regional events was closed in Pernambuco state, which hosted the 10th Northeastern Brazil Meeting of Fuel Retailers, from November 12 to 15 in Porto de Galinhas. The highlight was the progress achieved in the environmental licensing of the local filling stations, which was supported by the ANP in establishing an agreement between the local union and environmental organizations in the state of Pernambuco and its capital, Recife, to meet the rules of the regulatory body.

ExpoPostos Paulo Pereira

Held in the midst of an unfavorable economic environment, the traditional 2015 ExpoPostos & Convenience trade fair, held in the SĂŁo Paulo state capital, from August 5 to 7, was considered to have been a success. It was attended by 22,000 visitors, 180 exhibitors and had a turnover of R$ 150 million, the same business volume as in the previous edition. Parallel to the ExpoPostos, FecombustĂ­veis organized a Meeting of Journalists of Affiliated Unions, to promote professional retraining and update communications working day issues, as well as developing closer relations between the participants.

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fecombustíveis

International events Marcelo Amaral/Portphoto

The traditional National and Latin American Conference of Fuel Retailers was held in Gramado (Rio Grande do Sul state), between September 24 and 27. The event was attended by representatives of government bodies and the Rio Grande do Sul state government, trade union leaders and business executives who work in the distribution and retail segments across Latin America.

The meetings of Claec (Latin American Committee of Fuel Entrepreneurs), from March 18 to 20, in Guatemala, and from November 4 to 6, in Punta del Este, Uruguay, also featured on the Fecombustíveis event calendar.

NACS convention Fecombustíveis also participated in the 2015 NACS Show, in Las Vegas, which took place between October 11 and 14. During the four-day event, 24,392 visitors from some 73 countries participated in 62 educational lectures and four general sessions, besides circulating among the stands of the trade fair, which featured 1,264 companies exhibiting at the Las Vegas Convention Center.

92 Annual Fuel Retail Report 2016

Year-end celebration An atmosphere of unity prevailed at the Fecombustíveis End-Of-Year Dinner, which was held on December 11, at the Rio de Janeiro Yacht Club.

The presidents of the affiliated organizations, political figures and the directors and superintendents of the ANP, distributors and company partners attended the event.

Marcus Almeida/Somafoto

Left to right: Federal deputy, Simão Sessim, Maria Aparecida Siuffo Pereira Schneider (Sindcomb); Paulo Miranda Soares (Fecombustíveis) and Magda Chambriard (ANP)

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93

SUPPLY CHAIN

94 Annual Fuel Retail Report 2016

ACRONYMS

ABEGÁS - Brazilian Association of Piped Gas Distribution Companies ABEMA - Brazilian Association of State Environmental Entities ABF - Brazilian Franchising Association ABNT - Brazilian Technical Standards Association ABRAGÁS - Brazilian Association of LPG Dealers and Professional Entities ANEEL – National Electric Energy Agency ANFAVEA - National Association of Automotive Vehicle Manufacturers ANP - National Petroleum, Natural Gas and Biofuels Agency ANTT - National Road Transportation Agency API - American Petroleum Institute AVBC - Fire Department Inspection Certificate CADIN – Federal Public Sector Registry of Unpaid Credits CEG - Gás Natural Fenosa CEPEA/ESALQ - Center for Advanced Studies in Applied Economics / Luiz de Queiroz Higher Agricultural School CETESB - State of São Paulo Environmental Company CIDE – Contribution Tax for Intervention in the Economic Domain CIMA - Sugar and Ethanol Council CLAEC - Latin American Fuel Business Executives Commission CNG – Compressed Natural Gas COFINS - Social Security Financing Contribution COMGÁS - São Paulo Gas Company COPERGÁS - Pernambuco Gas Company EIA - U.S. Energy Information Administration FATMA - Santa Catarina Environmental Foundation FETRANCESC - Santa Catarina Federation of Cargo and Logistics Companies IBAMA - Brazilian Institute for the Environment and Renewable Natural Resources IBP - Brazilian Petroleum, Gas and Biofuels Institute ICMS - Tax on Circulation of Goods and Services INEA – Rio de Janeiro State Environmental Institute IPCA - Broad Consumer Price Index IPVA – Automotive Vehicle Tax LPG - Liquefied Petroleum Gas MME - Ministry of Mines and Energy NACS - National Association of Convenience Stores PEVs - Voluntary Delivery Points PIB - Gross Domestic Product PIS - Social Integration Program PMPF - Final Average Weighted Price PPD - Designated Stopping and Resting Place PPM - Part per Million PROÁLCOOL - National Alcohol Program PROCONVE - Automobile Air Pollution Program PSOL - Socialism and Liberty Party RECAP - Capuava Refinery RNEST - Abreu e Lima Refinery SEA - Environmental Secretariat SEMA - Environmental and Natural Resources Secretariat SEMMA - Municipal Environmental Secretariat SINDCOMB – Rio de Janeiro Municipal Fuel Retailers and Convenience Stores Union SINDESTADO - Rio de Janeiro State Fuel Retailers and Convenience Stores Union SINDICOM - National Fuels and Lubricants Distributors Union SINDICOMBUSTÍVEIS-PA - Pará State Fuel, Oil Product and Natural Gas Retailers Union SINDILUB – Interstate Union of Lubricant Retailers SMAM - Municipal Environmental Secretariat SULPETRO - Rio Grande do Sul State Fuel and Lubricant Retailers Intermunicipal Union SUV - Sport Utility Vehicle TCFA - Environmental Control and Inspection Fee TRF - Federal Regional Court TRR - Carrier-Dealer-Retailer

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Tables list

CHAPTER 1• ESTADOS UNIDOS

CHAPTER 3 • GASOLINA

1.1 Sales of gasoline and diesel

3.1 Sales

1.2 Biodiesel

3.2 Retail sales volume

1.3 Ethanol 1.4 Retail gasolina price breakdown 1.5 Retail diesel price breakdown 1.6 Service stations owned by oil companies

3.3 Sales by type of station 3.4 Tax revenues 3.5 A-gasoline imports 3.6 A-gasoline imports by company

1.7 Ownership of convenience stores selling fuel

3.7 Mismatch of prices between Brazilian

and U.S. gasoline

1.8 Hypermarkets retailing fuel

3.8 Price breakdown

3.9 Average upstream and downstream prices

CHAPTER 2 • CENÁRIOS

3.10 Average retail margin

2.1 Market expectations - 2016 2.2 Licensing of light vehicles 2.3 Share of liquid fuels in the GDP 2.4 Sales 2.5 Breakdown of sales at service stations 2.6 Tax collections

3.11 State tax 3.12 Distributors market share 3.13 Non-compliance rate 3.14 Non-compliance per brand 3.15 Non-compliance specification 3.16 A-gasoline supply by Petrobras

2.7 Market agents

CHAPTER 4 • ETANOL

2.8 Vehicle consumption matrix

4.1 Sales

2.9 Price of natural gas

4.2 Tax revenues

2.10 Natural gas consumption

4.3 Retail sales volume

2.11 Natural gas balance

4.4 State tax

2.12 Oil balance

4.5 External market

2.13 Price of the Brent oil in the spot market 2.14 Fuel retail stations per brand

4.6 Ethanol fuel production 4.7 Ethanol fuel production by state

2.15 Infractions and inspection actions

4.8 Destination of sugarcane for ethanol

in the Center-South

2.16 Fuel retail infractions

4.9 Sales by type of service station

2.17 Infractions in the distribution of liquid fuels

4.10 Distributors’ market share

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4.11 Price breakdown

6.4 Raw materials used in B100 production

4.12 Average retail margin

6.5 Ranking of infractions in

biodiesel production

4.13 Average price of anhydrous ethanol

at the plant

6.6 Producer market share

4.14 Average price of hydrous ethanol

at the plant

CHAPTER 7 • GNV

4.15 Downstream average prices

7.1 Natural gas sales by state concessionaires

4.16 Price parity between gasoline ad ethanol

7.2 Conversions

4.17 Non-compliance rate

7.3 Average retailer margin

4.18 Non-compliance specification

7.4 CNG savings

4.19 Non-compliance per brand

7.5 Average downstream prices

7.6 State tax

CHAPTER 5 • DIESEL

7.7 CNG market share

5.1 Sales

7.8 CNG point of sale outlets by state

5.2 Sales breakdown by segment

5.3 Sales by type of service station

CHAPTER 8 • GLP

5.4 S10 sales by service stations

8.1 Consumption

5.5 Breakdown of sales by type of diesel

8.2 Sales

5.6 State tax

8.3 Average upstream and downstream prices

5.7 Tax revenues

8.4 Average downstream margin

5.8 Distributors’ market share

8.5 Tax revenues

5.9 Imports

8.6 State tax

5.10 Mismatch between Brazilian

and U.S. diesel prices

8.7 Price breakdown

5.11 Price breakdown

8.9 Distribution infractions ranking

5.12 Average upstream and downstream prices

8.10 Product seizures

5.13 Average retail margin

8.11 Distributors market share

5.14 Non-compliance rate

5.15 Non-compliance by brand

CHAPTER 9 • LUBRIFICANTES

5.16 Non-compliance specification

9.1 Sale of finished lubricating oils

9.2 Sector agents

CHAPTER 6 • BIODIESEL

9.3 Market share of the Producers/Importers

6.1 Production x installed capacity

9.4 Market share of the Collectors

6.2 B100 auction results

9.5 Collection of used or contaminated product

6.3 B100 regional information

9.6 Re-refining market share

8.8 Retail infractions ranking

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GLOSSARY

A-GASOLINE: Gasoline without the addition of ethanol, which leaves the refinery.

ANHYDROUS ETHANOL: Fuel alcohol (ethanol) blended with A-gasoline by the distributors for the production of C-gasoline, which is sold at service stations.

ANP: National Agency of Petroleum, Natural Gas and Biofuels. It was created by Law 9.478/1997.

This special agency is responsible for regulating, contracting and supervising the economic activities of the oil, natural gas and biofuel industries.

ARLA-32: Automotive liquid reducer agent. It is also known as AdBlue or AUS 32. It is a liquid that is neither toxic, explosive nor hazardous to the environment, produced from a technical urea aqueous solution (agricultural urea cannot be used). In heavy vehicles manufactured from 2012 onwards that use S10, there is an additional tank for the product, necessary to reduce NOx emissions.

BIODIESEL: Biofuel produced from byproducts of vegetable oils or waste, according to the ANP’s specifications. Its name often starts with the letter B, followed by a number indicating the percentage used. Example: B2, addition of 2% biodiesel; B100 (pure biodiesel).

COMMODITY: Merchandise, a product that is bought and sold. The term used to describe products that are traded on international stock exchanges — usually raw materials such as minerals and agricultural products. Although they originate from different producers, their characteristics are uniform.

CORE SAMPLE: Representative sample of a product that has the same characteristics as the product from which it was collected. It is usually collected to serve as material evidence in administrative or judicial proceedings and it can be submitted for analysis to dispel doubts as to its nature and origin. The core sample must be collected in the presence of representatives of the interested parties, identified and packaged in accordance with the law or regulation that proposes its collection.

DISTRIBUTOR: Supply chain agent that works as a middleman between the producer and the retailer. Only distributors may buy directly from refineries and power plants. They are responsible for the blend of anhydrous ethanol with A-gasoline and biodiesel with diesel. Distributors are prohibited from operating gas stations directly, except in the case of teaching-service stations (station-schools).

They can supply fuel directly to large customers.

DOWNSTREAM: Fuel distribution and retail chain

BRANDED STATION: A service station that is affiliated with a distributor and which has declared such affiliation to the ANP. It may purchase fuel only from the distributor that bears the brand.

BRENT OIL (BARREL): It refers to the oil produced in the North Sea (Europe) and traded on the Intercontinental Futures Exchange in London.

C-GASOLINE: Gasoline after the addition of ethanol by the distributor CIDE: Contribution for Intervention in the Economic Domain. Federal tax provided for in the Constitution, instituted by Law 10.336, of December 19, 2001. It is a tax on the importation and sale of oil and oil products, and natural gas and natural gas products.

98 Annual Fuel Retail Report 2016

ENVIRONMENTAL LICENSING: The formal authorization by the official environmental bodies of any project or activity considered actually or potentially polluting and that could cause environmental degradation.

EURO 5 ENGINE: Since January 2012, all diesel-fueled vehicles manufactured in Brazil rely on the so-called Euro 5 engine. Light vehicles (pick-ups, vans and some types of trucks and buses) use engines equipped with an EGR system. Most heavy vehicles such as trucks and buses will use SCR, which requires supply through a specific tank for Arla-32.

FLEX FUEL: Vehicles that use either ethanol or gasoline.

FUEL RETAILER: Also known as fuel reseller. Legal entity authorized to work as a retailer of automotive fuel. It may purchase products only from a distributor, being prohibited from purchasing directly from the plant or refinery. Only fuel retailers may sell fuels in the retail segment to consumers.

S10: Diesel with very low (10 parts per million) sulfur content, sold in the country as of January 1, 2013.

SCR: Selective Catalytic Reduction is a technological post-treatment of the gases emitted by diesel

HYBRID VEHICLE: Vehicle that has two or more energy sources to drive it; for example, an internal combustion engine and an electric motor. The latter contributes to the reduction in fuel consumption and emissions.

powered vehicles, which together with Arla 32, reduces the emission of nitrogen oxides (NOx) and other atmospheric polluting gases.

SUPPLY POINT: Installation using equipment and

HYDROUS ETHANOL: Fuel alcohol (ethanol) sold to consumers at service stations.

systems for fuel storage, with an appropriate vo-

MARKET SHARE: Percentage of participation in a given market.

land motor vehicles, aircraft, ships or locomotives.

lume recorder for the filling of mobile equipment, Intended to be used by distributors to supply large consumers. The excess fuel may not be sold to

P-13: 13-kg LPG canister — the one most often used in Brazilian homes.

third parties.

PPM: Parts per million. Acronym commonly used to indicate the amount of sulfur present in diesel.

TRR: Carrier-Dealer-Retailer. Legal entity authorized to transport and resell fuels, except for automotive gasoline, liquefied petroleum gas, aviation

PROCONVE: The National Environmental Council created the Automobile Air Pollution Program in 1986. Its objective is to reduce emissions of pollutants from new vehicles, thanks to the implementation of more modern engines and fuels.

fuel and fuel alcohol. It may purchase products only from a distributor, and it is prohibited from purchasing directly from the plant or refinery.

UNBRANDED SERVICE STATION: Also known

RE-REFINING: Industrial process to which used or contaminated lubricating oil is subjected to return the same characteristics as basic lubricating oil so that it can be sold again.

as called an independent service station, because it is not affiliated with any distributor. It can not display the trade mark of the companies, but it is free to buy from any of them. It must inform the

RETESTING: Periodic process to assess the state of the LPG canisters to determine whether they may continue to be used, if they can return to the market or if they must be scrapped, in accordance with ABNT procedures.

origin of the pro-duct at the pump.

VERTICAL INTEGRATION: In the downstream sector, vertical integration is characterized by the operation of distribution companies (that sell fuel

REVERSE LOGISTICS: Set of actions, procedures and means intended to enable the collection and return of solid waste to the business sector, in order to reuse it in its cycle or other production cycles, or to dispose of such waste in an environmentally sound manner (Law 12.305/2010).

in the wholesale market) and in the commercial retail operation. Current Brazilian legislation determines the separation of the fuel retail and wholesale activities, and the distributors are prohibited from working in the operation of service stations.

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REFERENCES AND ACKNOWLEDGEMENTS

Adriano Pires (CBIE) National Petroleum, Natural Gas and Biofuels Agency (ANP) Brazilian Association of Piped Gas Distribution Companies Brazilian Automotive Engineering Association Brazilian Association of State Environmental Entities Brazilian Franchising Association Brazilian Electric Vehicle Association South American Association of Manufacturers of Emissions Control Equipment National Association of Automotive Vehicle Manufacturers Central Bank of Brazil Bernardo Souto (Fecombustíveis) BR Distribuidora Advanced Applied Economics Studies/ Luiz de Queiroz Higher School of Agriculture Claudia Bittencourt (Bittencourt Group) Claudio Felisoni (Provar-FIA) Combustíveis & Conveniência National Tax Policy Council Deborah Amaral dos Anjos (Fecombustíveis) Frank Chen (ABGNV) Frederico Amorim (Consultoria Cardinalis) Gustavo Sobral (Fecombustíveis) Ipiranga Integer Research Brazilian Petroleum, Gas and Biofuels Institute José Luiz Rocha (Abragás) Ministry of Mines and Energy National Association of Convenience Stores Paulo Tonolli (Fecombustíveis) Plínio Nastari (Datagro) Programa Jogue Limpo (Play Clean Program) Raízen Ricardo Vallejo (Comgás) Ruy Ricci (Sindilub) SAE Brasil Sandro Cimatti (CVA Solutions) Sérgio Bandeira de Melo (Sindigás) Sindicatos Filiados Sindicom Brazilian Biodiesel and Bioqueresine Union Sugarcane Industry Union U.S. Energy Information Administration 100 Annual Fuel Retail Report 2016