BACKGROUND The pricing policy for gasoline and diesel established by Petrobras has as one of its principles to never charge prices lower than international parity. The purpose of this Report is to analyze the price movements that occurred in the second quarter of 2017, checking their compliance to the pricing policy and the Business Plan of the company. METHODOLOGY Throughout this period, the assessment of adjustment needs on fuel values at Petrobras refineries is carried out by the Executive Group of Market and Prices (GEMP) composed of the President of the Company, the Financial and Investor Relations Executive Officer, and the Refining and Natural Gas Executive Officer, who meet at least once a month. The GEMP members continuously monitor oil and derivates prices in Brazil and in the world, as well as their progress vis-à-vis the expectations of results included in the current Business Plan. The assessments on any price movements are made based on analysis of the Marketing and Trading Executive management, which organizes market data taking into account factors such as international quotes, maritime freight, import costs and exchange rate. These assessments also consider the risks inherent to import activity, as for example: volatility in exchange rate and international prices of oil and derivates. It should be noted that all values used to compose international parity prices (PPI) reflect market costs, such as quotes, freight costs, and import costs. Based on these assessments, the GEMP is responsible for outlining the strategy to be implemented for any price movements, further considering expectations of increases or reductions in Petrobras market shares and the margin to be practiced by the Company in the period. This implies that strategic decisions can mean, for example, the adoption of margins eventually below or above the forecast in the Business Plan, in order to adjust the Company's competitiveness and, consequently, its market shares. ANALYSIS OF ADJUSTMENTS MADE IN THE 2st QUARTER 2017 The practice of price fixing never below international parity, as defined in the new pricing policy for gasoline and diesel, implies the monitoring of the international oil and derivate market, which will be reflected in internal pricing of derivatives, seeking a shorter-term adjustment to these fluctuations. Published on October, 2017 1
The graph below shows the evolution of international prices of Brent Dated, Diesel (ULSD USG Pipe) and Gasoline (Eurobob) over the second quarter of 2017, which were the main references for Petrobras in the analysis period. Source: Platts and Argus A strong downward trend was observed in international prices in the quarter, driven mainly by the increase of oil production in the US, Libya and Nigeria, which led to a reduction of the world surplus more slowly than expected by the markets during this period. Although the renewed agreement on cutting production by OPEC nations occurred in May, the increase in production and global oil reserves caused the brief price recovery not to be sustainable. As such, the price of oil went from an average level of US$52.5/bbl in April to US$46.5/bbl in June, having a major effect on the behavior of gasoline and diesel prices in the international market, which also presented a drop. The prices of diesel retreated from an average level of US$65.4/bbl in April to US$58.2/bbl in June, as well as the prices of gasoline, which also declined, going from average levels of US$64.9/bbl in April to US$59.1/bbl in June. The exchange rate was strongly impacted in the middle of the quarter. In the period, the Brazilian currency accrued a +6.1% depreciation, going from R$3.12 in early April to R$3.31 by the end of the quarter. Source: Central Bank of Brazil Published on October, 2017 2
The pricing policy for gasoline and diesel also considers the behavior of imports as a relevant factor in market analysis and, therefore, in the definition of derivative prices in the country. This has resulted in variations in Petrobras market share, which are considered by the GEMP. During the second quarter of 2017, the aggregate behavior of third-party imports is diverse when diesel and gasoline are observed. In the case of diesel, imports recorded an upward trend, increasing every month. In the case of gasoline, imports in the second quarter of 2017 featured a decrease over the period, starting the quarter at 0.42 million m³ and ending at 0.29 million m³, as internal monitoring presented below: Diesel Third-Party Imports (million m³/month Gasoline Third-Party Imports (million m³/months) 1,40 1,40 1,20 1,00 1,22 1,20 1,00 0,80 0,60 0,81 0,96 0,80 0,60 0,40 0,20 0,40 0,20 0,42 0,31 0,29 0,00 1-Apr 1-May 1-Jun 0,00 1-Apr 1-May 1-Jun Source: Petrobras This result indicates that price movements carried out by Petrobras in the first quarter of 2017 were an influence factor on the behavior of the other players in the country s derivatives market, though not the only factor. Despite the price reductions presented for both fuels, the growth of diesel imports over gasoline reveals a preference of market agents to import diesel when the products feature equivalent levels of import margin. Regarding import logistics, approximately 85% of the volume of purchases by third parties in the second quarter of 2017 were concentrated in 5 (five) ports, as detailed in the charts below: Published on October, 2017 3
Diesel Discharge Ports 2Q 2017 Gasoline Discharge Ports 2Q 2017 15% 12% 7% 30% 6% 30% 8% 13% 15% 25% 19% 20% Paranaguá Santos Itaqui Suape Aratu Outros Paranaguá Santos Itaqui Suape Aratu Outros Source: Petrobras During the second quarter of 2017, Petrobras also put in place the disclosed policy of oneoff discounts in poles of distribution, with adjustments that consider the need for greater flexibility in the management of trade and stimulus to increase sales. As shown in the chart above, the busiest discharge point was Paranaguá/PR, accounting for 30% of diesel discharges. In this context, during the second quarter of 2017, discounts have been applied at the following points of sale: Month Diesel Gasoline April May June São Francisco do Conde/BA Candeias/BA Published on October, 2017 4
Over the period under analysis, Petrobras held three price movements, per the table below: Period of Force Diesel Gasoline 04/21/2017 +4.3% +2.2% 05/26/2017-3.5% -5.4% 06/15/2017-5.8% -2.3% It should be mentioned that the executive group assessed that adjustments on at least a monthly basis to prices, although a significant improvement over the previous system, have not shown to be the best instrument to accommodate the volatility featured especially in the international price of commodities and foreign exchange. This observation drove a review of the pricing policy, which, as disclosed on 6/30/2017, increased the frequency of the adjustments to better reflect market dynamics, thereby increasing the competitiveness of the Petrobras product against imports. Pursuant to the pricing policy for gasoline and diesel, the prices charged by Petrobras over the second quarter of 2017 were always above international parity and aligned to the Company s Business Plan, which provides for a margin above PPI, practiced as a reference to increase its revenue, seeking to maximize its results through optimization of sales volume and margin. Published on October, 2017 5