Brazil plans extra ethanol investment in face of possible US deal

Mar 5, 2007, 20:47 GMT

Rio de Janeiro - Brazil's state energy company Petrobras is contemplating increases in its investment plans for the production of ethanol, in the face of a possible deal between Brazil and the United States to boost use of this biofuel in other countries.

'If talks with the United States evolve, we will have to expand the project,' said Petrobras' director of supplies Paulo Roberto Costa, in comments that the Brazilian daily O Estado de Sao Paulo published Monday.

Cooperation in the field of biofuels is set to be the main topic of discussions between Brazilian President Luiz Inacio Lula da Silva and his United States counterpart George W Bush, when they meet on Friday in Sao Paulo in the framework of Bush's Latin American tour.

Lula said Monday that he intends to ask the US president to reduce tariffs on imports of Brazilian ethanol, which is made from sugar cane and is a more efficient source of energy than US ethanol produced from corn.

Brazilian Foreign Minister Celso Amorim admitted that the demand will probably not be satisfied in the short term. The US Congress approved an increased tariff which is due to expire in 2009, but Petrobras considers that there are perspectives for a future increase in Brazilian ethanol exports to the US market.

Brazil exported 1.8 billion litres of ethanol to the United States in 2006 - more than half its export total - despite an extra 14 cents per litre that US importers have to pay for Brazilian ethanol.

Petrobras accounted for 600 million litres of exported ethanol in 2006 and is expecting the figure to rise to 850 million this year. The company's export capacity is 1 billion litres.

According to the Petrobras official, if the expectations of increased sales of the biofuel to the US and other countries are confirmed, the company will need to review its plans, which currently contemplate investments of 2.4 billion dollars by 2012.

The funds are earmarked for the construction of a network for the transport of ethanol produced in the south-eastern, centre-western and southern regions of Brazil to the terminal in Paulinia, in the state of Sao Paulo.

Besides, in association with the Japanese company Mitsui and with financial support from the Japan Bank for International Cooperation (JBIC), Petrobras plans to purchase a stake in up to 40 new plants for the production of ethanol and to build terminals to hold stocks of the biofuel in Japan.

The Asian country is considering the use of ethanol mixed with petrol - a practice that is compulsory in Brazil - and to generate energy in thermal power plants.

No contract has been signed yet, but Petrobras has estimated that Japan could import between 1.8 billion and 6 billion litres of ethanol a year.

Overall Petrobras' current investment plans are based on the expectation that its foreign sales of ethanol will reach 3.5 billion litres per year by 2011.

The state-owned company is only one player in Brazil's highly- fragmented ethanol market. Indeed, Brazil exported 3.4 billion litres of the biofuel in 2006, with only 225.4 million litres going to Japan.

If however Petrobras' ethanol exports rise to more than double the current expectations, to reach 8 billion litres per year in 2011, the construction of a new pipeline linking the Paulinia terminal to the port of Sao Sebastiao, in Sao Paulo, would be financially viable, according to the estimates of Petrobras technicians.

Currently, ethanol is transported by truck to ports in either Sao Paulo or Rio de Janeiro.

Costa said that the revised plans could also include the purchase of tankers for ethanol transport.