INSIGHT: Fuel subsidies may jeopardise Petrobras’ refining investments

05 July 2013 15:52  [Source: ICIS news]

By Leela Landress

MEDELLIN, Colombia (ICIS)--Analysts and investors worry that Petrobras’s heavy investment in its refinery division will not achieve any real boost in earnings as long as refined products prices are not set freely.

Brazil's currency has weakened more than 10% since early May and the stronger US currency will affect the company's cost of importing diesel and gasoline, which it is forced by the federal government to sell at subsidised rates domestically at a loss.

A sharp depreciation of the Brazilian real over the past month could accelerate inflation further by making imported goods more expensive, an analyst said. The real is trading at its weakest levels in four years.

After making one of the world’s biggest oil discoveries in 2007, instead of seeing sustained growth, Petrobras’s share price has lost value amid concerns it is being used to fulfil the government’s agenda to maintain low inflation rates rather than profitability.

Currently, because of a lack of refining assets, Petrobras imports fuel at international prices then sells it at a discount, helping the government control inflation, analysts say.

The escalation in 2007 and 2008 of the international oil price and the identification of large domestic offshore oil reserves radically changed the perception of the Brazilian oil situation, according to a June 2010 study by the International Institute for Sustainable Development.

Oil abundance prompted the view that Brazil can take advantage of the lower cost of domestic crude to speed up industrialisation and to mitigate social, regional and environmental problems as well, the study said.

Price subsidies for petroleum products were reintroduced in 2008, when domestic oil production and consumption were matched, so as to minimise the effect the brutal escalation of the oil price during that year had on the economy, the report said.

Refining output in Brazil, which was self-sufficient in crude and gasoline until 2009, hasn’t kept up with surging consumption as Petrobras faces delays and cost overruns at its biggest projects, the report said.

Petrobras plans to build two refineries at its Comperj project in Rio de Janeiro. The start up of the first 165,000 bbl/day refining train at Comperj was postponed to 2016 amid cost and labour issues, an analyst said. A larger 300,000 bbl/day train is scheduled to start operations by 2018.

Petrobras may create a joint venture with South Korea-based GS Energy to develop the Premium II refinery in the northeastern state of Ceara, the company said earlier this year. The two companies had signed a letter of intent on 29 May, Petrobras said.

The Premium II refinery is expected to start operations by the beginning of 2018. It will have a capacity of 300,000 bbl/day.

Premium II is among several refineries that Petrobras plans to build.

Premium I would be built in two stages in the state of Maranhao, Petrobras has said. Each stage would have a processing capacity of 300,000 bbl/day.

The Abreu e Lima refinery will be built near Recife. Also known as the Refinaria do Nordeste (RNEST), it is expected to have a processing capacity of 230,000 bbl/day.

Petrobras did not respond to emails seeking comment.

By: Leela Landress
+1 713 525 2653

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