Bloomberg News

Petrobras Ethanol Pipeline Pullback Raising Fuel Price

November 26, 2012

Petroleo Brasileiro SA (PETR4)’s decision to suspend investment in a $3.1 billion ethanol pipeline, the world’s largest, is spurring speculation the project will be scaled back and fail to lower fuel prices at the pump.

Petrobras, as the state-run oil company is known, won’t make payments next year for the 1,300-kilometer (808-mile) pipeline, according to sugar cooperative Copersucar SA, one of the six companies that co-own the project. An official at Petrobras in Rio de Janeiro declined to comment on the planned pipeline.

Investment in Brazilian ethanol capacity has plunged and production has stagnated since the pipeline proposal was conceived in 2007. The Petrobras move suggests the pipeline may be shortened or delayed, according to analysts including Sao Paulo-based Archer Consulting’s Arnaldo Correa and Bloomberg New Energy Finance’s Salim Morsy.

“The government, in a way, abandoned the ethanol sector after” oil discoveries in the so-called pre-salt region, said Adriano Pires, the head of the Brazilian Center for Infrastructure, a consulting firm in Rio de Janeiro. “Sugar mills are looking to the government and no one in the government will say what will happen.”

Petrobras is prioritizing investment in oil exploration and production as crude output will probably decline this year for the first time since 2004. Earnings dropped in the past seven quarters and its refining unit lost $8.4 billion in the first nine months of 2012, mainly from importing gasoline and selling it below cost to meet surging demand in Brazil.

Ethanol Policy

Brazil plans to revise its ethanol policies to spur investment in the industry, Trade Minister Fernando Pimentel said Oct. 18 on the country’s public radio network. The Mining and Energy Ministry declined to comment on Petrobras’s decision in an e-mailed response to Bloomberg questions.

The mix of sugarcane-based ethanol in Brazilian gasoline is 20 percent. Petrobras is seeking to increase that to 25 percent.

Copersucar Chairman Luis Roberto Pogetti said on a Nov. 5 conference call with reporters that Petrobras’s decision won’t affect the development of the project. Copersucar remains committed to the plan, according to an e-mailed statement yesterday. An official in Rio de Janeiro at Logum Logistica SA, the company developing the pipeline, declined to comment.

Petrobras Chief Downstream Officer Paulo Roberto Costa spoke about the pipeline at an ethanol summit last July in Sao Paulo, saying it would cost 6.5 billion reais ($3.1 billion), according to the company’s website.

The first section of the pipeline, 208 kilometers stretching across Sao Paulo state, is due to go into operation in March.

Cheapest Transportation

About 90 percent of the ethanol produced in Brazil is moved by long-haul trucks, often from mills in the interior to coastal cities, where it’s consumed or loaded onto ships for export. Another 6 percent goes by rail, while 3 percent uses existing pipelines and 1 percent is sent by rivers.

Pipelines are the cheapest form of transport in Brazil after waterways and the pipeline project may reduce transport costs by 7 centavos, said Morsy, an analyst at Bloomberg New Energy Finance in Sao Paulo, in a telephone interview.

Brazilian gasoline sold at an average of 2.75 reais a liter at the pump for the week ended Nov. 17, according to the Brazilian fuel regulator’s website. Ethanol sold for 1.88 reais. Ethanol results in 30 percent less mileage than gasoline.

Petrobras, Raizen Energia SA, Copersucar and Odebrecht Transport Participacoes SA each own 20 percent of Logum. Uniduto Logistica SA and Camargo Correa SA each hold 10 percent.

Marcelo Martins, the chief financial officer at Raizen controlling shareholder Cosan SA Industria e Comercio (CSAN3), said in an interview yesterday the pipeline partners are committed to the project and will make the necessary investments.

Central Brazil Mills

A pipeline may cut the cost of transporting ethanol by 50 percent from Goias, the center-west state where the project is expected to terminate, said Andre Rocha, president of the state’s ethanol industry association, or Sifaeg. About 60 percent of the region’s ethanol is shipped out of the state.

A shorter pipeline “would not just be bad for the state of Goias and mills here but for the whole sector,” Rocha said.

BNDES, Brazil’s national development bank, approved a 1.7 billion-real loan in September 2011 to fund the project’s first phase, comprising four terminals and a network of 476 kilometers of pipes linking the states of Sao Paulo and Minas Gerais, including the section that will be complete in March. A BNDES official in Rio de Janeiro declined to say whether the money has been disbursed to Logum.

Missed Expectations

Petrobras started studying the pipeline in 2007, when the ethanol industry was booming. Brazil produced 22 billion liters (5.8 billion gallons) that year and projections at the time anticipated annual production of 36 billion liters by 2016, when the pipeline would reach the center-west, Morsy said.

The original plan called for a pipeline capable of carrying 21 billion liters of ethanol a year and Brazil’s government expected to be exporting at least 9 billion liters by 2016.

The ethanol business hasn’t met those expectations, in part because the financial crisis of 2008 dried up investment in cane production, said Morsy. Production this year will be about 21 billion liters, and exports will total 2.5 billion liters, down from a peak of 5.1 billion liters in 2008, he said.

Investments in new capacity in Goias fell by more than half to about 750 million reais last year from an average of 2 billion reais a year between 2005 and 2010, Rocha said.

Less Necessary

At the same time, internal demand for the renewable fuel has increased, driving down exports and making a pipeline to coastal ports less necessary, said Archer Consulting’s Correa.

The project’s western-most segment, scheduled to pass close to mills run by Raizen, Petrobras and Odebrecht’s ethanol- producing unit ETH Bioenergia SA, may not be necessary, Pires said. Officials for Odebrecht, Raizen and a spokesman for Camargo Correa declined to comment when contacted by Bloomberg News. An Uniduto official didn’t respond to an e-mail.

If Petrobras also suspends investments in 2014, some of its partners may follow suit, Pires said, which may strand mills along its planned route.

“Many of these mills in the center west were built assuming the pipeline would be ready when they came online,” said Correa. “If that’s not the case, it’ll be a real problem.”

To contact the reporter on this story: Stephan Nielsen in Sao Paulo at snielsen8@bloomberg.net

To contact the editors responsible for this story: Adriana Arai at aarai1@bloomberg.net; James Attwood at jattwood3@bloomberg.net


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus