Petrobras, Brazil’s state-run oil company, plans to almost triple its share of the country’s ethanol production by 2015, staking its claim to one of the world’s leading alternative energy markets.

Foreign oil companies such as Shell and BP have piled into the industry this year, vying for an ever greater share of Brazil’s vast sugar cane fields as they prepare to exploit rising global demand for the biofuel from Europe and the US.

However, competition in the industry is set to get even tougher as Petrobras beefs up investment, spending $1.9bn by 2015 to increase its participation of the domestic market to 12 per cent from 5 per cent currently.

Other local producers are also likely to benefit from a new package of government incentives, such as cheap credit lines, expected to be announced as early as this week.

“We will grow in two ways: constructing new factories and buying existing ones, but always working in partnerships,” said Almir Barbassa, chief financial officer, in an interview with the Financial Times.

“We are already producing 5 per cent of ethanol in Brazil but we have about 40 per cent of the distribution market,” Mr Barbassa said. “We need to boost production so we can integrate the company in a more profitable and productive way.”

Ethanol is highly popular in Brazil where about 90 per cent of all new cars are built with “flex-fuel” engines that can run on gasoline or ethanol or any mixture of the two.

However, the US may also soon become a big market for Brazilian producers.

Under pressure to reduce the deficit, lawmakers in Washington are preparing to scrap ethanol subsidies and tariffs – barriers that have long prevented Brazil from exporting the biofuel en masse to the US.

Mr Barbassa said: “If they open the market, and it’s practical, then why not [sell to the US]? We are building an ethanol pipeline from the principal production regions to the coast to enable us to export.”

As part of the company’s $1.3bn logistics budget for biofuels for the next five years, Petrobras will build a pipeline between Jataí in the central state of Goiás and the town of Paulínia, about 850km away.

Brazil is the second-largest producer of ethanol behind the US but it is a more efficient one as it generates the biofuel from sugar rather than corn.

However, a lack of investment in the industry has pushed up the global price of sugar and made domestic ethanol so expensive that Brazil had to import 70m litres of corn-based ethanol from the US last year.

In order to bring down fuel costs, Brazil’s government is expected to announce a series of measures during the first half of August to encourage both greater production and stockpiling of the biofuel.

SOURCE: ft

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