Oil giants bet big on Brazil ethanol

SAO PAULO,- Oil companies investing in Brazil's ethanol sector said on Tuesday they are confident external demand for the fuel will rise in coming years despite slower-than-anticipated growth in recent years.

BP Plc (BP.L) and Brazilian state-run oil company Petrobras (PETR4.SA)(PBR.N) have plans to spend at least $3.4 billion in to build and purchase mills, as well as in research in new technologies to raise productivity and sustainability of cane-based ethanol.

BP, which has already invested $1.5 billion in biofuels research globally, has $1 billion to expand the plant it has in Goias in a joint venture with local groups Crystalsev and Maeda, and to build another adjacent plant.

BP was the first and biggest investment made by an oil major in Brazil's ethanol sector. It now has plans to invest with other partners in the next mills.

The company's idea is to create a production cluster in Goias state, a model to be repeated in other areas of the country until it reaches a total crushing capacity of 80 million to 100 million tonnes of cane per year, to be crushed in a series of mills.

"We believe a model like this is the most efficient. It allows the maximum synergies in terms of agricultural, industrial and commercial aspects," Mario Lindenhayn, president of BP Biocombustiveis said on the sidelines of a three-day Ethanol Summit in Sao Paulo.

Globally, the British company has a project with DuPont Co (DD.N) to develop biobutanol, a biofuel with an energy content 20 percent higher than conventional cane-based ethanol.

It also has a joint venture with U.S.-based Verenium to develop cellulosic ethanol production. The first plant, with an annual capacity of 36 million liters, is due to come on-line in 2012.

"We expect that mills in Brazil will also be a platform for biobutanol and lignocellulose (ethanol) in the future," Lindenhayn said.

"We see critics everywhere, as if biofuels were the same, but some of them are better than others," he said.

Brazil's Petrobras, which announced early last year plans to invest in production through minority stakes in mills, has plans to buy an existing mill by the end of 2009.

"We aim to begin production still in 2009, obviously in a partnership with an (existing) asset," said Miguel Rosseto, the president of the company's biofuels arm, Petrobras Biocombustiveis.

The company, which is already Brazil's top fuel distribution company, is currently building a plant in association with Japanese trading company Mitsui (8031.T), also in Goias state.

Petrobras's plans are ambitious but it has been slow to make good on initial plans to have a stake in 40 different plants, with focus in exporting to the Japanese market.

"There was expectation that there would be a firmer demand in other markets. So far, we have not detected this," Rosseto said.

Petrobras intends to invest $2.4 billion in biofuels by 2013 and has a target to produce 3.9 billion liters of ethanol by then. Rosseto said the figure was already updated from last year, taking into account the effects of the financial crisis.

"We'll balance (future) investments according to demand."

The initiative of oil giants to produce the renewable fuel has basically two reasons.

The first is to fight climate change - and the financial effects it could have on oil companies' finances. Analysts have said biofuels are the easiest and cheapest way to reduce carbon emissions if oil majors are forced to do so in the future.

The second reason is to improve energy security as demand grows at a faster pace than supply, even with a slowdown caused by the global financial crisis, Lindenhayn said.

source: reuters