VZCZCXRO9396
RR RUEHRG
DE RUEHRI #0205 2121300
ZNR UUUUU ZZH
R 301300Z JUL 08
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC 4571
INFO RUEHBR/AMEMBASSY BRASILIA 0911
RUEHSO/AMCONSUL SAO PAULO 5170
RUEHRG/AMCONSUL RECIFE 3442
RHEHNSC/NSC WASHDC

UNCLAS RIO DE JANEIRO 000205 
 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EINV BR
SUBJECT:  Petrobras Launches Biofuels Subsidiary 
 
¶1.  Summary.  This week, Brazil's semi-public oil company Petrobras 
will launch a new subsidiary to run its growing biofuels operations, 
looking towards building production capacity to meet growing global 
demand for ethanol exports.  The new subsidiary, called Petrobras 
Biocombustivel, will coordinate Petrobras' significant biofuels 
investments (US$1.5 billion over five years) which are currently run 
by various units of the company.  Through joint ventures with 
foreign investors, Petrobras plans to buy minority stakes in ethanol 
mills in Brazil and abroad, with an eye towards markets such as 
Venezuela, Japan and the U.S.  End Summary. 
 
Introducing Petrobras Biocombustivel 
------------------------------------ 
 
¶2.  Petrobras is launching a biofuels subsidiary this week, 
Petrobras Biocombustivel, to oversee over US$ 1.5 billion in new 
biofuels investments.  Petrobras Biocombustivel, headed by longtime 
Petrobras insider Alan Kardec Pinto, will partner with foreign 
investors to buy minority stakes in ethanol projects in Brazil and 
abroad, aiming at ensuring supplies for Petrobras's projected export 
supply contracts.  Mines and Energy Minister Edison Lobao will be at 
the New York Stock Exchange on August 18th to ring the closing 
belling as a means of announcing this new subsidiary.  By 2012, 
Petrobras expects most of its ethanol exports will come from the 
mills where it holds minority stakes with an annual ethanol output 
of 1.3 billion gallons. 
 
¶3.  Petrobras Biocombustivel's primary focus will be on ethanol and 
biodiesel production, as well as expansion of the company's ethanol 
pipeline and storage facilities.  It will also oversee three 
biodiesel plants that are scheduled to come on-line later in 2008. 
The biodiesel plants, at a combined cost of US$188 million, will 
each produce 45 million gallons of biodiesel annually for domestic 
consumption. 
 
Snapshot of Petrobras' Current Biofuels Operations 
--------------------------------------------- ----- 
 
¶4.  Petrobras is a strong player in ethanol transport (Note: 
Petrobras controls the country's pipeline which is used for ethanol 
transportation) and distribution in Brazil's domestic market, but it 
is not currently an ethanol producer.  Through its distribution 
unit, Petrobras Distribuidora, the company buys ethanol from 
Brazilian sugar-cane refiners and sells it at its service stations 
either as pure ethanol or as part of its gasoline and diesel 
mixtures.  (Note: By law, more than a fifth of all gasoline sold in 
Brazil contains ethanol and ethanol just displaced gasoline as the 
major automotive fuel earlier this year.)  Petrobras stations 
currently sell over one-third of the ethanol used as fuel in Brazil. 
 Since July 1, 2008, all diesel fuel in Brazil contains 3 percent 
biodiesel (supplied by Petrobras). 
 
¶5.  In 2007, Petrobras exported about 210 million gallons of 
ethanol.  Its only current ethanol export client is Petroleos de 
Venezuela (PDVSA), Venezuela's state oil company.  PDVSA imports 
ethanol as a replacement for tetra-ethyl lead, a toxic gasoline 
additive.  Outside of Venezuela (and potentially the U.S.), 
Petrobras sees Japan as a critical market for its expanded ethanol 
export strategy.  In late 2007, Petrobras entered into its first 
five joint venture partnerships to produce ethanol in the states of 
Goias and Mato Grosso.  In Petrobras's first partnership with 
Mitsui, Japan's second-largest trading company, each company bought 
10 percent of a mill that will start producing about 53 million 
gallons of ethanol annually in 2009. 
 
Comment 
------- 
 
¶6.  Despite Petrobras' bright ethanol exports forecast in the long 
term, this year's overseas sales will fall short of its goal, due 
mainly to Venezuela's shift to an oil-based additive in gasoline 
instead of Brazilian ethanol.  Petrobras may also fall short of its 
export targets as countries including Japan, which the company 
counts on to buy most of its biofuels exports, delay plans for 
mandatory blending of ethanol into gasoline.  A consulate contact 
described Petrobras Biocombustivel as a "pet project" of the Lula 
government driven primarily by the administration's "obsession" with 
ethanol.  Petrobras is first and foremost an oil company, the source 
said, but the new subsidiary will at least serve to centralize the 
company's biofuels activities - which, up to now, have been spread 
out over several divisions and will compete with many firms which 
specialize in biofuels. 
 
¶7.  This cable has been coordinated with and cleared by Embassy 
Brasilia. 
 
MARTINEZ