Brazil Govt. Tends Towards 1 Refinery Plus Upgrades

Brazil's government is tending towards building one new refinery and upgrading the existing park, rather than building two new refineries, mines and energy minister Dilma Rousseff told a senate commission Tuesday.

This is prompted by the significant drop in consumption of oil derivatives due to the rise in oil prices, the minister said. The top end of demand growth is now estimated at between 2-3% a year on average through 2010, adding a maximum of 400,000 barrels a day (b/d) to drive total demand to between 2-2.5mb/d by that date.

Brazil currently has capacity to process around 1.9mb/d, 98% of which is controlled by federal energy company Petrobras. A new refinery would have to be able to process heavier Brazilian crude and produce more specialized products such as diesel, aviation fuel and naphtha, requiring more expensive technology, the minister said. In round numbers, the government is looking at a new refinery processing 200,000b/d at a cost of US$2bn, she said, adding that upgrading existing refineries would be cheaper than building new ones.

A plan to upgrade refineries would be designed to increase the capacity for processing heavy Brazil crude, and produce more diesel and less fuel oil, she said. The final decision will be taken based on a combination of political and technical reasons, by the federal government, through its majority share in Petrobras, and private sector investors, she said. "The location will not just be defined by the government. It has a major role from political point of view but an investor's decision will also have to be taken into account," Rousseff said.

The minister said that private investors have not stepped up to invest in refineries because there has not yet been a major oil discovery by a private company in Brazil. Consequently, any new investors in refineries will want to partner with Petrobras as it has the access to local crude supplies. Various private sector investors have already shown interest, but all the projects are still in preliminary studies, she said. All recent studies have been affected by the recent volatility in the international oil markets, and a return to some sort of normality is important to be able to define a refinery project, she said.

As for location, the most important projects presented by state governments are all equally competitive, she said. From a logistical point of view, the choice is between locating a refinery close to the market, as in the center west and northeast, or close to crude supplies, in the southeast. As a general rule, locations closer to markets provide higher margins, she said. The size of the market and fiscal incentives would all be considered. The deeper local ports, the lower the cost of transport. The center-west and northern regions import all types of fuel, the northeast imports most fuels but exports fuel oil, while the southeast and southern regions both export practically all types of fuel except for LPG, the minister said.

The minister said the northeast is "one of the most legitimate challengers for the refinery," but said the decision would not be taken purely for geographical reasons. Even with these new investments, Brazil will not be completely self-sufficient, and will still need imports, so any changes in the market along the way could trigger new investments, the minister said.

One of the senators raised the recent announcement by Petrobras of a discovery of oil in Sergipe state. The minister confirmed that the crude oil in Sergipe is high quality, 46 degrees API, but said Petrobras has not yet confirmed the size of the discovery. "I believe it would almost double production in Sergipe," she said, without saying whether that would impact the refinery decision.

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