September 12, 2012:

BRASILIA/RIO DE JANEIRO, Sept 11 (Reuters) - Brazil's state-led oil company wants domestic fuel prices to gradually rise to match international crude oil as any sudden price hikes would hurt the country's economy, Petrobras Chief Executive Maria das Gracas Foster said on Tuesday. Petrobras' policy of setting gasoline and diesel prices based on long-term crude-oil averages rather than short-term swings has provided more profit than loss in the 2002-2010 period, helping the government control inflation, Foster said. "We don't believe that immediate fuel price parity would be healthy for the economy," Foster told a hearing of the economic affairs committee in the government's Senate. "The impact of a fuel price rise on the economy is great." Brazil's gasoline and diesel prices are more than 27 percent below world prices, according to the Brazilian Infrastructure Institute, a Rio de Janeiro energy think tank.

The disparity contributed to Petrobras' first loss in 13 years in the second quarter, which in turn reduced the company's access to cash to pay for a $237 billion five-year expansion plan, the world's largest corporate spending programme. Foster said in June that scheme, which envisions spending an average of $130 million a day through the end of 2016, would be impossible to achieve without higher fuel prices. The plan aims to more than double output to about 5.4 million barrels a day by 2020 and help make Brazil one of the world's top three oil producers. Under its fuel pricing policy, Petrobras loses money when crude prices rise, but makes those losses back by holding fuel prices steady when world crude benchmarks fall. Foster's comments to the Senate committee come less than three months after Petrobras received its first real price rise in six years and less than a month before nationwide municipal elections.

PUMP PRICE CONCERN

Previously the government helped Petrobras recoup losses without driving up service station prices by cutting taxes on wholesale fuel sales. Petrobras would sell the fuel at the same price, pocketing the amount that was previously collected in taxes. With taxes now at zero, any future rises will hit consumers at the pump. While Petrobras shares have gained about 20 percent since the June fuel hike, they remain close to four-year lows. Shares are now worth less than they were before Petrobras announced the discovery of giant new offshore reserves five years ago. Despite concerns about the company's declining revenue from fuel sales, rising costs, a declining cash position and falling output, Petrobras stock is undervalued, Foster said. She told Senators the stock should be trading at values close to those before a nearly $70 billion 2010 share sale, or about 25 percent more than on Tuesday. The company, however, needs to "work on its debt" or risk losing its investment grade bond rating, she said. Petrobras gained 2.31 percent to 21.72 reais in Sao Paulo trading on Tuesday.

PDVSA COURTED

Foster also said Venezuela's state-owned PDVSA has until November to decide if it will participate in a refinery under construction near Recife on Brazil's northeast coast. The Abreu e Lima refinery is being built with two separate refining chains, one for Petrobras's Brazilian crude and the other for heavy Venezuelan oil. PDVSA has yet to pay any of the cost of the plant. "I am saying specifically that PDVSA needs to come and be part of this refinery effectively, because this refinery was planned for two kinds of oil," Foster said. Petrobras has said the decision to build two separate processing units instead of just one was one of the reasons the cost of the refinery has soared.

PDVSA has the right to take a 40 percent stake in the refinery, which is 63 percent complete, Foster said. She added that if PDVSA misses the November deadline, Petrobras may consider changing it. The cost of the 230,000 barrel a day refinery has rocketed to as much as $20 billion when complete, sometime in 2014, from its original budget of $4.3 billion in 2008. According to Brazil's Federal Accounts Court, an independent auditor of government accounts, a separate refinery in Rio de Janeiro is nearly $700 million over budget and already three years behind schedule. 

SHALE GAS CONCERN

Foster denied that Petrobras was inflating the cost of the refineries and said the auditing court was using outdated accounting and pricing methods. She said the Abreu and Lima refinery cost explosion was the result of mistakes made in the original planning and the use of improper budget projection software. But even with the completion of five new refineries by the end of 2017 and upgrades to Petrobras' existing 12 in Brazil, the company will still be unable to meet domestic demand for fuel by 2020 and be forced to import, Foster said. She added that it would be easier to deal with the country's gasoline deficit by increasing production of sugarcane ethanol, which almost all new Brazilian cars can burn in pure form or mixed with gasoline, thanks to so-called flex-fuel technology. One of the reasons ethanol production is down is that it is more expensive to use than gasoline in nearly every one of Brazil's 27 states. Had fuel prices been allowed to rise, ethanol would have been competitive in many more, according to Unica, the country's main sugar-cane growers association. Foster also said she is concerned about U.S. shale gas output and its impact on natural gas prices. Lower U.S. gas prices are making petrochemical industries uncompetitive outside the U.S., she said.

By Reuters