October 28, 2013 / 4:43 PM / in 4 years

UPDATE 2-Petrobras plans new Brazil fuel price system to cut debt

RIO DE JANEIRO, Oct 28 (Reuters) - Brazil’s state-run oil company Petrobras has proposed a new fuel-pricing plan, hoping to generate more cash and cut debt levels by improving the timing of gasoline and diesel price adjustments, Chief Financial Officer Almir Barbassa said on Monday.

The new policy, once it is in place, will set automatic fuel price rises or cuts, Barbassa told investors, analysts and reporters on a conference call to discuss third-quarter earnings. Petrobras stock jumped on hopes the new system will help the company cut debt that has ballooned because Petrobras now sells imported fuel at a loss to keep domestic prices low.

He said the proposed pricing system will not change the company’s policy of targeting long-term international prices for gasoline and diesel rather than short-term changes in global benchmarks.

The Brazilian government has tried to fight inflation by preventing Petrobras, known officially as Petroleo Brasileiro SA , from raising gasoline and diesel prices in line with world market prices. The price gap has increased in recent months as Brazil’s currency, the real, has weakened against the U.S. dollar. Because of the policy, all imported fuel is sold at a loss in Brazil.

The resulting reduction in income, exacerbated by the need to boost fuel imports to make up for rising domestic demand and a cut in the amount of ethanol used in gasoline blends, has led the company’s debt to balloon by more than a third to 250.9 billion reais ($112.5 billion) in the 12 months ending Sept. 30.

“The new policy will provide predictability and help us reduce our debt levels,” Barbassa said, adding the policy is under final study and will be presented to the board by Nov. 22.

Preferred shares of Petrobras, the company’s most-traded class of stock, rose 6.9 percent and common shares gained 8.5 percent in early afternoon trading in Sao Paulo.

Barbassa said the change in policy does not mean a gasoline price increase, long awaited by the market, is imminent.

“The new policy will still target long-term prices,” Barbassa said.

In 2002, former Brazilian President Luiz Inacio Lula da Silva, current President Dilma Rousseff’s predecessor, ended a short experiment with world-market pricing. He moved Petrobras to the current system under which the company would avoid raising domestic prices when world prices rose but also avoid fuel-price cuts when world benchmark prices fell.

But prices have trended upward in recent years. Brazil has let Petrobras charge more but has slashed wholesale fuel taxes to help keep domestic prices steady. Taxes hit zero, however, and recent permitted price increases have narrowed but not closed the gap with international prices.

The most recent price increases have been largely swallowed by the weaker real, which made fuel imports more expensive in local-currency terms.

The sustained increase in global prices and continued reliance on imports has saddled Petrobras with more than 30 billion reais of refining-unit losses since the beginning of 2012, crimping its ability to pay for a $237 billion five-year investment plan.

A long-delayed oil refinery being built on Brazil’s northeastern coast could help reduce Petrobras’ dependence on imported gasoline. The so-called Abreu e Lima refinery is now 82 percent complete, Jose Carlos Cosenza, Petrobras’ director of refining and supply said.

Petrobras is studying raising the capacity of the Abreu e Lima refinery now that Venezuela’s PDVSA is no longer partner in the project, Cosenza said on Monday.

The refinery was originally conceived to process 230,000 barrels of heavy crude from Venezuela’s massive Carabobo field, but now Cosenza said Petrobras plans to refit it to handle lighter crude at greater volumes from Brazil’s Campos Basin.

Cosenza said the recalibration to handle lighter crude “would not carry any additional costs” for Petrobras. The Abreu e Lima’s price tag is estimated at $18 billion.

Petrobras last month abandoned a partnership with Venezuelan counterpart PDVSA, which was supposed to finance the project with the Brazilian company, and said it would finish the refinery alone.

PDVSA had wanted to sell some of the fuel produced at the refinery abroad, but Petrobras said its requirements under Brazilian law made exports unlikely. Venezuela can get more money selling its refined crude outside of Brazil than in it.

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