RIO DE JANEIRO (Reuters) - Brazilian state oil company Petrobras’ refining investments are crucial to ensuring Brazil’s long-term energy supply as fuel consumption soars in fast-growing nations such as India and China, CEO Jose Sergio Gabrielli said on Monday.
Speaking at the Reuters Brazil Investment Summit in Rio de Janeiro, Gabrielli said critics of the company’s planned $74 billion in downstream investments over five years ignore the risks for Petrobras of relying on foreign refiners in the coming years as fuel consumption surges in emerging economies.
Petrobras (PETR4.SA) has heavily defended its refining investments despite investor criticism that they provide lower returns for shareholders and are a product of political meddling in the company.
“Brazil could specialize in producing oil, exporting it to China, and then importing diesel, but that’s insane,” Gabrielli said.
“It doesn’t make sense to do that if you can build a refinery here and boost flexibility, reduce risk, and reduce the possibility of predatory (actions) in the market,” he said, noting most of Petrobras’ income comes from the Brazilian market.
“A company that relies on its internal market has to invest to cover that market,” he said.
Oil consumption and refining capacity in the United States, Europe and Japan will decline in the coming years while consumption in emerging markets will soar, Gabrielli said, citing a market study carried out by Petrobras.
“If you look at China India and Brazil, what do you see? Intense economic growth and an increase in per-capita (fuel) consumption. China, India and the Middle East are investing heavily in refining capacity,” he said.
Investors and analysts have criticized the company’s refining plans as lowering overall returns compared with the more lucrative upstream assets including the firm’s massive offshore discoveries in the deep water region known as the subsalt, which is believed to hold 50 billion barrels of oil.
Petrobras plans to invest $224 billion for the 2010-2014 period, its largest-ever investment plan which is meant to help Brazil become a major energy exporter by tapping the subsalt reserves.
Gabrielli said he expects no changes to the company’s operations once President-elect Dilma Rousseff, an ally of President Luiz Inacio Lula da Silva, takes office on January 1 because many long-term projects are already under way.
“We have $69 billion invested in projects that are under way, which means that it will be difficult to radically alter the company’s strategy in the short term. It would be almost impossible,” he said.
He did not say whether he expected to stay on under the Rousseff administration and declined to comment on speculation that he might enter politics in his native state of Bahia, a tropical, easy-going mecca of Afro-Brazilian culture.
“President Lula has guaranteed that I will have a job at least until December 31,” he said.
He said he would be happy to return to teaching economics at a Bahia university as he did before joining Petrobras.
But most expect he will continue at the helm of the company. Brazil’s Estado de Sao Paulo newspaper reported on Monday that Gabrielli would stay on at least until the end of next year as Congress moves toward approving new oil regulations meant to boost state control over the subsalt reserves.
Petrobras in 2011 will begin raising production from the subsalt fields and begin exploration of new areas holding 5 billion barrels of oil it acquired through a complex oil-for-shares swap linked to a record $70 billion share offering in September.
Despite the heavy investments needed to develop those new areas, Gabrielli said the company is not considering selling off any of its assets in the subsalt region to finance the new projects.
“It would be totally illogical,” Gabrielli said.
The company will borrow between $32 billion and $40 billion by 2014 to finance its investments.
Brazil’s total production, including output by both Petrobras and private partners, in 2020 should reach 4.6 million barrels per day (bpd) compared with an estimated domestic market demand of around 3.4 million bpd, he said.
He added it was difficult to make projections about how much oil Brazil will be able to export then because those volumes depend on such volatile factors as crude prices and refining margins.
Gabrielli said the government is reviewing its projected rate of growth of Brazil’s domestic fuel market — a key factor in the nation’s export capacity — on signs that it could turn out to be faster than initially expected.
“This year was completely atypical because demand for liquid (fuels) grew faster than the rate of growth of GDP,” he said. “We believe that was due in large part to reduction in poverty and improvement in social equality,” he said.
Reporting by Brian Ellsworth and Denise Luna; editing by Stuart Grudgings, Lisa Von Ahn and Matthew Lewis