Petrobras will spend $3.5 billion over the next four years double biofuels output

Will the waterways soon be flooded with biofuel tankers?

Brazilian state-run energy giant Petrobras (PBR, PETR4.BR) will spend $3.5 billion over the next four years to more than double biofuels output, positioning the company to take advantage of global demand for clean, renewable sources of energy.

“We are preparing for a global scenario in which the demand for biofuels is expanding,” Miguel Rossetto, chief executive of Petrobras biofuels unit Petrobras Biocombustivel, said in an interview.

Petrobras created Petrobras Biocombustivel in 2008 to be the platform for its entry into Brazil’s biofuels sector, where sugarcane ethanol has been in use since the 1970s. But the world’s need to reduce carbon emissions, including firm targets set by some countries, means that demand for biofuels such as ethanol and biodiesel will likely explode in coming years.

The transition toward low-carbon economies is already “definitive,” Rossetto said, “and the evolution of the low-carbon economy for the fuels sector is already a reality in some countries and will be a growing reality for the rest of the world.”

“The pace of growth, the volume of growth and the size of these markets are what’s in play,” Rossetto said. “But the course of expansion for renewable energy markets for us is a given.”

Petrobras Biocombustivel currently operates or has stakes in 14 biofuel mills, including 10 dedicated to ethanol production and four for biodiesel, Rossetto said.

The company plans to spend $2.5 billion to boost ethanol and biodiesel production, with about 80% of the total earmarked for ethanol projects, Rossetto said. An additional $1 billion will be spent on infrastructure development, including Petrobras’ participation in a $3.3 billion ethanol pipeline project, as well as research and development.

Ethanol production is targeted for 2.6 million cubic meters by 2014, up from output of one million cubic meters in 2010. Biodiesel production, meanwhile, is expected to climb to 750,000 cubic meters in 2014, up from 500,000 cubic meters at the end of last year.

The company’s primary focus is to meet rising demand in Brazil, Rossetto said. Brazil not only mandates a 25% blend of ethanol into gasoline at the pump, the country also has a massive flex-fuel fleet of light vehicles that can operate seamlessly on ethanol, gasoline or any combination of the two fuels.

Demand for biofuels from the petrochemicals sector is also growing as the industry moves toward greater production of so-called green plastics. Local petrochemicals giant Braskem (BAK, BRKM5.BR), in which Petrobras holds a 49% stake, consumes about 400,000 cubic meters of ethanol per year.

Brazil’s appetite for biodiesel is expected to grow “very strongly,” given the heavy use of diesel fuel in the country’s transportation sector, Rossetto said. And while the government currently requires a 5% blend of biodiesel with diesel fuel, called B5, that’s likely to rise in coming years.

“We believe that in 2011, the government should start an initiative to put in place a regulatory regime for biodiesel. The idea is to increase the biodiesel blend to 10%, starting in 2012,” Rossetto said.

While high tariffs present a barrier to ethanol exports, Rossetto said that a recent biodiesel joint venture with Portugal’s Galp Energia (GALP.LB) opens a golden door to the European market.

Petrobras will produce palm oil on plantations in Para state, then ship it to a refinery in Portugal capable of producing 250,000 cubic meters of green biodiesel by 2015.

“We think that Europe will not be able to supply via its own production the biofuels necessary to meet the mandate to use 10% biofuels in its transportation sector by 2020,” Rossetto said. “(Europe) should be importers of biofuels.”