Grupo de Economia da Energia

The future of biofuels VI: Petrobras’ strategy

In biofuels on 14/03/2011 at 00:30

By José Vitor Bomtempo

In the previous article, we compared the BP and Shell’s strategies for biofuels. Today we present the case of Petrobras. We have to recall the reasons for the analysis. We start with a basic distinction between competition within the existing industrial structure – ethanol and biodiesel – and the competition in what we call biofuels and bioproducts industry of the future – new processes and new biofuels and bioproducts. In the first case we have a typical competition based on positioning within a known industrial structure. In the second case, the industrial structure is not yet established, and the basis of competition is the ability to innovate and shape the new industrial structure. These points are developed in more detail in previous articles of this the series.

It is also important to note that the first-generation biofuels industry conversion technologies are available to investors from accessible external sources such as engineering/technology companies and equipment manufacturers. In the biofuels industry of the future – based on innovation in new commodities, new processes, new products – a fundamental change is to move the source of technology into the companies; thus, the technology tends to be much more advanced in bioproducts of the future and, therefore, owned. Therefore, there are large differences in the technological strategies of the current industry and the future of the industry.

The case of Petrobras

Petrobras intends to become one of the five largest producers of biofuels in 2020. The recent presentation of the company’s Business Plan for 2010 – 2014 gives us a good perspective of how Petrobras intends to act on biofuels. We took the picture below from this presentation.

The first point to note is the significant amount of planned investments: 3.5 billion dollars. That amount maybe places the company as the greatest investor in biofuels between the oil and gas companies. Petrobras is the only one out of major oil companies has formed a subsidiary to focus on biofuels segment.

But in what activities are these investments focused on? The main segment is ethanol, which will consume about 2.0 billion dollars, that is, more than half of total investment in the period. If we consider about 0.7 billion dollars to be invested in logistics and that most of these funds will go to the ethanol export structure, we can conclude that ethanol is the focus of Petrobras’ strategy. The company plans to expand its production capacity by 193% in the period, reaching 2.6 billion liters/year in 2014. Large portion of the ethanol will be exported, which will grow 135% in the period, reaching 1.1 billion liters in 2014.

As all this investment will be made within the current ethanol industry, we can conclude that the Petrobras’ strategy is competitive positioning with particular attention to the development of the international ethanol market.

In the case of biodiesel, although the funds are much lower, the logic of investment is similar: take a competitive position within the current industry. It will be invested US$ 400 million for the expansion of biodiesel production, which should enable a capacity increase of 47%, reaching 747 million liters in 2014. Currently, there are four plants operating and three under implementation. There are two palm projects: one of them for the export of palm oil to be industrialized by Galp in Portugal, and the other one to produce biodiesel for the Amazon region. These projects represent investments of nearly 900 million dollars.

In P&D, US$ 400 million will be invested over the next four years. The volume of funds should be considered significant even though it represents only 11% of the funds invested in the expansion of first-generation industry. Petrobras therefore considers as a strategic objective to ensure a strong position in the current industry.

What are the most important research themes in progress? How will these studies be integrated in the growth process of Petrobras Biocombustiveis? In light of the documents published by the company and the information available in company presentations and specialized press, this process does not seem very clear. In fact, studies are based on CENPES, and businesses on a subsidiary, Petrobras Biocombustiveis, which can lead to strategies definitely non convergent.

It is known that Petrobras has teamed up with American company, KL Energy, to develop cellulosic ethanol from sugarcane bagasse and predicted from the announcements (August 2010) the possibility of a plant in 2013 near one of the existing ethanol units. This initiative allowed research efforts on a pilot scale that CENPES has been developing based on internal research and Brazilian universities. The association with KL Energy suggests a commitment to make progress on lignocellulosic ethanol.

It is known that the CENPES conducts research on biomass gasification for the production of diesel in the so-called BTL thermochemical route (biomass to liquids). There are also records of research networks on raw materials for biodiesel, with the participation of universities and research centers: sunflower, castor, jatropha and macaw palm and bio-oil.

The HBio process, which has received much attention as an important technological achievement, is hardly mentioned in the company’s documents. The records merely mention that the HBio process represents a new form for the production of biofuels supplementing the Brazilian Biodiesel Program. This seems to suggest that the company currently does not show great interest in this alternative.

Thus, the research effort of the company, in case of diesel, seems to be focused on conventional technologies that are not considered as promising by large oil and gas companies interested in biofuels. At this point, there is strong contrast between Petrobras and the approach of Neste Oil. The Finnish company has a clear focus on diesel, but works with a proprietary technology for refining vegetable oil (NexBTL) somewhat similar to the HBio concept. Neste Oil has three plants operating (two with 190,000 t/a, and one with 800,000 t/a) and there is another one under construction (800,000 t/a), using basically palm oil. The total investment for the four plants is around 1.4 billion euros. But this production is associated with research projects of more advanced technologies (BTL, algae, microorganisms) that are explicitly announced as processes that in the future will be strategic to meet the needs of raw material and environmental quality of biofuels.

In general, this contrast on current first-generation industry and less interest in innovation, in order to construct the industry of the future, can also be seen when comparing the Petrobras’ ethanol strategy and Shell and BP’s strategies. These two companies now have a portfolio which includes first-generation investments but also structured investments with a transition to the industry of the future. Major oil companies, such as Exxon and Total, before out of biofuels segment, have showed up in major technological ventures (Exxon: US$ 300 million, in 2009, for algae with Synthetic Genomics, Total purchasing interests in « star » projects, like Amyris, Gevo and Coskata).

Therefore Petrobras distinguishes itself due to a strategy of strong involvement in industry and concentration of this involvement in the first-generation industry. Consequently, an aggressive strategy of positioning in the current industry with little involvement in more advanced technologies that may be the basis for the future of the industry. Limited to the small number of companies mentioned so far, we can identify the remaining oil and gas companies are divided into two groups: positioning strategies reconciled with innovative efforts to build the industry of the future (such as BP, Shell and Neste) and investment strategies via minority interests in major innovative projects (such as Exxon and Total.)

To conclude, we can highlight the large volume of funds invested by Petrobras as an indicative of effective interest to keep a leadership position in the biofuels industry. However, the strategic focus seems to be centralized on first-generation industry – ethanol and biodiesel – not yet seeing an effort to build the biofuels industry of the future and seeking leadership in this new industry.

It is expected that significant funds allocated to research will contribute to the sophistication of the company’s portfolio, particularly in the diesel segment. This sector seems to be committed in excess, according to our observations of the dynamics of innovation worldwide, with concepts that will occupy hardly an important place in the biofuels industry of the future. Petrobras may be much more daring and ambition a much more expressive position in biofuels and bioproducts industry of the future.

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  1. […] last article, we discussed the Petrobras strategy, arguably the most important actor in the future of energy in […]

  2. […] addition to Shell and BP, as discussed in article VI, Petrobras adopts a more conservative behavior but focused on finding a competitive position in the […]

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