Costs spiral for Brazil-Venezuela refinery project

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Aug. 28 -- Brazil’s Petroleo Brasileiro SA (Petrobras), already under fire from legislators, said the estimated cost of the joint-venture Abreu e Lima refinery project tentatively stands at $12 billion, or nearly three times more than the original estimate of $4.05 billion.

"It's important to clarify that the total investments are under evaluation and will be subject to approval by the executive board after a technical and economic feasibility study," Petrobras said.

The Brazilian firm said the original estimate of $4.05 billion came in 2006 during the conceptual project preparation phase, when the expected capacity of the plant was 200,000 b/d of oil. At that time, it said the cost of building a refinery was estimated at about $20,000/bbl of capacity.

Petrobras said the cost rose to $12 billion with the finalization of the basic plans for the project and the decision to increase its refining capacity by 15% to 230,000 b/d. It said the upward cost estimate fits with current construction costs for a refinery, which have risen to $50,000/bbl of capacity.

Petrobras said in addition to the increase in construction costs, the budget for the refinery was affected by the depreciation of the dollar relative to the Brazilian real.

The Petrobras statement came after complaints by opposition members of a legislative committee which is investigating alleged irregularities at the mixed capital firm, whose shares are traded on stock markets in Sao Paulo, New York, Madrid, and Buenos Aires.

The legislators based their complaints on an investigation by the office of Brazil's controller-general, which allegedly has found irregularities and over-invoicing and overpricing by companies hired to build the refinery.

The Abreu e Lima refinery is under construction in Brazil's northeastern Pernambuco state by Petrobras in association with Venezuela’s state-own Petroleos de Venezuela SA (PDVSA). Site work at the refinery project, which started last year, is near completion, the company added.

Earlier this month, Petrobras and PDVSA reached an agreement in principle on the final details of the joint venture, and the accord is expected to be signed in September, during bilateral trade talks between presidents of the two countries (OGJ Online, Aug. 6, 2009).

Contact Eric Watkins at hippalus@yahoo.com.

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