MercoPress. South Atlantic News Agency

Petrobras earnings down 20%; subsidized fuels strangling the company

The fuel subsidy, combined with a massive investment budget, has turned Petrobras into the world's most indebted oil major

Second quarter profits for Brazil's Petrobras dropped 20% compared to the same period one year earlier, the state-run oil giant said. Petrobras recorded profits of 4.96 billion Reais (about 2.22 billion dollars) in the quarter, compared to 6.2 billion Reais (nearly 3 billion) for the same period in 2013.

 CEO Graca Foster said that the slump in profits was due to an 800 million Reais drop in revenue as well as an increase in federal taxes.

The company also imports gasoline -- its local refineries cannot meet the domestic demand -- and sells it at a subsidized price as set by the Brazilian government.

Income from sales, however, stood at 36.9 billion dollars, up 12% compared to the same period last year.

Only counting crude and liquefied natural gas production, Petrobras had an average production of 1,972 barrels per day in the second quarter, up from 1,931 barrels per day a year earlier.

Petrobras' imports of oil and derivatives surged 33% in the second quarter from a year earlier to 941,000 barrels a day. The refining division's quarterly loss ballooned to 3.88 billion Reais, up 54% from the second quarter of 2013.

The fuel subsidy, combined with a massive investment budget, has turned Petrobras into the world's most indebted oil major. Net debt as of June 30 stood at 109.58 billion, up 16% from the end of 2013.

Earnings before interest, taxes, depreciation and amortization, or Ebitda, fell 10% on the year to 16.26 billion reais.

Brazil aims to be among the world's top five global oil producers by 2020, when it expects to be producing four million barrels of oil a day. Petrobras reiterated its target of increasing oil production by 7.5%, plus or minus one percentage point, in 2014.

Petrobras Chief Executive Maria das Gracas Foster said in a note that the company's own output of gasoline and diesel will rise in the second half of the year as production at existing refineries improves and the Abreu e Lima refinery, the cost of which has risen past 18 billion, comes online.

“These factors will allow us to reduce by about 30% our imports of oil and derivatives compared with the first half,” Ms. Foster