Sao Paulo:  Brazilian state-run oil company Petrobras said on Friday it would invest 1.6 billion reais (Dh3.38 billion) in one of the country's largest sugar and ethanol groups, Acucar Guarani, to expand in biofuels production.

The deal between Petrobras and French sugar group Tereos, Guarani's parent company, will give the Brazilian oil company a 46 per cent stake in the local ethanol and sugar producer.

"This investment will translate Petrobras' strategic plan for the ethanol sector [into reality]," said Miguel Rossetto, president of Petrobras Biocombustivel, to journalists.

The deal, said Alexis Duval, head of Tereos's international activities, "will strengthen the project of creating a strong group, headquartered in Brazil, to act in the bio-energy and food sectors."

Diversifying

Both said organic growth would be a priority, but Rossetto also mentioned the possibly of "acquiring regional projects."

Petrobras is not the only oil major to be delving into Brazil's biofuels sector. Shell said in February that it would team with Brazilian ethanol and sugar giant Cosan.

This followed a 2008 announcement by Britain's BP Plc that it had taken a 50 per cent stake in Tropical Bioenergia SA, a joint venture between Brazilian sugar and ethanol producer Santelisa Vale and cotton and grains grower Maeda.

Shares of Guarani closed up 12.3 per cent at 4.75 reais on the Sao Paulo Stock Exchange on Friday prior to the announcement of the partnership with Petrobras, made in a filing to the market regulator.

Petrobras wants to become a leading player in the global biofuels sector, with a production target of 3.9 billion litres by 2013.

But with limited experience in cane, sugar and ethanol production, the company's strategy has focused on buying minority stakes in other companies to meet its aggressive targets.

Petrobras said in December that it planned to buy stakes in two or three ethanol plants in 2010. In 2009, it bought a 100 million litre plant in the state of Minas Gerais.

It is currently a large distributor of ethanol through its chain of service stations, but production is only beginning.

Petrobras is building an ethanol pipeline and river barge system to bring ethanol from frontier cane areas in Brazil's centre-west to its main refining and port terminal assets in Sao Paulo and Rio de Janeiro states.

The company also has joint ventures with Japanese trading company Mitsui and others in the region to develop its ethanol distribution network in Asia.

Petrobras owns a refinery in Okinawa, which it bought from ExxonMobil Corporation in 2008 and plans to use it as a platform for exporting biofuels in the region.

Guarani produces about 490 million litres of ethanol a year.

The group has five mills in the north and northeast of Sao Paulo, the state that accounts for 60 per cent of Brazil's cane output. Guarani expects to crush 17 million tonnes of cane this season, up from 13.8 million in 2009-10 (April-March).

Because of the deal, the company will likely increase its ethanol production, at the cost of producing sugar.

Brazil is the world's largest exporter of ethanol.