21/6/6 ( Reuters)  - SAO PAULO, Brazil - Less than a year ago, analysts were saying the Brazilian government's biodiesel program -- based on castorbean oil production to benefit poor family farms -- was a charitable thought but unviable.
 
The small castorbean farm component still appears to be inadequate for the demands of the plan. But the entry of large players like the state-run oil and gas company Petrobras has analysts changing their outlooks.
The emergence of new biodiesel plants and retail outlets via the distribution arm of Petrobras appears to have Brazil on course to meet forecast demand in 2008 when a 2 percent mix of biodiesel becomes mandatory in all nationally sold diesel.

Petrobras already offers biodiesel at 500 of its filling stations and plans to sell it in 7,000 stations in 2007.

"Brazil is forecast to need 800 million liters of biodiesel by January 2008 and, as it looks now, output will reach and surpass that with plenty to spare," biofuels specialist Miguel Biegai at local analysts Safras e Mercado told Reuters.

And Brazil's large but crumbling vegetable oils industry may end up being the direct beneficiary of the program.

"This could help support the soy crushing industry, especially in the center-west, which is the only oil producer of sufficient scale to match a national biodiesel program," said Norberto Freund, biodiesel specialist at Vision Grain.

Brazil's soy industry, which has been closing plant doors and moving to Argentina due to more favorable market conditions, may benefit in the short term. But analysts say more efficient oil yielding crops such as palm, sunseed and canola could eventually displace soy.

In a pre-election blitz to inaugurate public works projects before he is expected to announce his candidacy in the coming days, President Luiz Inacio Lula da Silva stopped in to the Repar refinery in Araucaria, Parana, Brazil's top grain state.

Repar on Tuesday tested a state of the art refining process for high quality diesel using 10 percent vegetable oil, for which Petrobras has applied for a patent.

"In developing this technology, we are allowing a great advancement in the energy independence of Brazil, and also in the area of diesel," Petrobras President Jose Sergio Gabrielli said during the test production of the so-called H-Bio diesel.

Petrobras says H-Bio is cheaper to produce than high quality petroleum diesel because the vegetable oil is blended in with petroleum in the refining process. H-Bio could be used by city bus fleets to improve urban air quality because of its low sulfur content -- roughly 10 percent that of normal diesel.

Annually, Brazil consumes 40 billion liters of petroleum diesel, a good part of which it still imports at what it considers a high cost. The quality of domestically produced diesel is seen as rather poor, with impact on the environment.

The H-Bio, which has not been produced commercially and is still in an incipient state, should not be confused with Brazil's parallel conventional biodiesel production that has been under way for over a year.

Petrobras said the H-Bio program alone will allow Brazil to quit importing 250 million liters of diesel in 2006 and reduce 2007 imports by 450 million liters.

Lula is leading to the country's strengths by betting on the new biodiesel program, which should consolidate Brazil's role as a world leader in biofuels production.

As large and small economies seek alternatives to high priced oil imports, Brazil is far ahead of the game with the most advanced ethanol fuel industry based on sugar cane.

There are over 30,000 filling stations across the country that sell pure ethyl alcohol fuel to motorists and ethanol, as it is called, accounts for 40 percent of all fuel consumed by Brazil's light vehicle automobile fleet.

Brazil went from a net oil importer to a net exporter this year. This was due in part to increased production of deep water crude after Brazil opened exploration and production to international firms.

But Brazil still needs to import lighter petroleum products that its predominantly heavy crude output lacks.