THE TOP 10 REASONS WHY PETROBRAS MATTERS, DEEPLY, TO THE DEVELOPMENT OF A GLOBAL BIOFUELS INDUSTRY

1. Transpetro, Petrobras' subsidiary in charge of transportation, has been piping ethanol in Brazil for over thirty years. It holds the most advanced technology in the world for such operations and is currently investing USD 1.2 billion in the construction of an ethanol export corridor that comprises a pipe grid, terminals, and large ocean vessels for ethanol. With total capacity of 12 million cubic meters per year, the project is the largest of its kind anywhere in the world. More on this - including detailed technical information - is available on Transpetro's web site (in English) here.
2. Petrobras is providing technology to a number of developing countries seeking to start a biofuels industry. In Nigeria, its is investing USD 200 million to build an ethanol production facility in partnership with the Nigerian National Petroleum Corporation, which will own 70% of the project. In Mozambique, it is working with state-owned oil company Empresa Nacional de Hidrocarbonetos to research and develop biofuels there.
3. In July 2008, its biofuels subsidiary, Petrobras Biocombustivel, was working on the development of 23 joint ventures for ethanol export - a critical move in the establishment of a global biofuels market. One of the projects, developed with Mitsui & Co., aims to export ethanol to Japan, which has authorized ethanol blends of up to 3% and is a strategic market for ethanol from Brazil and other countries.
4. Petrobras researches the development of new strains of sugarcane with higher sugar content, greater resistance to pathogens, and better adaptability to various climate and soil conditions - an essential process to jumpstart ethanol production in other tropical countries that would benefit from a biofuels industry. Research is being conducted at the company's Sugarcane Integrated Agri-Industrial Center in Quissama, Rio de Janeiro state.
5. Petrobras has research agreements with a number of foreign institutions, including the United States' National Renewable Energy Laboratory, with which it is collaborating on second generation biofuels research. The research project spans all parts of the production chain, including feedstock selection, cultivation, harvesting, and distribution.
6. Petrobras is using its expertise in Brazil, energy, and biofuels to build five ethanol plants around Brazil, in partnership again with Japan's Mitsui. The main objective is to ensure supply to the Japanese market - a pre-requisite for that country to invest in the infrastructure necessary to store, distribute, and use ethanol. The strategic importance of the Japanese market goes without saying.
7. Petrobras has biofuels partnerships with a number of key players in the global energy market, including ConocoPhillips, Portugal's Galp Energia, Italy's Eni, India's Bharat Petroleum and Oil and Natural Gas Corporation, the China National Offshore Oil Corporation, the Toyota Tsusho Corporation, Mitsui & Co., and Nippon Alcohol Hanbai. With the latter, Petrobras is planning to produce ethanol in southeast Asia for export to the Chinese and Japanese markets.
8. Petrobras is working with a number of foreign companies to open up markets for biofuels abroad, including firms like Korea's Samsung, Norway's Statoil, and the Petroleum Corporation of Jamaica, with which the company is developing a hub to trans-ship ethanol produced in Brazil and reduce its cost, as the fuel makes its way into the highly-protected US market.
9. Petrobras operates a pilot plant for second generation ethanol at its Cenpes research center. Through enzymatic hydrolysis, it was producing 220 liters of ethanol per tonne of sugarcane bagasse in July 2008. The company is currently working to develop more efficient enzymes, supplementing efforts in other research centers, in Brazil and abroad, which seek to produce cellulosic ethanol on a commercial scale. This line of research also leads Petrobras to investigate new processes for handling bagasse for use as feedstock. As Brazil is expected to produce upwards of 600 million tonnes of sugarcane this year, bagasse is considered the most viable feedstock worldwide for the production of cellulosic ethanol.
10. Petrobras is the lowest-cost producer of biodiesel in Brazil. It has three plants around Brazil and is working to develop a range of feedstocks that can be used in other tropical countries to produce biodiesel. In Brazil, it has successfully developed a production chain for castor beans as feedstock, and also uses soybeans.

US DEPARTMENT OF AGRICULTURE: BNDES FUNNELING MONEY INTO BRAZILIAN SUGAR AND ETHANOL INDUSTRY, MAY BE STOKING OVERCAPACITY

While most plants in Brazil can produce both sugar and ethanol, about 150 of the country’s 420 plants are ethanol-only operations (previous post). Most were set up during the ethanol fever that took hold of the industry post-2006, when oil prices were skyrocketing and the U.S. government embarked on an all-out to promote the use of ethanol.

Highlights on the expansion of Brazil’s sugar and ethanol industry, taken from the USDA’s recently-released report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry:

Dropping sugar and ethanol prices during 2007 and 2008 and the global financial crisis in September 2008 became a major obstacle to new investments in 2009 and 2010, although investments in the sugar-ethanol sector had been growing steadily during the last few years. (Financing from the National Bank for Economic and Social Development - BNDES, the major federal bank funding new projects, increased from R$ 3.56 billion in 2007 to R$ 6.5 billion in 2008.) Credit has become scarce, to fund both sugar export operations and investments in new mills. The industry estimates that total credit to finance investments should drop from R$ 12 billion in 2008 to R$ 7 billion or less in 2009. Approximately 40 percent of the mills that were supposed to start running in 2009 (35 mills) have already postponed operations until 2010.

US DEPARTMENT OF AGRICULTURE FORECASTS BRAZIL TO MILL 605 MILLION TONNES SUGARCANE IN 2009-2010, ETHANOL EXPORTS DROP

Inquiring minds are looking at the United States Department of Agriculture's GAIN (Global Agriculture Information Network) report on the 2009-2010 outlook for the Brazilian sugar and ethanol industry.

The numbers put out by the USDA's Foreign Agricultural Service, which has an office in Sao Paulo, are in line with those published at the end of April by Conab (previous post), the agency within the Brazilian Ministry of Agriculture responsible for forecasting agricultural production in the country, and with the figures offered in early April by Plinio Nastari's Datagro (previous post), the leading sugar and ethanol consultancy in Brazil.

Highlights from the USDA's GAIN report:

"Sugarcane for crushing for MY 2009/10 is projected at 605 million metric tons (mmt), up 7 percent from the previous year, due to continuing area expansion. Sugar production is forecast to increase to 36.85 mmt, raw value. Sugar exports are forecast at 24.36 mmt, up 4.05 mmt from the previous year, due to expected lower supply from other producing countries such as India. Ethanol production for MY 2009/10 is forecast at 28.45 billion liters, while ethanol exports are expected to drop to 3.7 billion liters."

COMPARISON OF DIFFERENT PROJECTIONS
FOR CANE, ETHANOL AND SUGAR PRODUCTION
2009-2010 HARVEST YEAR - BRAZIL

	USDA	BRAZIL GOVERNMENT (CONAB)	DATAGRO
Total sugarcane for crushing (million tonnes)	605	622 – 634	598
Y-o-Y increase in sugarcane for crushing	7%	8.6% – 10.7%	5.72%
Sugar production (million tonnes)	36.85	36.42 – 37.91	35.2
Y-o-Y increase in sugar production	14%	Up to 17%	11.38%
Ethanol production (billion gallons)	7.53	7.35 – 7.57	7.38
Y-o-Y increase in ethanol production	4.6%	n/a	3.0%

Source: USDA, Datagro, Conab

ETHANOL PRICES IN BRAZIL PLUNGE

The collapse in the price of ethanol over the past three months has been astonishing (chart). With the harvest season barely beginning, the price is the lowest it has been since Q3 2007, when the sugarcane harvest was in full swing.

Compounding the problem is the fact that the country suffers from insufficient storage capacity – a problem that the government, through BNDES, has set out to tackle (previous post). In March, BNDES announced that it would channel USD 1.1 billion towards the construction of storage facilities for up to 1.32 billion gallons of ethanol. The stated goal is to allow for a more even flow of the fuel to the market throughout the year.

DATAGRO'S PLINIO NASTARI: CALIFORNIA'S LCFS DECISION SHOULD OPEN DOORS TO BRAZILIAN ETHANOL IN FOURTEEN OTHER STATES

Plinio Nastari, founder of leading sugar and ethanol consultancy Datagro, believes that the recent decision by the California Air Resources Board (CARB) to approve the Low Carbon Fuel Standards sets the stage for a number of other states to pass similar legislation, with the goal of reducing carbon emissions through the use of clean-burning fuels, like sugarcane ethanol. Mr. Nastari's estimates show that the expansion of the markets for Brazilian ethanol represents about 30% of the total US market for gasoline.

According to a Brazilian business newspaper, Mr. Nastari believes that, "the United States will have to import sugarcane ethanol because (the production of) corn ethanol will not be enough, nor is corn ethanol clean enough to meet the standards approved in California", where the goal is to promote a 10% reduction in the carbon intensity of all fuels by 2020.

CONAB: BRAZIL TO CRUSH MORE THAN 620 MILLION TONNES OF SUGARCANE IN 2009-2010

Conab, a Brazilian government agency that is part of the country’s Ministry of Agriculture, has just released its estimate for the production of sugarcane in the 2009-2010 harvest year.

This first assessment (the agency conducts a total of three throughout the year) projects that Brazil will crush between 622.03 and 633.72 million tonnes of sugarcane between now and the end of the harvest season, in Q2 2010. This volume sets a record and represents an increment of between 8.6% and 10.7% over the previous harvest season’s output, which saw production of 572.57 million tonnes.

According to the agency, one significant factor pushing up volumes is a total of 28 million tonnes of sugarcane left over from the 2008-2009 harvest season and that are expected to be milled this year. Area under sugarcane cultivation has also grown 9.9%, an expansion associated with 25 new plants coming on-stream.

Until last year, sugarcane plantations for sugar and ethanol production occupied 7.08 million hectares (17.49 million acres); this year, the figure is expected to jump to 7.79 million hectares (19.24 million acres).

Sugarcane for all uses (which includes the production of forage and spirits) grew from 9.4 million hectares (23.22 million acres) to 9.59 million hectares (23.69 million acres). This may bring the total of sugarcane produced in the country to 674.8 million tonnes. The head of Conab, Wagner Rossi, stated that, “this proves that the sugar and ethanol market remains strong, in spite of the economic crisis”.

It should be noted, however, that a part of the crop may not be processed, due to factors like precipitation, the availability of harvesting equipment, and issues related to infrastructure.

The states of Brazil’s Center-South region account for 90% of sugarcane processed, with the balance milled in the states of the North-East. In the Center-South, Sao Paulo state leads, with an expected production of between 360.41 and 367.69 million tonnes, or about 58% of all the sugarcane that will be processed.

Other states have seen significant progress: Goias state, also in the Center-South region, has an increment this year of 527.6 thousand hectares, or 31.3% over the previous total; Mato Grosso do Sul, further west, has an additional 335.1 thousand hectares, equal to 21.5% of the past year’s figure.

All the states of the Center-West region (Mato Grosso, Mato Grosso do Sul, and Goias) have witnessed combined growth of 20.5% in sugarcane area, reaching a total of 1.09 million hectares (2.69 million acres). Production follows a similar trajectory, with 30% added output (85.29 million to 87.01 million tonnes).

Plantations in the country’s South (which comprises the states of Parana, Santa Catarina, and Rio Grande do Sul) are expected to grow 18.3%, occupying 644.3 thousand hectares (1.74 million acres). The amount of cane used by sugar and ethanol makers is expected to reach between 53.24 and 54.31 million tonnes.

Parana state stands out in this expansion process – it is now the second-largest grower, producing an expected 53.1 million tonnes to 54.2 million tonnes – practically the entire output of the region. This figure places it behind Sao Paulo and ahead of Minas Gerais state, which will mill from 50.8 million and 51.8 million tonnes.

Sugar and ethanol mix changes

The amount of sugarcane marked for the production of sugar may grow by up to 17%, while that used for ethanol is expected to grow 7.7%. With this mix, Brazil will produce between 36.42 and 37.91 million tonnes of sugar and between 27.78 and 28.6 billion liters (7.35 million and 7.57 million gallons) of ethanol, with a breakdown between anhydrous (used for blending with gasoline) and hydrous (sold directly at the pump as E100) of 33% anhydrous to 67% hydrous.

Drivers that have spurred producers to favor sugar over ethanol include depressed prices for ethanol on the Brazilian domestic market, difficulties in exporting caused by tariffs and subsidies to inefficient agricultural systems in formerly-rich nanny states in North America and Europe, and a shortfall in production in countries around the Indian Ocean that was motivated by drought and that has made India a net importer of sugar. A strengthened dollar has also made international prices more attractive for sugar.

These projections were developed using satellite imagery from Canasat, a project sponsored by Brazil’s National Space Research Institute, by the University of Sao Paulo, through the Center for Advanced Studies in Applied Research, known as Cepea, by the Center for Sugarcane Technology, known as CTC, and by Unica.

History of Ethanol in Brazil: 1979 Issue of Veja Magazine Provides Glimpse into Future for Global Biofuels

("Will It Work"? This 1979 edition of Brazil's Veja Magazine reveals the hopes and doubts surrounding the introduction of ethanol in the country)


Veja Magazine has been the main Brazilian news weekly since 1968, a kind of Time Magazine and Newsweek rolled into one. It is printed on glossy paper with easy-to-digest information, presented in articles that span from one to four pages.

Veja does a good job of capturing the Brazilian zeitgeist. So I decided to go back and check issues from the 1970s, when the Brazilian National Ethanol program, Proalcool, was being instituted.

What did Brazilians think of the program back then? What was the government’s strategy to introduce a novel fuel to the world’s tenth-largest economy, a country with a population of 120 million at the time? What were the roadblocks and pitfalls?

Below is the first installment of a series of translations of Veja articles from that time. It makes for a fascinating read, as we encounter the exact same doubts, gripes, and motivations, both declared and undeclared, that we are witnessing today on a global level.

Petroleum from Sugarcane

Go to original

After years of hesitation, the Brazilian government has decided to make up for lost time and institute ethanol as the best alternative for the future.

June 13, 1979

It would be, in the opinion of its enthusiastic defenders, a sure passport to a problem-free energy future. And with formidable powers to single-handedly solve a good chunk of the country's problems, doing away, in one fell swoop, with the dark clouds that hover over the automobile industry, the balance of trade, the unemployment rate and inflation. But, in spite of all these qualities, the National Ethanol Program (Proalcool) will remain a vague promise, far from an effective path to rid Brazil of the petroleum nightmare.

Born in 1975, Proalcool ended up having to wait for an unfettered, disorderly break-out of petroleum prices that threatens to shake the Brazilian trade balance, this year with a likely shortfall of approximately USD 7 billion – about 50% of imports – to receive hope from the government. Such was the winning intention at last Wednesday’s meeting of the Council for Economic Development (CDE) in Brasilia, when new, ambitious goals and resources were added to the plan.

GLOBAL CONCERN – “This time, we won: the CDE has cinched the deal and there is no turning back now from Proalcool”, the Minister for Industry and Commerce, Joao Camilo Pena, said to a friend, as he left the meeting in a state of euphoria. In fact, the CDE decided to invest USD 5 billion in Proalcool, until the end of the Figueiredo administration (1979-1985), in order to reach an equally-ambitious number: 10 billion liters (2.64 billion gallons) of ethanol per year. With such a volume, the government expects to meet, over the following six years, additional demand for gasoline, while fully supplying 475,000 vehicles with adapted engines and 1.225 million others with a factory-made ethanol-powered engine.

Cautious, many technical personnel believe that it would be more realistic to cut the approved goals by half. Likewise, among economists, businessmen, and consumers, there is no lack of people who are relatively cool to the measure. And such an attitude is hardly surprising. After all, this is not the first time that, after a CDE meeting, ministers of state proclaim the beginning of a new energy phase in Brazil. In January 1977, for example, then-president Ernesto Geisel, at a meeting of the same Council, supposedly assigned absolute priority to Proalcool – “with unlimited funds”. However, three years after its creation, weak statistics flow from Brazil’s distilleries. Doses that are, without a doubt, below the national thirst for fuel in a country that consumes 1 million barrels of oil per day, 85% of which is imported. For this year’s harvest, for example, billions of liters of ethanol for blending are expected to be produced. They will be added, at a 20% grade, to the 15 billion liters of gasoline consumed by the 7 million vehicles in the Brazilian fleet. And, even if the goals set by the CDE materialize in 1985, the situation would not change things substantially, pessimists contend.

(to be continued)

France’s Louis Dreyfus Acquires Significant Stake in Santelisa Vale, Will Mill More Sugarcane than Australia

Santelisa Vale, a company formed in 2007 after the merger of the Santa Elisa and Vale do Rosario sugar and ethanol companies, has just sold a significant stake to Louis Dreyfus Commodities Bioenergia S.A. The exact numbers have not been disclosed.

Before the deal with Louis Dreyfus was approved on Monday, April 6^th, a host of other contenders, including Sao Martinho and Bunge, had attempted to woo Santelisa Vale. At the time, offers for a 40% stake were estimated by the local business media at BRL 3 billion, or USD 1.4 billion.

Together, the two companies will have a combined yearly processing capacity of 40 million tonnes of sugarcane – more than the entire Australian output in the 2007-2008 harvest year, a paltry 36 million tonnes. In milling capacity, Santelisa Vale-Louis Dreyfus are also just a step behind Cosan, the world’s largest producer of sugar and ethanol, which milled 40.3 million tonnes in the 2007-2008 season, producing 3.24 million tonnes of sugar and 1.52 billion liters (400,000 gallons) of ethanol (see MD&A, p. 4, in Form 20-F here). One tonne of sugarcane yields, on average, 80 liters, or 21.16 gallons, of ethanol.

Santelisa Vale is choking on the debt it took on in March 2007 to finance its acquisition of Nossa Senhora do Vale do Rosario. At the time, the owners of Santa Elisa, the Biagi family, offered Santa Elisa itself as collateral and took on USD 675 million in debt from Bradesco – until recently, Brazil’s largest private bank. Now they are struggling with a debt load of BRL 3 billion, or USD 1.4 billion.

With the acquisition of a stake in Santelisa Vale, Louis Dreyfus is extending its shopping spree in Brazil. In February 2007, the company doubled its local milling capacity when it acquired four mills belonging to the Tavares de Melo Group. At Santelisa Vale, Louis Dreyfus joins a select group of investors and partners that includes Goldman Sachs, Global Foods, Carlyle/Riverstone, and Discovery Capital.

Other European players are also significantly expanding their production and trading operations in Brazil. Sucden, Tate and Lyle, Czarnikow, and Tereos, which owns Acucar Guarani, are all helping their respective countries in Europe diversify away from sugar beets.