Bioethanol in Brazil – a norwegian experience BNCC 4 November 2008

Bioethanol in Brazil – a norwegian experience

BNCC

4 November 2008

Global energy outlook

A radical change in the energy chain

• The world must move from a global energy system that is:

(Source: IEA World Energy Outlook 2006 and UNEP 2007)

VULNERABLE

DIRTY

EXPENSIVE

• Government action creates incentives to change existing investment patterns

• There is no single economically and technologically feasible solution – only a mix

• Biofuels is an important part of the mix

• To a competitive energy future based on new policies on :

ENERGY EFFICIENCY

RENEWABLES

NUCLEAR

Core knowledge

• A significant part of the world’s fuel consumption will come from sustainable biofuels– Sustainable biodiesel and bioethanol provide energy security and climate change mitigation

• Sugarcane is by far the most efficient feedstock for bioethanol– Highest land and energy efficiency due to efficient photosynthesis – Largest reduction in greenhouse gas emissions, generally 80% relative to emissions from fossil fuels

• Brazil is currently the lowest cost producer of sugarcane ethanol in the world– Vast territorial expanse– Favorable climate– Technological, agricultural and industrially developed with high competency level– No direct conflicts

• The domestic market in Brazil is already well established – export potential increasing– Increasing demand from growing flex-fuel car fleet– Infrastructure for export developing

• Umoe BioEnergy is an integrated bioethanol company with growth ambitions– Value chain secured – land positions and agri-industrial assets– Production start-up in 2008 and expansion in 2009/10– Strategic growth opportunities

3 COMPANY PRESENTATION

Biofuels – transportation fuel derived from biomass

• Liquid or gas transportation fuel derived from biomass

• Automotive transport the most common use

• Cost, energy efficiency and carbon footprint varies among different technologies and biomass

• Bioethanol and biodiesel are the most common biofuels

• Ethanol is currently accounting for more than 90% of total biofuel usage

COMPANY PRESENTATION4

BIODIESEL• Production is based on trans-esterification of vegetable oils and

fats through the addition of methanol (or other alcohols) and a catalyst, giving glycerol as a co-product

• Feedstock includes rapeseeds, sunflower seeds, soy seeds, palm oil seeds from which the oil is extracted chemically or mechanically and algae

• Biodiesel is currently most often used in 5%-20% blends (B5, B20) with conventional diesel, or even in pure B100 form

BIOETHANOL• Production process based on conversion of biomass into

sugars, and/or fermentation of carbon sugars with final distillation of ethanol to fuel grade

• Feedstocks includes cereal crops, corn (maize), sugar cane, sugar beets, potatoes, sorghum, cassava

• Ethanol is used in low 5%-10% blends with gasoline (E5, E10) but also as E-85 in flex-fuel vehicles (gasoline must contain a minimum of 22% bioethanol in Brazil)

Source: IEA Energy Technology Essentials, January 07

Sugar cane ethanol essentials

• Cost winner among current biofuels

– Economically viable >40 $/bbl oil

• High land efficiency

– The most land efficient biomass for bioethanol

– ~50 % more efficient than US corn

• High energy efficiency

– One of the plant kingdom’s most efficient photosynthesis

– By far the most energy efficient feedstock for bioethanol

– Energy output/input ratio 9,3

5

• Sustainable at right location

– No direct conflicts

• Provide energy security

– Renewable

– Land and energy efficient

• Significant GHG reduction

– The largest reduction in CO2 among biofuels

– 75-90% well-to-wheels compared to gasoline

COMPANY PRESENTATION

The low cost sugar cane ethanol


ESTIMATED COST OF BIOFUELS

Compared with the prices of oil and oil products (biofuels exclusive taxes)

BIOFUEL 2006 (USD/LITRE)

LONG TERM ~2030(USD/LITRE)

1. Price of oil, USD/barrel 0.50-0.80

2. Corresponding pre-tax price of petroleum products US cents/litre

0.35-0.60

3. Correspondonding price of petroleum products with taxes included, USD/litre (retail price)

In Europe: 1.50-200In US: ~0.80

4. Ethanol from sugar cane 0.25-0.50 0.25-0.35

5. Ethanol from corn 0.60-0.80 0.35-0.55

6. Ethanol from beet 0.60-0.80 0.40-0.60

7. Ethanol from wheat 0.70-0.95 0.45-0.65

8. Ethanol from lignocellulose 0.80-1.10 0.25-0.65

9. Biodiesel from animal fats 0.40-0.55 0.40-0.50

10. Biodiesel from vegetable oils 0.70-1.00 0.40-0.75

11. Fischer-Tropsch synthesis liquids 0.90-1.00 0.70-0.85Source: The Royal Society, Sustainable biofuels, January 2008

COST WINNER

• By far the most efficient feedstock when it comes to production costs

• Import barriers through local subsidies and import tariffs for Brazilian produced ethanol apply in US and in Europe.


Sugar cane

The leading product in terms of production cost

Sugar cane

The leading product in terms of land efficiency

8

YIELD PER REGION/FEEDSTOCK

0

1000

2000

3000

4000

5000

6000

7000

Sugar cane,Brazil

Sugar beet,EU

Sugar cane,India

Corn, US Wheat, EU

Liter ethanol/ha

Source:

-52.3%-60.0%


ENERGY OUTPUT/INPUT RATIO

8,5

2,92,5

2 21,7 1,6

1,2

Sugarcane

ethanol

Soybeanbiodiesel

Rapeseedbiodiesel

Palm oilbiodiesel

Jatrophabiodiesel

Sugarbeets

ethanol

Cornethanol

Wheatethanol

Source: Goldman Sachs

The ratio describes units of energy created using 1 unit of energy in production

Sugar cane

By far the most energy efficient feedstock

9

Sugarcane ethanol 8.0-9.0vs.

US corn ethanol 1.5-1.8


Current bioethanol market

10

Source: Accenture primary analysis

Domestic market

Bilateral deals (Few trading partners)

International market (Few trading partners)

GLOBAL SUPPLY MARKET Illustration

Global market

Start-up industry

Scale and experience efficiencies

New technology

US Brazil

Net importer

Net exporter

Domestic supply

Transition

Japan

Ukraine

Poland

Spain

Sweden

ChinaFrance

Germany

India

Austria

South Africa

UK

NigeriaArgentinaItaly

Thailand


Why sugar cane ethanol from Brazil?

• Economically, socially and environmentally sustainable transportation fuel– Cost competitive in a growing fuel market

– No direct conflicts with food, water or biodiversity

– Particularly energy and land efficient feedstock utilizing renewable solar energy

– Significant greenhouse gas emissions reduction

– Unique production environment in tropical Brazil, in a well established industry


Brazil has stabilised politically and economically

• More than 20 years of military rule ended in 1985

• A new constitution was ratified in 1988

• The government of Fernando Henrique Cardoso (1995-2002)

– Ended hyperinflation and advanced reforms to liberalise the economy

– But public-debt indicators deteriorated amid low economic growth

• The current government, under the president, Luiz Inacio Lula da Silva

– Has been successful in consolidating macroeconomic stability

– Stepping up social spending

• Implementation of deeper reforms needed to accelerate growth

COMPANY PRESENTATION12 Source: The Economist Intelligence Unit, August 2008

A changing business environment in Brazil

The emergence of a new private market economy

• Hyperinflation

• Massive shortages

• Financial turmoil

• Low capital inflow

• Devaluation of the real in 1999

• Heavy and complex tax burdens

• Underdeveloped bank structure and little opportunity to manage risks locally

• Little investments in infrastructure

• By 2001-02, the economy was stable but hibernate, at the same time as inflation again threatened…

• Declined interest rates and rising market competition acts as defense against inflation

• Economy resistant to turbulence due to structural demand and focus on commodities

• Reduced public debt and regained investment-grade status

• High capital inflow

• Program of large infrastructure investments

• Economic reforms and sound macroeconomic policies

• Relaxation of restrictions on investment

• Local and international banks increase presence

• New equity and debt issues expected

• M&A activity

• Increased focus on environment and sustainability

OLD PARADIGMS NEW PARADIGMS

Source: The Economist Intelligence Unit, August 2008, McKinsey, Newsweek, CIA, UN13

Brazilian economy accelerating without overheating

• South America's leading economic power– Macroeconomic outlook of 4-5 percent GDP

growth– A floating exchange rate, an inflation-

targeting regime, and a tight fiscal policy are the three pillars of the present economic program

• Expanding presence in world markets

• Vast natural resources and a large labor pool

• Industrial and agricultural growth and development

– Large and well-developed agricultural, mining, manufacturing, and service sectors

• Fiscal problems persist, preventing a steeper decline in interest rates

– Public debt remains high at around 41.2% of GDP


Annual data 2007

Population (million) 189.3

GDP (US$ bn; market exchange rate) 1,313.7

Historical averages (%) 2003-07

Population growth 1.1

Real GDP growth 3.6

Real domestic demand gorwth 4.1

Inflation 4.2

Current-account balance (% of GDP) 1.1

FDI inflows (% of GDP) 2.1

Major exports (% of total) 2007

Transport equipment&parts 12.5

Metallurgical products 11.6

Soybeans, meal&oils 8.2

Chemical products 1.9

Source: The Economist Intelligence Unit, August 2008 and McKinsey

BRAZIL’S VAST TERRITORIAL EXPANSE

Arable land of 550 million ha equates to 33 countries in Europe

Only 22 % of available arable land is utilized

Forest preservation requirements of 20-30%

Brazil offers sustainable bioethanol production

• No direct conflicts with food; rainforests; water; biodiversity

• The most productive land areas in the world for sugar cane production

– Resource rich – sun, water and high yield arable land

– Longer harvest cycles– Greater cane production per hectare– Brazilians sugar cane has higher sugar

content

• Capable of expanding sugarcane operations multiple times

• Highest cane crop competence

• Established domestic industry and market for ethanol production and consumption

• Increasing demand from growing domestic flex-fuel car fleet

• Infrastructure developing – export potential increasingSource: Infoamricas, MB Agro


Brazil is the world’s leading sugarcane producer

• 2007/2008 harvest 487Mtons from 350 plants

– Of which 250 were combined mills and distilleries and 100 pure play ethanol

• Sugarcane cultivation covers 7.8M ha, 2.3% of domestic arable land

– Less than 50% of this goes to ethanol, rest become sugar.

• Sugarcane is grown mainly in South-Central and North-easthern regions, with two different harvest periodes

– South-Central 85% of production– Sao Paulo > 60% of production

• Sugar mills in Brazil are becoming power/electricity self-sufficient

– Re-use of bagasse new power source for electricty supply

• Industry developed over the last 30 years– Continual technological improvements


SUGARCANE PRODUCING REGIONS IN BRAZIL

Areas marked in red indicate where sugarcane is harvested and sugar, ethanol and bioelectricity plants are located.

Source: UNICA, NIPE-Unicamp, IBGE, CTC

Brazilian industry’s impact on the environment

• Soil occupation not in conflict with food production or rain forests

– 1,0% of Brazil’s territory is used for sugar cane for ethanol – supports 54% of all car fuel consumption

– Sao Paulo production areas not in conflict with the Amazon Rain Forest; the Pantanal; Atlantic Forest

• Reduction of greenhouse gas emissions

– 75-90% wheels-to-wheels compared to gasoline

• Limited impact on water supply

– Brazil has the greatest availability of water in the world

• Biodiversity secured through regional area planning and forest preservation requirements

• Improved air quality in cities and rural area

– Ethanol utilization has led to improved quality reducing; lead compounds in gasoline; sulphur; CO2 emissions; reactivity and toxicity of organic compound emissions


Source: ‘Sugar Cane’s Energy’. 2007. UNICA

‘OUR MISSION IS TO SUPPLY THE WORLD WITHEFFICIENT, CLEAN AND SUSTAINABLE BIOENERGY’

‘OUR VISION IS TO BECOME A MAJOR ANDSUSTAINABLE PRODUCER AND PREFERREDSUPPLIER OF ETHANOL TO THE INTERNATIONALMARKETS FOR BIOFUEL.

AND FURTHER CREATE A STATE OF THE ARTINTERNATIONALLY FOCUSED OPERATION’


Umoe BioEnergy is an integrated bioethanol company

19

• Sustainable value chain – no conflicts, land control, target 100% mechanized agri-operations

• Competitive business model – low cost, energy and land efficient sugar cane ethanol

• Unique production environment in Sao Paulo, Brazil – well established industry

• Production start-up fall 2008 and full production in 2009 – reaching 2.9M tons/annum

• ~1700 employees


SALESLANDAGRICULTURAL

OPERATIONSINDUSTRIAL

OPERATIONS

Bioethanol+

power

History


2003 • PROJECT INITIATION Acquisition of a 0.3Mtons per annum crushing capacity distillery by Brazilian ethanol investor (Valencia)

2006 • STRATEGIC GROWTH ALLIANCE Brazilian ethanol investor and Norwegian energy investors

• LAND POSITIONS SECURED Long term lease contracts in the Paranapanema region

2007 • EPC TURNKEY CONTRACT NEW MILL Signed with consortium of leading Brazilian suppliers

• EXPANSION CAPITAL RAISED USD 85 million bonds / USD 55 million equity, in June

• OTC LISTED In July on the NOTC list in Oslo, Norway

• CONSTRUCTION STARTED ON MILLS Works 1 restructuring and Works 2 green field project started

• FURTHER LAND POSITION SECURED Land secured with ownership and long-term lease contracts

2008 • UMOE MAJOR SHAREHOLDER USD 27 million equity private placement in January

• FURTHER LAND POSITIONS SECURED Land secured and agricultural mechanical equipment delivered

• EXECUTIVE MANAGEMENT IN PLACE Strengthened project management and control capabilities

• CONSTRUCTION IN PROGRESS Phase 1: Works 1 (1.0Mtons) and Works 2 (1.9Mtons)

• FURTHER CAPITAL RAISED USD 67 million in equity in May

• SCHEDULED PRODUCTION START-UP Works 1 in September 2008 and Works 2 in November 2008

Value chain integrated bioethanol company

21

LAND AGRICULTURAL INDUSTRIAL

12 - 18 months 0 - 9 months

OWN

LEASE

THIRD PARTY

FORMING

PLANTING

CARING

HARVESTING

ETHANOL PRODUCTION- RECEPTION- CRUSHING- FERMENTATION- DISTILLATION

COGENERATION / POWER

MARKETING

DISTRIBUTION

• Secure high-yield areas is a key success factor for bioethanol companies

• Reputation and CSR are transaction agents

• Land survey

• Approx 70% of the value chain costs are related to the agricultural part

• Bio-engineering technology

• Requires high expertise in the industry

• Sophisticated logistic management

Key success factors:

• Proven technology

• Operational excellence

• Equipment sourcing

• Bioethanol sold through gasoline distributors:

– Petrobras

– Shell

– Exxon

– Texaco++


SALES

UMOE BIOENERGY A FRONTRUNNER WITHIN THE SUGAR CANE ETHANOL INDUSTRY

• Land positions secured in Brazil• High agricultural competence• +95% mechanized agri-operations• Significant HR and HSE focus• High project execution competence• No direct conflicts with food, rainforests, water, biodiversity• Active and long term industrial owner

Umoe BioEnergy is a industry frontrunner


SALESLAND AGRICULTURAL INDUSTRIAL

SUGAR CANE ETHANOL IS A FRONTRUNNER WITHIN THE BIOETHANOL MARKET• Energy and cost efficient sugar cane ethanol• Highly competent bioethanol industry in Brazil• Brazilian business and industry environment continually improving• Already well established domestic bioethanol market in Brazil• Export potential growing

Company growth vision

• Become a major, long term and sustainable producer of bio-ethanol

• Create an international business operation based on best practice governance principles

• Become a preferred supplier of bio-ethanol to international oil companies and other buyers

• By 2013 sustainably control

– 1,000M liters/year bioethanol production

– 12.0Mtons per annum sugarcane crushing capacity

– 150.000 ha land

– 1,000 MW electric power production capacity

23

PHASE 1

PHASE 2

PHASE 3

PHASE 4

EXPANSION IN PHASES Growth

2007 2008 2009 2010 2011 2012 2013

Create foundation

Production expansion + Cogeneration

Growth through acquisitions

Organic growth in region


Regional focus within the Sao Paulo state


• Operational assets in Paranapanema region– Brazilian head office in city of Ribeirao Preto

• Agricultural assets– Securing of total 36.000 ha (89.000 acres) – 28.000 ha pt secured (21.800 leased / 1.400 owned/ 4.800 3rd

party)

• Consolidated industrial capacity:– Crushing capacity 2.9Mtons (3.6Mtons in 2010)– Output volume 240.000 m3 hydrous ethanol (295.000 m3 in 2010)

• Production Works 1 - Remodeled distillery– Municipality: Narandiba– Crushing capacity: 1.0Mtons– Production start Sep’08 / 100% complete

• Production works 2 - Greenfield mill constructed (EPC)– Municipality : Sandovalina – Crushing capacity : 1.9Mtons (2.6Mtons in 2010)– Ramp-up Nov’08 / 99% complete

WORKS 1 - NARANDIBA

WORKS 2 - SANDOVALINA

SAO PAULO

Sao Paulo


Agricultural operations

• Key strategic part of the value chain– 70% of the company’s ’strategic value’

• 100% mechanized operations– Vs. 30% average in Brazilian agriculture

– Vs. 60% average in Sao Paulo

– No cane burning

• Operational exellence emphazise– Agri-technical experienced management

– Highly competent workforce

– Educational programmes

– Minimum salary protection

• Feedstock flexibility with crop alternatives

• High competency and complex industry– High level of R&D in agri-industry


Agricultural equipment

27

Industrial operations

PRODUCTION WORKS 1• Remodeled distillery• Municipality: Narandiba• Crushing capacity:

– 1.0Mtons in 2008• Started production Sep’08• 100% complete


PRODUCTION CAPACITYTons crushing capacity/annum

700

700

2900

1000

1900

0 1000 2000 3000 4000

Total

Works 2

Works 1

Phase 1 Phase 2

PRODUCTION WORKS 2• Greenfield mill constructed

(EPC)• Municipality : Sandovalina • Crushing capacity

– 1.9Mtons in 2009– 2.6Mtons in 2010)

• Ramp-up Nov.’08• 100% complete

Industrial operations Narandiba

29

Industrial operations Sandovalina

30

Current manning

17%

78%

5%

Industrial

Agricultural

Central administration

INDUSTRIALOperators, management, supervisiors, project managers 296

AGRICULTURALRural employees, agricultural management and supervisiors 1346

ADMINISTRATIONAll inclusive 95

Total 1737


Paranapanema project – Phase 1 and 2


CONSTRUCTION TO BE COMPLETED IN 2008

AGRICULTURAL ASSETS36,000 ha land

INDUSTRIAL ASSETS2.9M tons/annum


INDUSTRIAL ASSETS0.7M tons/annum284,000 Mwh

SUBJECT TO FINANCING

PHASE 1

PHASE 2

EXPANSION IN PHASES Growth

2007 2008 2009 2010

Create foundation

Production expansion + Cogeneration

Phase 1 - ongoing project

33

CONSTRUCTION TO BE COMPLETED IN 2008

PRODUCTION WORKS 1- Remodeled distillery- 1.0M tons/annum crushing

capacity- 100% compl. Prod.started sept’08- Municipality of Narandiba

PRODUCTION WORKS 2- Greenfield mill constructed (EPC)- 1.9M tons/annum crushing

capacity- 100% completed; ramp up Nov’08.- Municipality of Sandovalina

CONSOLIDATED CAPACITY- 2.9M tons / annum crushing

capacity- 240.000 m3 hydrous ethanol

LAND28,000 ha presently secured :- 21,800 leased- 1,400 owned- 4,800 third party)

36,000 ha totally to be secured to support 2.9M tons/year crushing capasity


INDUSTRIAL ASSETS2.9M tons/annum

PROJECT LOCATIONSao Paulo, Brazil

PRODUCTION EQUIPMENTCLT equipment:- Cutting- Loading- Transport

PARANAPANEMA REGIONWorks 1 and 2 are approx. 30 km apart

PRODUCTIVITYAverage farm productivity:97 tons/ha (07/08 harvest)

PRODUCTIVITYAverage industrial productivity 2008/09: 85 l. ethanol / ton sugar cane


Phase 2 - investment plan project


EXPANSION WORKS 2Capacity expansion of Production Works 2 with 0.7M tons crushing capacity to 3,6 million tons

COGENERATION PLANTCogeneration plant with excess output capacity up to 284,000 Mwh

CONSOLIDATED CAPACITY3.6M tons / annum crushing capacity 298.000 m3 hydrous ethanol284,000 Mwh production capacity

LANDNeed to secure 10.000 ha additional land to support additional 0.7M tons crushing capacity and totally 3.6M tons crushing capacity


INDUSTRIAL ASSETS0.7M tons/annum284,000 Mwh

PROJECT LOCATIONSao Paulo, Brazil

PRODUCTION EQUIPMENTCLT equipment:- Cutting- Loading- Transport

PARANAPANEMA REGIONWorks 2 and cogeneration

SUBJECT TO FINANCING

Experiences

Project specific:

• Poor initial project planning

• Project execution challenges and delays

• Lack of financial control and planning

• Lack of adherence to required licences and permits

• Poor quality control

35

Experiences

General framework and conditions:

• Generally well regulated

• Strengthened regulations and permits (environment and social responsibility focus)

• Rules not always well enforced and policed – lead to unbalanced conditions and requirements across country

• Bureaucracy is a huge time and effort cost to industries

• Unpredictable tax regime

• Sugar industry cleaning up still required to secure 100% stamp of sustainability

• Easy to differentiate ourself from the average industry

36

Shareholders


PER 2008-09-08 NUMBER OF SHARES %UMOE INVEST AS 37496120 72.4

VALENCIA S.A.R.L 6242285 12.0

CAMILLO ENERGY AS 1275000 2.5

RBC DEXIA INVESTOR SERVICES BANK 1000000 1.9

SAF INVEST AS 800000 1.5

MATHIAS HOLDING AS 656246 1.3

VERDIPAPIRFONDETFNVEKS 568154 1.1

AMROTH AS 550000 1.1

PECUNIA FORVALTNING AS 355096 0.7

CAIANO AS 250000 0.5

WARRENWICKLUND NORGE 200024 0.4

JACO INVEST AS 165000 0.3

SJØINVEST AS 165000 0.3

NB AKSJEFOND 128099 0.2

FARINVEST AS 127835 0.2

JPMORGAN CHASE BANK 120360 0.2

AUDLEY A/S 100000 0.2

CLIPPER A/S 100000 0.2

STRAEN A/S 100000 0.2

MORGAN STANLEY & CO. INC. 81362 0.2

TOPP 20 50480581 97.4

REST 1334981 2.6

TOTAL OUTSTANDING SHARES 51815562

SHAREHOLDERS 85

The Umoe Group

• Norwegian investment company and one of Norway’s largest private companies

• An active long-term owner and investor– develop new companies through acquisition, restructuring and organic growth

– counter-cyclically investments and willingly accept the risks associated

– see management as co-owners in the companies in which they invest

• Investments include– marine transportation

– maritime equipment industries

– Shipyards

– oil & gas services

– catering services

– IT/telecom

• Founded in 1984, by sole owner and president and CEO Jens Ulltveit-Moe

• www.umoe.no


Documents

Bioethanol in Brazil – a norwegian experience BNCC 4 November 2008