Ricardo de Gusmão DornellesDirector - Renewable Fuels Department

THE BRAZILIAN EXPERIENCE WITH BIOFUELS

Ministry of Mines and Energy

Panama, 06.01.2007

Brazil Biofuels Experience: Summary

1. Introduction

2. Ethanol

3. Biodiesel

4. H-Bio: a New Brazilian Technology

5. Final Remarks

WORLD ENERGY CONTEXT

World economy growth

Demand growth

Climate change reality

High prices for energy

Refining capacity in the limit

Geopolitical instability and conflict at important energy supplier countries

Strong dependency on non-renewable energy sources

THE CHALLENGE FOR ENERGY POLICY

Long term energy supply security

Cheaper prices for energy sources

Keeping the local energy competitiveness

Dealing with climate change and environment

BIOFUELSBIOFUELS

Brazilian Energy PolicyLaw nº 9.478/1997

Objectives established by Law:

To increase the share of biofuels in the national energy matrix;

To protect the environment;

To promote energy security with lesser external dependency;

To protect the consumer best interests through regulation mechanisms and surveillance at the Regulatory Agencies;

To promote free competition.

RENEWABLESOURCES

44.5 %

218.7 MILLION

TOE

Hydroelectricity14.8%

Uranium1.2%

Natural Gas9.4%

Petroleum and Derivatives

38.7%

Other Renewables

Sources2.9%

Sugarcane13.8%Wood and other

Biomass13.0%

Coal6.3%

BRAZILIAN ENERGY MIX - 2006

Source: Brazilian Energy Balance (BEN,2007)

Ministry of Mines and Energy (MME)

RENEWABLENON-RENEWABLE

Brazil0

20406080

100

World

14

86

45 55

%

(1)Production Consumption Net Imports Net Exports

Thousand m3 % of demand % of production

GASOLINE A 21,325 18,656 - 2,668 13%

DIESEL 38,660 41,604 2,943 - 7%

ETHANOL 17,764 14,445 - 3,319 19%

FUEL OIL 15,220 8,680 - 6,541 43%

JET KEROSEN 3,748 4,449 701 - 16%

NATURAL GAS (million m³/day) 21.5 47.8 26.3 - 55%

FuelThousand m3 Thousand m3 Thousand m3

Net Imports Net Exports

Fuel Production and Dependency - 2006

Source: ANP, MAPA e MDIC ( Elaborated by MME – Fev/07)

Self-SuficiencyDependency

(1) Apparent Consumption = production + net imports.

CURRENT MATRIX OF VEHICLE FUELS - 2006

54,5% (2005)

2.9% (2005)

8.4% (2005)8.5% (2005)

25.6% (2005)

0% (2005)

Gasoline C 27.2 + 7.3 = 34.5%

34.1% (2005)

Ethanol (Total)7.3 + 9.9 = 17.2%

16.9% (2005)

VNG3.2%

Diesel48.9%

B23.3%

9.9%7.3%

Gasoline A27.2%

Diesel (Total)48.9 + 3.3 = 52.2%

54.5% (2005)

Anhydrous Ethanol Hydrated Ethanol

*

♦

* Pure Gasoline – Before blending with ethanol♦ Diesel blended with 2% of Biodiesel

CURRENT MATRIX OF VEHICLE FUELS - 2006

57.0%

15.3%

20.8%

6.9%

VNGHydrated EthanolAnhydrous EthanolGasoline A

Ethanol (Total)36.1%

LIGHT VEHICLES(OTTO-CYCLE)

6%

94% Diesel

B2

HEAVY-DUTYVEHICLES

VNG3.2%

Diesel48.9%

B23.3%

9.9%7.3%

Gasoline A27.2%

*

* Pure Gasoline – Before blending with ethanol

♦

♦ Diesel blended with 2% of Biodiesel

ETHANOL

1925: First tests using ethanol blends with gasoline

2006: Sustainability and environmental benefits

Two types of ethanol used, produced and tested in Brazil:

1975: National Alcohol Program (Proalcool)

anhydroushydrated

Main goals at that time:1. To introduce in the market the mixture gasoline-ethanol2. To stimulate the development of pure ethanol motors

Mixed with pure gasoline (20 a 25%)

Directly used in Otto-cycle motors (100%)

1979: Manufacturers begin to sell 100% Ethanol Vehicle

The only remaining incentive nowadays

Incentives established by the Pro-Alcohol in 1975

Alcohol price lower than gasoline price

Guaranteed remuneration to the producer

Tax reduction for hydrous alcohol cars

Loans for alcohol producers to increase their capacity

Gas stations were obligated to sell alcohol

Maintenance of strategical alcohol stocks

The Deregulation of Fuel Market and the Ethanol Fuel

19901991

Maximum Prices at the Gas Stations (Jul/90)

19921993199419951996199719981999200020012002

Liberalization of Consumer Prices: Alcohol and Gasoline (Apr/96)Liberalization of Anhydrous Alcohol prices at the producer (May/97)Petroleum Law defines the transition period for deregulation (Aug/97)

Liberalization of Hydrated Alcohol prices at the producer with the subsidy reduction (Feb/99)End of subsidies for Hydrated Alcohol (Nov/99)

Complete Liberalization of Fuel Prices (Jan/02)

Maximum Prices at the Fuel Distributors (Nov/91)

Constitutional Amendment Nº 09: petroleum monopoly made flexible (Nov/05)

Federal Law n° 10.336/01: Creates the "CIDE" from 2002 on (Dec/01)

Free prices in the whole chain of production and commercialization

Economic Agents of Sugar Cane IndustrySugar and Alcohol Industrial Phase

Fuel Distributors

Gas Stations

Exporters

Sugar Cane Agriculture Phase

Regulatory Domain: Ministry of Agriculture

• 1.000.000 jobs in the countryside• 367 Industrial Plants

• 92% of total gas stations in Brazil have an ethanol pump.

• Free Prices Market

• 160 Operating Distributors• Only distributors may blend ethanol with motor gasoline

• 3,42 Billion litters exported in 2006

Source = MAPA – MME – MDIC - 2006

Regulatory Domain: Ministry of Mines and Energy / ANP (National Petroleum Agency)

Ethanol Figures (2006):Production: 18 million m3

Production Capacity: 20 million m3

Cropped Area for ethanol Production: 3 million hectaresExports in 2006: 3,4 million m3

Exports infrastructure: 4 million m3/yearAs of 2010:

Investments* that will amount US$ 8.6 billion in 77 plantsIncrease in the ethanol production (in comparison with 2006): 6 million m3

Expansion in the sugarcane cropped area: 2 million hectaresExpansion in exports infrastructure: to reach a capacity of 8 million m3/year

BRAZIL (Territorial Extension): 851Total Agriculture Area: 383

of which:Fertile and free areas for agriculture: 91Present cropped area for ethanol: 3

(in million hectares)

SUGARCANE AGRO-INDUSTRY

Source: Ministry of Mines and Energy;Ministry of Agriculture, Livestock and Food Supply - 2007

* Agricultural and Industrial phases

Ethanol in Brazil – Sugar Mills Location - 2007

Source: Ministry of Mines and Energy – Ministry of Agriculture, Livestock and Food Supply - 2007

Production in 2006:

17,8 billion liters

NORTH-NORTHEAST REGION 79 INDUSTRIAL UNITS:

• SUGAR MILLS 8• ETHANOL PLANTS 19• ETHANOL AND SUGAR 52

91% of the ethanol production

9% of the ethanol production

Operating Sugarcane MillsSugarcane Mills under construction

↑ 11% (2005)

SOUTH-CENTRE REGION 288 INDUSTRIAL UNITS:

• SUGAR MILLS 8• ETHANOL PLANTS 59• ETHANOL AND SUGAR 221

Amazon Forest

Pantanal

Atlantic Forest of Brazil

Sugarcane CropsCANASAT Project

Source: IBGE (Preservation Areas) and CTC (Sugarcane Crops)

Center-South Region Crops Location – 2005/2006

A Region that growssugarcane crops for more than 30 years

More than 1,300 miles far fromthe Amazon Forest boundaries

9 multinational automotive manufacturers settled in Brazil are producing nearly 100 different models of Total FFV

2006: Total FFV – a Brazilian reality

Source: Ministry of Development, Industry and Foreign Trade;Brazilian Association of Automotive Vehicle Manufacturers - 2007

Any mixture of gasoline and ethanol can be used, from 0 to 100%; In 2006: The domestic flex-fuel vehicle sales represented 78% of all 1,824,266 light vehicles sold in the same period (imports included);

Total domestic flex-fuel vehicle sales (2003-2006): 2.67 million units)

Source: Ministry of Mines and Energy - Brazilian Energy Balance – 2006and Laura Tetti – USP – 2002

Ethanol in Brazil: Oil economy and environmental benefits

+ Total economy of 1,194 billion boe or 23 months of the present Brazilian petroleum production..

FUEL DEMAND FOR LIGHT VEHICLES IN BRAZIL

0

20

40

60

80

100

120

140

160

180

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

YEAR

106 BEP

This curve shows how much gasoline would be necessary to satisfy the fuel demand for

light vehicles.

Total economy of 813 millions boeor 16 months of the present Brazilian

petroleum production.

TOTAL DEMAND FOR LIGHT VEHICLES (GNV INCLUDED)

GASOLINE PRODUCTIONGASOLINE CONSUMPTION

TOTAL DEMAND FOR LIGHT VEHICLES (WITHOUT GNV)

Accumulated economy of 8 years of pure gasoline national consumption.

+ US$ 61billions

+ US$ 16 billions

IN THIS PERIOD, WITH THE ETHANOL USAGE, THE EMISSION OF 675 MILLION TONNES OF CO2 WAS AVOIDED

Source: DATAGRO (in “New trends to the ethanol supply chain in Brazil”, Simoes, R.B., Master Thesis, Universiteit Van Tilburg, Holanda, Jul-2006)

Cost of Ethanol Production

154

75

324651

0,00

0,20

0,40

0,60

0,80

1,00

1,20

UE (Cereais) EUA (Milho) Austrália(Cana-de-Açúcar)

Tailândia(Cana-de-Açúcar)

Brasil (Cana-de-Açúcar)

US$

/ lit

ro

US$ / barril

US$ / barril

US$ / barril

US$ / barril US$ / barril

Production Durin

g the Year

Season Productio

n

EU - Wheat USA - Corn AustraliaSugarcane

ThailandSugarcane

BrazilSugarcane

US$ /

Lite

r

0 1 2 3 4 5 6 7 8

T rig o

M ilh o (E U A )

B e te rra b a

C a n a -d e -A ç ú c a r (B ra s il)

Source: F.O.Licht (in “New trends to the ethanol supply chain in Brazil”, Simoes, R.B., Master Thesis, Universiteit Van Tilburg, Holanda, Jul-2006)

Another Competitive Advantage of Brazilian Ethanol

Wheat

Corn

Beet

BrazilSugarcane

Energy Balance of Ethanol Production

Energy Output / Energy Input

Ethanol Perspectives: Aviation Industry

• Brazilian Aviation Industry sells the first 100% ethanol aircraft, the Ipanema (EMB-202) a single-seat agricultural utility .

• Embraer, in partnership with an Italiancompany, announces the development of thefirst aircraft with Flex-Fuel technology.

The EMB-202 wasawarded with the prizes

"Flight InternationalAerospace Industry

Award" General Aviationcategory (June /2005) in Paris and The Scientific

American 50 (December/2005) as oneof the best inventions of

the year in the world.

Ethanol Contribution to Hydrogen Economy

+

and ... =

+

One step towardHydrogen Economy!

BIODIESEL

Castor Beans Sunflower Palm Oil CottonSoy

BRAZIL: Raw material diversity for production of Biodiesel

0

10

20

30

40

50

60

70

80

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

JAN-

JUL/

06

US$

/ ba

rrel

Oil - Brent Dated

Biodiesel versus Ethanol: Different ReasonsEthanol (1975): basically economics. Reasons for biodiesel (today):

Economic: high crude oil prices again, but Brazilian dependence is now very low

Social: needs for jobs and permanent settlement of families in countryside

Environmental: to introduce another renewable and friendly fuel

1975: Pro-Alcohol is launched

Crude Oil Prices

2003: Biodiesel Program

Law 11.097/2005: Establishes minimum percentages to mix biodiesel to diesel, besides the monitoring on the introduction of this new fuel into the market.

Biodiesel: Regulatory Framework

2005to

2007

Authorized

Potential Market: 840 million Liters/year

2%

2008to

2012

Mandatory

Sound Market:1 billion Liters/year

2%

From 2013on

Mandatory

Sound Market:2,4 billion Liters/year

5%

SOCIAL FUEL CERTIFICATE: How it works?

If the biodiesel producer wants to have the Social Fuel Certificate, it must:

1) Buy regularly a minimum amount of raw material that comes from the household agriculture (small farmers, according to

previously defined criteria); and …

2) Provide the appropriate technical assistance: certificated seeds, rural technicians, best practices etc.; and …

3) Sign a contract with each small farmers in terms that must be regarded as proper by a rural workers’ union.

BIODIESEL: FEDERAL TAXATION POLICYLaw n° 11.116/ 2005

50 100 150 200 250

70General Household Agriculture Aliquot

151Agribusiness: Castor Oil

or Palm Oil + North, Northeast ans Semi-arid

218General Aliquot

0Household Agriculture +

Castor Oil or Palm + North,Northeast and Semi-arid

BIOD

IESE

L

DIESEL 218CIDE + CIDE + Pis/PasepPis/Pasep and and CofinsCofins

R$ / m3

-31%

-68%

-100%

Biodiesel: CIDE is not present + Tax on Industrialized Products has zero aliquot

CIDE: A Federal Tax that is present on fuels. It is an abbreviation form of “Contribution of Intervention in the Economic Domain”PIS/PASEP and Cofins: A Federal Tax for social security

Social Fuel CertificateBenefits (Detaxation)

BIODIESEL: Producers in Commercial Operation and Projects Forecast (As of Dec/2007)

Source: Survey by MME/SPG (Jan/2007)

CREATED JOBS = 1 MILLION(Household Agriculture = 205 THOUSAND FAMILIES)

Nowadays more than 4,900 gas stations are selling biodiesel in Brazil

3,03865TOTAL94819• NEW PROJECTS

2885• UNDER CONSTRUCTION

1,13722• IN AUTHORIZATION PROCESS (ANP)

66419• AUTHORIZED BY ANP

Installed Capacity

(MM L/year)

Number of Plants

In Authorization Process (ANP/RF))Under Construction

Key to Symbols:In Commercial Operation

New Projects

Biodiesel Auctions

The Federal Government has established:

• The mandatory B2 mixture is now anticipated for January of 2006, only for biodiesel produced by industries that have the so-called Social Fuel Certificate and commercialized in public auctions promoted by the National Agency of Petroleum – ANP.

• The biodiesel with certificate acquired in the auctions must beacquired by producers and importers of petroleum diesel.

H-BIO: A NEW BRAZILIAN TECHNOLOGY

THE EFFICIENCY OF H-BIO PROCESS

100 liters of any vegetable oil

96 liters of diesel oil

2,2 Nm3 of propane

BiodieselBiodiesel

Glycerin Glycerin OthersOthers

Refinery

Hydrogen Fractions of diesel

Gas Station

Distributors

Agribusiness

Plantation Oil Crushing

Grains

RefinedOil

DieselDiesel

H-BIO

B2 or B5mixture

DieselOR

TransesterificationUnitEthanol Ethanol

or

MethanolMethanol

OROR

BIOFUELS PRODUCTION

FINAL REMARKS

ENERGY PRODUCTION

X

FOOD PRODUCTION

GLOBAL CHALLENGE

ANDAND

ENERGY PRODUCTIONX

FOOD PRODUCTION

GLOBAL CHALLENGE

0,2 to 0,47%(0,4% to 1% of arable

area)

1,7 to 4,0OILSEED CROPS FOR B2 and B5

0,35%(0,8% of arable area)

3SUGARCANE AREA FOR ETHANOL

11%(24% of arable area)

91AVAILABLE FOR EXPANSION

45%383ARABLE AREA

100%851BRAZIL (TOTAL)

PERCENTAGEAREA

(EXTENSION)

In millions of hectares

AND BRAZIL

EVOLUTION OF ETHANOL PRODUCTIVITYSUGARCANE PRODUCTIVITY

(tonnes of sugarcane / ha)

746247

01020304050607080

1975 1990 2005Sugarcane Production 2006 = 457 106 t

33% of the world productionWorld Average = 69 t/ha

ETHANOL PRODUCTIVITY (liters / tonnes of sugarcane)

867469

30

40

50

60

70

80

90

1975 1990 2005

ETHANOL PRODUCTIVITY(m³ / ha)

3,24,6 6,6

0123

4567

1975 1990 2005

NECESSARY LAND AREA FOR TOTAL SUBSTITUTION (IN VOLUME) OF OIL CONSUMPTION

Source: Data for oil consumption - British PetroleumData for land areas - FAO

(*) Average biofuels production: 3 thousand liters per hectare

Necessary Land Area for Biofuels (*)

103

Barrels/DayBillion

Liters/Year 103 hectars

Total North America 24.874,6 1.443,6 481.200 Total S. & Cent. America 4.775,9 277,2 92.390

Total Europe & Eurasia 20.350 1.181,0 393.676 Total Middle East 5.739 333,0 111.012

Total Africa 2.763 160,3 53.445 Total Asia Pacific 23.957 1.390,4 463.456 TOTAL WORLD 82.459 4.785,5 1.595.179

REGIONConsumption

Land Area for Agriculture

% of the agriculture land

area necessary for biofuels

Total Land Area of the

Region

% of the total land area necessary for

biofuels

103 hectars % 103 hectars %

Total North America 591.707 81% 2.016.412 24%Total S. & Cent. America 614.147 15% 1.834.172 5%

Total Europe & Eurasia 813.973 48% 2.738.369 14%Total Middle East 297.968 37% 391.390 28%

Total Africa 1.135.372 5% 2.786.664 2%Total Asia Pacific 1.528.715 30% 2.909.449 16%TOTAL WORLD 4.981.881 32% 12.676.457 13%

REGION

AMERICA

NECESSARY LAND AREA FOR TOTAL SUBSTITUTION (IN VOLUME) OF OIL CONSUMED

Source: Data for oil consumption - British PetroleumData for land areas - FAO

(*) Average biofuels production: 3 thousand liters per hectare

Necessary Land Area for Biofuels (*)

Country Land Area

for Agriculture

% of the agriculture land area

necessary for biofuels

Total Land Area of the

Country

% of the total land area

necessary for biofuels

103 Barrels/

Day

Billion Liters/ Year

103 hectars 103 hectars % 103 hectars %

USA 20.655,5 1.198,7 399.580 416.902 96% 916.192 44%Canada 2.241,3 130,1 43.359 67.505 64% 909.351 5%Mexico 1.977,8 114,8 38.261 107.300 36% 190.869 20%Total North America 24.874,6 1.443,6 481.200 591.707 81% 2.016.412 24%Argentina 421,3 24,4 8.150 128.747 6% 273.669 3%Brazil 1.818,5 105,5 35.180 263.600 13% 845.942 4%Chile 257,5 14,9 4.981 15.242 33% 74.880 7%Colombia 230,4 13,4 4.457 42.051 11% 110.950 4%Ecuador 148,2 8,6 2.866 7.250 40% 27.684 10%Peru 138,8 8,1 2.685 21.210 13% 128.000 2%Venezuela 553,2 32,1 10.701 21.640 49% 88.205 12%Other S. & Cent. America 1.208,0 70,1 23.369 114.407 20% 284.842 8%Total S. & Cent. America 4.775,9 277,2 92.390 614.147 15% 1.834.172 5%

COUNTRY

CONSUMPTION

NECESSITY OF AGRICULTURAL LAND AREA ACCORDING PRODUCTIVITY OF DIFERENT RAW MATERIALS

SUBSTITUIÇÃO TOTAL DO PETRÓLEO, 50%, 25% e 5 %

MUNDO

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

600 1.000 2.000 3.000 4.000 5.000 6.000 7.000

Produção (litros/hectare)

% d

a ár

ea a

gric

ola

nece

ssár

ia p

ara

bioc

ombu

stív

eis

5%20%50%100%

Different sceneries for oil substitution (5%, 20%, 50%, 100%)

SUNFLOWER (880 l/ha)PEANUTS (866 l/ha)

JATROPHA (2.000l/ha)

SOYA (600 l/ha)

CASTOR OIL(500-1.000 l/ha)

SUGARCANE (*) (5.000 l/ha)

PALM OIL(5.000 l/ha)

CELULOSIC ETHANOL (*) (7.000 l/ha)

Production (l/ha)

(%) P

ropo

rtio

n of

nec

essa

ry

agric

ultu

ral l

and

area

for b

iofu

els

13,7 %

HEY! WHAT ARE WE WAITING FOR?

INTERNATIONAL TENDENCIES (1/3)Social and Environmental Certification demanded by

ImportersCriteria of sustainability Regulation of labor market More rigorous environmental concerns

USA: local production and imports – focus on ethanol33 billion liters from renewables until 2012Goal to reduce 20% of gasoline consumption in 10 years

(potential demand of imports > 400 billion liters from renewables)

Caribbean – exports to USA based on CBITax exemption (ways to export to USA)

Non-tariff barriers?

European Union: solution to the agricultural questionBiofuels faced as an alternative to agricultural subsidies, with focus

on biodieselTendency to local production, even though with raw material imports

(no biofuels)Goal to 2010: 5,75% of consumption from renewables – 16 billion

liters of ethanol and 5,5 billion liters of biodiesel

ChinaGoal to 2020: consumption of 16 billion liters of ethanol and 5,5

billion liters of biodiesel2006 Production: 5,3 billion liters of ethanol

India:E5 mandatory in 10 provinces (0,4 billion liters of ethanol)

INTERNATIONAL TENDENCIES (2/3)

International Tendencies (3/3)Japan:

2030 Target: to reduce oil dependence from 98% to 80%E10 use in 10 years

ArgentinaMandatory B5 and E5 in 2010 (650 million liters)

PeruMandatory B2 in 2009 (56 million liters)Mandatory B5 in 2011 (138 million liters)Mandatory E7,8 in 2010 (107 million liters)

ColombiaMandatory E10Mandatory B10

Biofuels: perspectives in the near future...

World growing demand

More rigorous environmental concerns

Increase in international trade

Improvement on productivity and on energy balance of biofuels:

• Biodiesel: traditional crops (600 L/ha) versus new oilseeds (6.000 L/ha)

• Ethanol: new production methods (bagasse/cellulose hydrolysis)

The achieve of this technology will bring:Energy AND Food Production, not versus!

But it requires to be a common product and negotiated in an international environment

A market to be established itself.

Biofuels = Commodity?Commodities general characteristics:

Patterns in a context of international tradeCompatible Specifications

Possibility of delivery on due dates settled between buyers and sellers

Negotiation with traders

Possibility of storage or sale in standard units of trade

liter, barrel, m3 ...

CONCLUSIONBiofuels do contribute to:

Energy security;

Improvement of environment conditions in urban areas;

Creation of jobs and income in rural areas;

Economic development.

However, in order to achieve this reality, it is required:

Governmental decision with adequate public policies

Global efforts towards creation of biofuels international market

Governmental policies do exert strong influence on climate for investment because they can produce immediate impacts over costs,

risks and barriers to competition.

CONCLUSION

ENVIRONMENTAL MOTIVATION !!!

BIOFUELSBIOFUELS

... A SOLUTION WITH SOCIAL INCLUSION !!!

THIS CHANGE IS POSSIBLE

THANK YOU!

Ricardo de Gusmão DornellesDirector - Renewable Fuels Department