Primer: What You Need to Know About Brazilian Biofuels

While U.S. ethanol producers are like teenagers in the global biofuels market, Brazil is like a mature adult, approaching middle age. The Brazilian government began investing heavily in ethanol infrastructure and R&D more than 30 years ago. Now the country, which produces 45 percent of its own transportation fuel “on only 1 percent of its arable land,” is aggressively looking beyond both first-generation biofuels and its domestic market.

Brazil currently produces 4.7 billion gallons of ethanol every year; the Brazilian government estimates that number will double by 2015. And they are increasingly looking at the U.S. as potential buyers. Although President Bush did sign an ethanol technology-sharing agreement with Brazilian President Luiz Inácio Lula da Silva, a 54 cent-a-gallon tariff prevents cheap Brazilian ethanol from competing with homegrown U.S. corn ethanol.

But the readily fermentable sugars found in sugarcane make it a far better ethanol feedstock than grain. Brazilian sugar ethanol gives an eightfold return on the fossil energy used to make it; American corn, on the other hand, only yields 1.3 times the fossil energy used. Brazil is now the No. 2 producer of ethanol, dethroned by the U.S. in 2005, but still leads in ethanol exports, sending some 900 million gallons of ethanol overseas last year, according to Reuters.

Brazil’s ethanol success and failures can teach the rest of the world a lot about biofuels. So who are the big Brazilian ethanol players? Who’s investing in the sector? And which biofuel startups are making Brazilian deals? Below, a primer:

Big Players:

  • Cosan SA: The largest grower and processor of sugarcane on the planet, Cosan crushed some 36.2 million tons of sugarcane into 326.7 million gallons of ethanol in 2007. More recently, the company made a move to buy all of ExxonMobil’s Brazilian distribution and service-station businesses for $826 million. Speaking at Stanford last November, a month after the company raised $1.2 billion via an IPO on the NYSE, Cosan CFO Paulo Diniz broke down Cosan’s $1.7 billion in revenue: 61 percent from sugar sales, 33 from ethanol sales, and 6 percent from selling the electricity generated by burning sugarcane byproducts. Diniz added that the company is developing genetically modified sugarcane that can be grown in various climates and could increase its production to “at least 150 or even over 200″ tons per capita from the current 85.
  • Petrobras: Petrobas still has significant petroleum interests but is also the largest buyer of ethanol in the world. Petrobras is an energy company; it doesn’t actually grow any sugar but buys it and sells the fuel through its distribution arm, Petrobras Distribuidora. According to Bloomberg, Petrobas plans to invest $600 million by 2010 to expand its ethanol exports. “The U.S. is the market where we would like to be,” Petrobras head Jose Sergio Gabrielli told Bloomberg. Petrobras also recently formed a partnership with Japan’s Nippon Alcohol Hanbai to export Brazilian ethanol to Japan.
  • Santelisa Vale: Brazil’s second-largest sugarcane and ethanol producer, Santelisa Vale recently sold its 50 percent stake in Tropical BioEnrgia — which was launched with plans for $1 billion of ethanol refineries — to BP Oil for $60 million. In the meantime, the commodities division of Goldman Sachs put more than $200 million into Santelisa Vale.
  • Crystalev: A subsidiary of Santelisa, Crystalev’s own operations are massive. In addition to being Brazil’s largest producer of renewable energy, the company says they produce 2 billion tons of sugar and 1 billion liters of ethanol each year. However, Crystalev’s operations represent only 8 percent of the total sugarcane crushed in Brazil. The company also recently partnered with California startup Amyrsis to develop renewable, sugar-based fuels including diesel, jet fuel and gasoline; they’re aiming to commercialize sugar-based diesel by 2010.

Startup Players Heading to Brazil:

Brazil doesn’t just tap the cane’s sucrose for ethanol. The country’s sugarcane crop also produces a considerable amount of bagasse, the fibrous leftovers and fodder for a growing number of cellulosic ethanol ventures that are finding Brazil to be a great place to set up shop.

  • Brazil Renewable Energy Co.: Founded by former Petrobras president Philippe Reichstul, Brenco, as it’s known, has A-list investors including Bill Clinton, Steve Case, Vinod Khosla, and film producer Steve Bing, and has raised nearly $150 million from Brazilian, American and European investors. The company is now working hard to become Brazil’s largest ethanol producer, with 14 mills under construction at a cost of $2.4 billion. While the company suffered some bad PR following accusations of illegal labor practices, the Brazilian Labor Ministry has lifted the operation restrictions and declared Brenco compliant.
  • KiOR: A joint venture between Khosla Ventures and Dutch BIOeCON, KiOR has signed on with Petrobras to work on its biomass catalytic cracking technology at the energy giant’s research center. Using catalytic pyrolysis, Kior “cracks” cellulosic biomass, like sugarcane slag, into a biocrude.
  • Amyris Biotechnologies: In a joint venture with Santelisa Vale-owned Crystalsev, Amyris plans to commercialize “advanced renewable fuels” including sugar-based gasoline, diesel and jetfuel. Called Amyris-Crystalsev Pesquisa e Desenvolvimento de Biocombustiveis Ltda, the JV will start with renewable diesel; it has contracted Santelisa Vale to provide two million tons of sugarcane crushing capacity and a test plant. With $90 million from an impressive list of Sand Hill Road investors — Kleiner, DAG Ventures, Khosla Ventures and TPG Ventures — Amyris is making lucrative deals on both sides of the Gulf.
  • Ethos Ethanol: Backed by biofuel-happy Khosla Ventures and GreatPoint Ventures, Cambridge, Mass.-based Ethos Ethanol has been pretty stealthy about exactly what it plans to do. Its web site says merely that Ethos plans to pursue sugarcane-based fuels “in areas of Central/Latin America and the Caribbean.”

International Investors:

With such a large market opportunity, you can bet that huge multinational corporations and investors are making Brazil part of their portfolios.

  • Goldman Sachs: Last July, Goldman put $210 million into Santelisa Vale to expand the company’s sugar mills.
  • Dow Chemical: Midland, Mich.-based Dow last year teamed up with Crystalslev to make polyethylene from sugarcane ethanol.
  • ExxonMobil: Cosan will be buying Esso’s Brazilian distribution network, but the oil company’s Chilean and Uruguayan distribution business is up for grabs and Cosan will likely again be bidding against Petrobras.
  • BP: BP entered the Brazilian biofuel scene with their initial $60 investment in Tropical Bioenergia SA and say they and their partners plan to invest $1 billion in two new ethanol plants. Ethanol consumption is starting to outstrip gasoline use and fixed gas prices keep petrol fuels more expensive than ethanol, all signs that fuel players in Brazil need to get into ethanol.

Hurdles:

While sugarcane makes for more energy-efficient ethanol than corn, it is an extremely labor-intensive process, with much of the harvesting being done by hand. Earlier this year, Bloomberg TV aired a documentary called “Deadly Brew – The Human Toll of Ethanol,” which chronicles the horrendous working conditions in many Brazilian sugar fields (trailer embedded at the bottom).

The environmental toll has also been in the global media spotlight. While the Amazon is indeed being chopped and burned down at an alarming rate, farther south new sugar growth taking place at the expense of the Cerrado, one of the world’s most biodiverse savannas.

Meanwhile, food riots are breaking out in cities around the world, with much of the blame being placed on biofuel production. But Brazil says that it will continue to produce ethanol from sugar.

[youtube=http://www.youtube.com/watch?v=cGsBMWsjLcE]

Graph courtesy of Petrobras.

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