Brazil just makes it happen

With a plethora of projects in the works, and a nationwide low-blend mandate looming, Brazil-a nation famous for producing low-cost ethanol-is poised to become a world leader in biodiesel production.
By Elizabeth Johnson | August 01, 2006
Record-high world oil prices have catapulted biofuels into the multi-billion dollar commodity mainstream, threatening to cause shock waves in other sectors-some say eventually food prices-and an explosion in new investments in production. Brazil has long been far ahead of the mean in biofuels development, production and distribution ever since the country's sugarcane mills convinced the government that it could lighten Brazil's dependence on foreign oil imports by implementing the famous, but now defunct, Pro-Alcohol Program of the late 1970s.

Now, President Luiz Inacio Lula da Silva is attempting to expand Brazil's presence in biofuels production with a new biodiesel program. When the Brazilian Congress approved a national biodiesel law in late 2004-the first of its kind that will mandate a biodiesel blend in all petroleum diesel fuel sold at the pump by 2008-many specialists, especially in the vegetable oils industry, were skeptical of the program as it was floated by the government.

The law will mandate B2 and eventually B5 nationwide. Brazilian demand for biodiesel is estimated to reach 800 million liters (211 MMgy) anually when the B2 mandate takes effect Jan. 1, 2008. An additional 2.5 billion liters (660 MMgy) a year will be required by 2013, when B5 becomes mandatory. For now, using B2 is voluntary as the nation ramps up for the launch of program.

Critics have said the requirement wasn't viable and that production capacity couldn't be on line by the established deadlines. However, with the increased presence of Brazil's state-controlled oil giant Petrobras in the biodiesel industry-as well as growing investment from the private sector-it appears Brazil won't have much, if any, difficulty meeting demand for the vegetable-oil-based fuel when the 2008 launch date hits.

Big Investments Being Made
Petrobras plans to invest in biodiesel plants that are expected to produce 855 million liters per year (226 MMgy) by 2011. In addition to its investments in conventional biodiesel plants, Petrobras has begun patenting a new technology that it says can produce high-quality diesel using 10 percent vegetable oil in the refining process at a cost well below the cost of producing traditional high-quality diesel. The company calls it H-Bio, and President Lula was present for an industrial test run of the production process at Petrobras' Getulio Vargas Refinery (Repar) on June 20 in Araucária, Paraná-Brazil's leading grain-producing state. "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 new biodiesel.

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 (10.5 billion gallons) of petroleum diesel. The quality of domestically produced diesel is seen as rather poor, and its production and use is not environmentally nominal. Still, H-Bio has yet to be produced commercially and is still in an incipient state, having come about only a year ago. Petrobras says its H-Bio program alone will allow Brazil to quit importing 250 million liters (66 million gallons) of diesel in 2006 and reduce 2007 imports by 450 million liters (119 million gallons).

There is also the private sector investment in biodiesel production. According to government estimates, on the same day he stopped at the H-Bio Repar plant, President Lula inaugurated the BSBios biodiesel plant that is expected to produce 100 million liters of the fuel per year (26 MMgy) in Passo Fundo in Rio Grande do Sul, a large grains and oilseed producing state in the South. It should begin operations in 2007. It will require an investment of about BRZ$20 million, based on financing from the Banco do Brasil, Caixa Economica and Brazil's BNDES development bank. Some 4,000 farmers will be supplying the plant with soy, sunflower and canola that will be used to produce the fuel. Rio Grande do Sul is a state of mostly small farmers, unlike the larger operations in the west-central part of the state.

"Brazil looks as though it is on course to reach and surpass the market's demand for biodiesel by 2008 with plenty to spare," says biofuels analyst Miguel Biegai at private consultants Safras e Mercado.

Rodrigo Rodrigues, coordinator of the government's biodiesel commission, recently said at a biodiesel seminar in Aracatuba, São Paulo, that Brazilian biodiesel production capacity should reach 1.1 billion liters (291 million gallons) in 2007, more than sufficient for the 2 percent compulsory blend coming into force in 2008.

Brazil currently has five biodiesel plants on line, with a total production capacity of nearly 50 million liters per year (13 MMgy) and another five mills representing an additional 61 million liters per year (16 MMgy) that are under development and/or construction. Another 24 mills with 1 billion liters (264 million gallons) of collective capacity are planned or being built.

Leaders in the vegetable oils industry, however, say the Brazilian government could do more to attract the private sector, and they complain that policy has been favoring family producers to the detriment of industrial manufacturers. Government representatives are quick to point out that foreign investors are involved in new projects outside the government program. However, only biodiesel producers that can show they have bought a minimum quota from family farmers can take part in government buying-auctions, where Petrobras purchases biodiesel for its distribution arm.

Putting Feedstock and Infrastructure in Place
Participation in the auctions is key. At the most recent auction, Petrobras bought 93 percent of the 600 million liters (159 MMgy) of biodiesel sold. Petrobras's Refap refinery purchased the remaining 7 percent. Petrobras and Refap have been the major buyers at all of the previous auctions. While there is a private market for the product and other filling stations are also selling biodiesel, Petrobras controls 98 percent of oil refining in Brazil and is hands down the largest fuel distributor. Petrobras already offers biodiesel at 500 of its filling stations and plans to sell it in 7,000 stations in 2007.

ALE, which was the first gas station in Brazil to sell biodiesel, has been surprised by the success of the biofuel's sales. Since beginning to sell B2 at a handful of its gas stations in March 2005, the company has expand B2 sales to 194 of its 487 locations. ALE is now planning to invest roughly $15 million in two biodiesel plants, which will have a combined production capacity of 100 million liters per year (26 MMgy).

Likewise, Rio de Janeiro oil refinery Manguinhos recently announced a plan to begin producing biodiesel. The refinery initially plans to produce 30 million liters per year (8 MMgy), with the ultimate goal of producing 100 million liters per year (26 MMgy).

The plan of President Lula's left-leaning administration was to provide tax and fiscal incentives to stimulate small family farmers of castor beans mostly but also other oil-bearing crops-the oilseed feedstocks of biodiesel production. Some said it was the government's attempt to even the playing field for the small guy against the big oilseed processors like Archer Daniels Midland Co., Bunge, Cargill, Louis Dreyfus and the national crusher Caramuru.

Analysts and leaders in the vegetable oils industry say that only Brazil's soybean-crushing industry has the infrastructure, logistics, capacity and economy of scale to deliver vegetable oil volumes of that size in the short-term. Brazil is the world's second-largest soybean grower after the United States. Soy oil is significantly cheaper than castor oil.

Although the recent low price of soybeans and oil in Brazil has been bad for producers and the industry, it has made the production and sale of soy-oil-based biodiesel competitive with petroleum diesel in the southeast, home to Brazil's largest consumer market, the Center for Advanced Studies in Applied Economics (Cepea) at the University of São Paulo said in a recent study on biodiesel. When the price of soy, processing and returns from byproducts of processing are taken into account, biodiesel is about 30 percent cheaper than the average price of petroleum diesel sold at the pump in the region. This margin will be more than enough to cover freight costs and taxes while still allowing a profit margin for resale by distributors, Cepea said.

The think tank said that soy oil may eventually only be cost competitive in some regions of the country, such as the west-central area, where most of Brazil's soybeans are produced but where costs for importing diesel deep into the interior of the country are very high. Other oil-bearing crops may eventually replace soy oil depending on the region. Palm oil in the northeast will likely be the most competitive in that region due to its oil yields, specialists said. Canola and sunflower seed will be competitive in the more developed, southern grain-rich states. For now and in the medium term, the soybean crushing industry is the only oil producer that has the necessary capacity and infrastructure to immediately meet demand.

In addition to oilseed projects, Brazil's cattle industry is also investing in lard-based plants. Bertin, one of Brazil's top beef producers and exporters, began construction of a large biodiesel plant recently. The plant will cost an estimated BRZ$30 million (US$13.3 million) to build and will begin operating in November. Earlier this year, Brazilian fertilizer manufacturer Fertibom also began production of biodiesel using animal fat as a feedstock. The company has already participated in the government-sponsored biodiesel auctions. Likewise, two other companies-Biocapital and meatpacking plant Marfrig-are also reported to be considering investments in biodiesel production.

Given current investment levels, Brazil is poised to become a world leader in biodiesel production and is likely to repeat the success of its ethanol program, significantly reducing its dependence on oil and contributing to the reduction of greenhouse gases.

Elizabeth Johnson writes for Biodiesel Magazine. Her last contribution, "Argentina's Climate of Growth," was published in our November 2005 issue.
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