Pipeline Projects On Hold

Brazilian ethanol pipeline projects are budding, but not all will bloom.
By Elizabeth Ewing | June 02, 2008
In the past few months three major ethanol pipeline projects, through roughly the same corridor of Brazil's existing and future center-south sugar cane production belt, have been tabled by separate groups interested in extending their downstream footprint in the industry and capitalizing on the growing export potential of the world's largest cane ethanol producer.

All three investor groups—one representing Brazil's state oil company, a second the established center-south cane industry and a third deep-pocketed private equity investors—are banking on Brazil becoming the world's main international ethanol exporter, supplying the North American, European and Japanese markets with their marginal ethanol needs.

Brazil is already ramping up its ethanol production in preparation for expansion into international markets. The local cane crop, which has traditionally expanded about 6 percent a year, has seen annual expansion at more than 10 percent. This year's crop, however, is expected to grow by 16 percent to more than 550 million metric tons (606 million tons) in an effort to meet growing domestic and international demand. Brazil's cane sector is expected to attract $17 billion in investment over the next six years by market estimates. Most of this expansion will be directed to ethanol production to supply Brazil's growing flexible-fuel automobile fleet that now makes up more than 90 percent of all new car sales. Until last year, slightly more than half the country's cane crop was directed to sugar and the rest to ethanol production. But this season, a full 58 percent of the main center-south's crop is expected to go to ethanol production, according to the Brazilian Cane Industry Association (Unica).

Although Brazil's ethanol exports have been relatively flat over the past few years at just more than 3 billion liters (793 million gallons), it will increasingly become a larger ethanol exporter. Ethanol production from the main center-south crop will grow to 24.3 billion liters (6.4 billion gallons) this season, from 20.3 billion liters (5.4 billion gallons) in the previous, and exports should grow to 3.9 billion liters (1 billion gallons) from 3.1 billion (819 million gallons) last season, with the United States continuing to make up for just over half of those volumes. Plinio Nastari, president of cane sector analyst Datagro, says Brazil's ethanol fuel production would have to grow by 3 billion liters (793 million gallons) a year through 2025 to keep up with demand at home and abroad.

"Through 2015, ethanol exports will remain limited to roughly 7 billion liters (1.8 billion gallons)," Nastari says. "But the shift has already begun … as sugar has been the driver of Brazil's cane industry for several hundred years, so ethanol will now take over as the main force behind cane expansion."

He estimated that in 2015, U.S. legislation would cap the amount of ethanol from corn and U.S. demand for alternative fuels. That could potentially help boost Brazil's international ethanol sales, which are expected to grow to 25 billion liters (6.6 billion gallons) by 2025. Japan with the world's second-largest automobile fleet will also be a major importer of Brazilian ethanol, and it is this market that is of interest to Brazil's state-run oil and gas company Petrobras. The company recently bought a 90 percent stake in Exxon Mobil's Okinawa oil refinery, and Petrobras's chief executive, Jose Sergio Gabrielli, says that it may serve as a staging point for Brazilian ethanol exports to Japan and the rest of the fast-growing Asian region. One of the main problems that Petrobras and other major ethanol exporters are facing is the lack of offloading infrastructure in the destination markets.
Other potential markets for Brazilian ethanol include the European Union, which is currently debating its biofuels directive. According to the proposal currently being debated by the European Commission, 10 percent of all transport fuels consumed in the trade bloc by 2020 must be biofuel blends.

Currently, Unica is directing much of its lobbying efforts toward the European Union, which has the potential to import significant volumes of Brazilian ethanol. "There's a lot of pressure against the biofuels directive and we are focusing on educating people about the virtues of Brazil's cane-based ethanol," says Unica President Marcos Jank. "The debate is heated right now, because of concerns about food inflation, but we continue to believe that Brazilian ethanol meets all the requirements of the directive in terms of [carbon dioxide] reduction," he adds.

Petrobras Partners With Mitsui
Petrobras announced earlier this year that it entered into a joint venture with Japanese trading house Mitsui and local construction company Camargo Correa to build a designated ethanol pipeline that will run from Goias state in Brazil's center-west to Petrobras's Paulinia refinery in Sao Paulo state. The venture will be called PMCC Projetos de Transporte de Alcool. The Goias-Paulinia leg is part of an ethanol export corridor which will also eventually include ethanol-only legs between Paulinia and Guararema, which in turn will link up with the coastal terminals in Sao Sebastiao in Sao Paulo state and Ilha D'Agua in Rio de Janeiro state. The line is expected to have the capacity to ship 12 million cubic meters (12 billion liters or 3.2 billion gallons) of ethanol annually.

Brazil has moved ethanol fuel through pipelines for decades with great success but they are multiuse ducts, so the ethanol is tainted with traces of gasoline, diesel and other fuels. That is not a problem for the local fuel distributors but it is for foreign buyers. All ethanol exports in Brazil come to the port by truck or railcar. This is the main bottleneck that will limit the future expansion of Brazilian ethanol exports.

The construction of pipelines is considered key for the export market to expand, according to Antonio de Padua Rodrigues, technical director for Unica. "We estimate that freight costs represent 15 percent of the free-on-board price of ethanol exports between Ribeirao Preto and the port of Santos. With a pipeline, these costs would decline significantly," Padua Rodrigues adds.

Petrobras has also teamed with Mitsui as a minority shareholder in about 20 separate ethanol plant projects in Brazil but recently said that it is slowing the development of these plants until Japan shows stronger signs of making an E2 blend mandatory in its retail fuel market. It still plans to export 4.7 billion liters (1.2 billion gallons) of the biofuel by 2012. "We are also looking at the South Korean, South African and U.S. markets," says the company's supply director, Paulo Roberto Costa.

Roberto Gianetti da Fonseca, an economist who is director of trade at the Sao Paulo Industry Federation (Fiesp), estimates that demurrage cost for ships waiting to load ethanol at Latin America's largest port of Santos has surpassed $30 million a year because of a lack of sufficient storage capacity. He estimates port ethanol storage capacity needs at about $50 million to $60 million in investments to bring them up to par with current ethanol export levels. "It's not enough to only think about production, we are leaving out important logistic decisions," da Fonseca says, alluding to the nearly 90 new ethanol mills that will be coming on line in the next few years. "Ethanol pipelines should have been built yesterday because the ports are already at their capacity limits."

Petrobras has also secured an agreement from the states of Mato Grosso do Sul in the center-west and Parana, which has one of Brazil's new ethanol export terminals. Mato Grosso do Sul is also seen as one of the main frontier cane regions. The project is expected to require investments of about R $2 billion (U.S. $1.25 billion). But although the Paranagua export terminal has been in place for a couple of years, it has not yet exported a drop because of regulatory and technical problems.

Petrobras has said it would allow the private sector third parties access to its ethanol pipelines but the company has a bad history in allowing access to its natural gas pipelines, which has prompted private investors to push ahead with their own projects.

Cosan, Copersucar, Crystalsev Form Joint Venture
Petrobras's entrance into Brazil's ethanol industry has sent shudders through Brazil's cane industry, which realizes the benefits the state-run giant can have in opening foreign markets, but also fears its monopolistic and predatory tendencies in the local fuels markets. Almost in response to Petrobras's pipeline investment announcements, Brazil's biggest sugar and ethanol producer Cosan soon after formed a joint venture with Sao Paulo Sugarcane, Sugar and Ethanol Producers Association known as Copersucar and sugar and ethanol trader Crystalsev to build a designated ethanol pipeline in the state of Sao Paulo, which accounts for about 65 percent of Brazil's cane output.

The three giants of Brazil's sugarcane sector, which are essentially competitors, will make initial investments of R $20 million (U.S. $11.5 million) apiece in the joint-venture company called Uniduto Logistica that will plan and install an ethanol-only pipeline between the oil refinery in Paulinia, in Sao Paulo state to an ethanol offloading terminal on the state's coast. Other investors may be brought on at a later time, Cosan says, as the project costs are expected to run to R $1.5 billion (U.S. $914 million).

Brenco's Big Investors
Recent expansion and interest in Brazil's cane ethanol sector has birthed at least three major private equity groups dedicated to investing in the sector, some of them have raised money by floating shares on the London AIM exchange—Infinity and Clean Energy Brazil, while another has amassed a cadre of deep-pocketed backers. The private equity fund Brenco, also known as the Brazil Renewable Energy Co., includes investors such as former U.S. President Bill Clinton, Vinod Khosla, who was one of the co-founders of Sun Microsystems, America Online founder Stephen Case, Hollywood producer and Democratic fundraiser Steven Bing, and former World Bank President James Wolfensohn.

Brenco plans to invest $1 billion in a 1,100-kilometer (683 miles) ethanol pipeline, which is expected to be completed by 2011 with a capacity to deliver 4 million liters (1.1 million gallons) of ethanol a year. The company is currently applying for the necessary licenses from Brazil's environmental protection agency, Ibama, and the National Petroleum Agency.

The plan is to build a pipeline from Alto Taquari in Mato Grosso state via Mato Grosso do Sul, Goias and Sao Paulo state to Brazil's main port in Santos. The pipeline will link six terminals: in Alto Taquari in Mato Grosso state; Costa Rica in Mato Grosso do Sul state; Paranaiba in Goias state; Sao Jose do Rio Preto and Paulinia in Sao Paulo state; and
Santos port.

Brenco has been investing heavily in the past year and a half but as of this year doesn't have any operational mills. It expects to have 10 mills working by 2015, two of which will be in Mato Grosso and will be ready to start crushing sugarcane in March 2009. Brenco has 30,000 hectares (74,132 acres) of sugarcane plantations in Mato Grosso, Mato Grosso do Sul and Goias.

Despite optimism regarding pipeline construction, Unica is convinced that not all of the proposed pipelines will be built. "There is simply not enough demand for three ethanol pipelines," Jank says. "The external market simply isn't developed enough—only 15 percent of our production was exported," he adds. Jank says that Unica is working with all the players involved to agree on a single project. "This process is very complex and it takes a long time to develop these projects."

Jank adds that the biggest concern for the industry is Petrobras control. "Petrobras has proven that it is very successful at using monopolies to its advantage," he says. For a project to be successful, it will need participation from all sectors, he concludes.

Elizabeth Ewing is a journalist covering biofuels from Sao Paulo, Brazil.