It also forecasts changes to come, considering critical elements of the Brazilian biofuels supply chain. The study examines related markets, such as distillers grains and flexible-fuel and dedicated ethanol vehicles, and profiles Brazil from a global perspective, highlighting local opportunities as well as key issues for companies considering investment options worldwide.

The goal of the study is to provide stakeholders with the following:

+ An understanding of Brazil's policy and regulations including an assessment of possible trends and changes over the next decade

+ An understanding of feedstock options and issues in Brazil

+ An independent assessment and opinions on the direction of technology development

+ An analysis of the competitive position of Brazilian biofuels relative to other major global producers

+ An understanding of the Brazilian biofuels industry from both a local and global perspective, covering investments, research, and strategy

+ Insight into the direction of the biofuels market in Brazil and the role of sugarcane and ethanol over the next decade

Even though Brazil itself may not be a primary focus for some industry participants, Nexant undertook this study in the belief that the strengths, issues, and outlook for Brazilian biofuels are nevertheless of interest to all global industry players. Highlights of the study are summarized below.

Policies And Regulations Relevant To Biofuels
Energy Policies

The Brazilian government has been active in management of the domestic energy sector, such as in the existing initiatives requiring greater point-of-use energy efficiency, and giving priority to the types of energy associated with the creation of employment, which so far has shown only modest results.

For example, in addition to being commercially competitive as a source of liquid fuel, the use of biomass potentially will employ more people than the petroleum sector.

In order to manage the combination of advantages, risks, employment opportunities, and allocation of financial resources associated with growing the national energy supply, a set of public policies has been put in place, or is being developed, while making provision for direct participation by private enterprise. The key challenges of energy policy in Brazil include:

+ Ensuring a continuous supply of energy without losing the focus on the use of clean technologies

+ Diversifying the mix of energy sources in order to reduce reliance on hydroelectric power, which is subject to volatility due to weather

+ Contributing to sustainable development

+ Mitigating market risks

+ Creating a competitive environment and protect energy consumers

+ Policies for Transporting Fuel

Diesel and gasoline in Brazil are primarily moved through pipelines and coastal shipping. Ethanol, however, is transferred from production plants to terminals by rail and highway. The transfer of products from terminals to final consumers is mainly done by railcars and trucks, which often must travel great distances from the primary and secondary terminals.

Existing bottlenecks in both rail and pipeline infrastructure significantly affect the logistics for gasoline, ethanol, and diesel, aggravating the supply chain and affecting final user prices.

As fuel prices are major drivers of inflation in Brazil, any additional cost in their distribution is an important issue at the national level. The key infrastructure bottlenecks observed in the current system are limited pipeline and rail capacity, and the very poor state of the highways.

In summary, this analysis has identified the need for improvements to the infrastructure for moving liquid fuels in Brazil as an important issue that needs to be addressed in order to support significant growth in production and use of biofuels over the next decade.

Ethanol Policy

Brazilian ethanol production has expanded by about 70 percent in the last six years. This growth has been supported by concern over global warming and rising petroleum prices.

The 2007/2008 sugarcane harvest achieved an expansion of 21 percent, and the 2008/2009 harvest is forecast to grow by 25 percent. Reflecting this growth, Brazilian ethanol production will reach 30.18 billion liters per year with the goal to double production by 2017. Roughly three-fourths of the growth of the last harvest was achieved by increased planting, with the remaining due to increased productivity.

In 2007, the mandated ethanol content in gasoline increased from 23 percent to 25 percent. This change was a result of a joint resolution signed by four Ministries (Agriculture, Treasury, Mines and Energy and Development, Industry and Commerce), that became effective on July 1, 2007.

The decision represents a relief for producers that in one year will introduce an additional 400 million fuel alcohol liters to the market.

The capacity to produce fuel ethanol is rapidly increasing. In the 2006/2007 period, 13 production units started up. In the 2007/2008 period, another 16 started up, and 47 more are expected to start operating in the 2009/2010 period.

According to the Brazilian government, the North American market will continue to be the main ethanol importing market, buying 2 to 2.5 billion liters a year from Brazil.

Biodiesel Policy

Brazil is one of the world's leading producers of soybeans. The growth potential for soybeans is positive as an alternative source of income for rural producers, who will benefit from the production of the soybeans as well as from the use of soy oil to replace diesel oil.

The present issues are the choice of technologies and which raw material should be employed to generate energy. Results obtained to date have shown that globally biodiesel has a good growth potential, in particular in Brazil where climate is attractive and land available to support significant production of biodiesel.

The federal government has mandated the use of biodiesel at 5 percent diesel oil by 2013, up from the current 3 percent requirement which became mandatory in 2008.

The Ministry of Mines and Energy considers that in view of the current expansion in the country's production of biodiesel, production volumes to meet this 5 percent blend could be feasible as soon as 2010. Ag�ncia Nacional de Petroleo (ANP) has calculated that each percentage point in biodiesel blending will represent a savings of about US$140 million in imported diesel oil.

Petrobras Distribuidora (BR) has studied the investments required for logistics and distribution to meet the 5 percent blend level. BR expects to invest R$20 million to build twenty more storage terminals, in addition to the 46 existing ones, to prepare for this market.

Technology R and D Programs
The Brazilian biofuels industry is supported by a complex series of R and D programs at the federal, state and private sector level. Key characteristics include:

+ The Brazilian national government has established and supports an aggressive program of biofuels research and development

+ A complex matrix of organizations are involved in biofuels R and D in Brazil. Key participants include the Ministry of Mines and Energy (MME), and the Ministry of Science and Technology (MCT), who work closely with private companies, institutions, universities, private entities, state agencies, financial organizations, Petrobras, Foreign collaborators, etc.

+ Ethanol production in Brazil is nearly all based on sugarcane and is centered in the Southeast. Most of the distilleries are integrated with sugar mills, with sugar still being the somewhat dominant product overall Bagasse use for energy cogeneration is an established feature of ethanol production in Brazil, and a number of programs are in place to improve energy cogeneration operations. Fermentation of bagasse to increase the production of ethanol at mills is another important R and D objective

+ Biodiesel production in Brazil is more complex than that of the ethanol industry, being based on soybean oil, palm oil, and a number of other indigenous, more localized oilseeds and fats. Biodiesel R and D, which is strongly sponsored by state agencies, seeks to increase and improve the use of these localized feedstocks While state agencies have a strong role in biodiesel development, there are no well-defined state programs for ethanol

Economics Of Ethanol Production
The lower end of ethanol costs of production includes ethanol from sugarcane in Brazil and energy-integrated fermentation of switchgrass in the United States.

The former is of course fully commercial, while the latter is a concept that is yet to be commercialized but is considered as a likely contender for biomass conversion. The higher end of ethanol cost of production includes ethanol from corn in the United States, ethanol from sugarcane in India, and ethanol from wheat in both Canada and Western Europe.

A similar analysis has been prepared for the production costs of biodiesel from a variety of sources.

In summary, the Brazilian biofuels industry is experiencing dynamic growth in both ethanol and biodiesel production.

Supported by policies and objectives at the federal and state level, and with a strong focus on developing technologies that utilize extensive supplies of biomass, the biofuels industry in Brazil appears to be on the verge of significant expansion over the coming decade.

Exports of both ethanol and biodiesel can also be expected to increase during this period. Nexant's study on Brazil's Biofuels Industry: Outlook for a Global Leader addresses these and other key commercial and technoeconomic issues facing the industry.

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