Canada and Brazil: the Biofuels Story

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Canada and Brazil the Biofuels Story

• Conferénce de Montreal 2006
• Agri-Business Forum
• Brazil Building Market Intelligence and
• Realizing Market Opportunities
• Annette Hester
• Special Research Fellow, CIGI, Waterloo, ONT.
• Senior Associate, CSIS, Washington, DC

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From micro to macroFrom agriculture to
geopoliticsAll in 20 minutes .........

• Brazil the biofuel success story
• Focus on ethanol the growth drivers
• Enter the US, and then Canada
• A look at the Western Hemisphere Energy
  Geopolitics
• Future equilibrium? Only if

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Brazil the biofuel success story

• The worlds largest producer and consumer of fuel
  ethanol.
• Produced 15.4 billion litres in 2004 and 16.03 in
  2005.
• 38 of the world, while the US 33, China 9, and
  India 4
• In Brazil, ethanol accounts for 40 of the
  gasoline/ethanol market and all gasoline contains
  between 20 to 25 ethanol.
• In the US, ethanol accounts for 3 of the market.
• Cheapest biofuel in the world (equivalent to
  US35 to 50 per barrel).

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Brazil the biofuel success story

• Since 2003 Flex-Fuel Vehicles heralds a new era
• 1 million vehicles sold in 2005.
• Since 1975, decades of research leads to
  production efficiency.
• 500 Cane Varieties, Pest control, environmental
  stewardship, equipment manufacturing, heat and
  power generation
• Over 320 plants with flexibility of production
  sugar/ethanol.
• Subsidy free, but still some tax exemptions.

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But (theres always a but)

• Feedstock accounts for 58 to 65 of production
  costs. Sugar cane prices on the rise.
• Concurrent with accelerated export growth leading
  to possible product shortages.
• The Centre-South Region accounts for 80 of
  current production. Regional monoculture.
• New production possible. However crop
  substitution? Implications? Infrastructure?
  Environmental considerations?
• Future technology advancement incremental while
  the rest of the world is ready to leap.

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Focus on ethanol yet again, set to double
production in 5 years

• Production from less than 20 billion litres in
  2000 to over 40 billion litres in 2005.
• Forecasts for production in 2010 of over 70
  billion litres
• All in billion of litres
• U.S. 28.4 Brazil 26 EU 10 Canada 3.1 China
  2.5 India 1.5.

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Focus on ethanol the growth drivers

• The Drivers
• Environmental Concerns
• Energy Security
• High oil prices
• Insecurity of supply
• Rural Support Mechanism

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Focus on ethanol the business

• US and Canada production mostly from corn.
• Production converts biomass to fermentable
  sugars, from that to ethanol, and a last stage of
  separation and purification.
• Hydrous ethanol 95 pure balance water.
• Anhydrous ethanol removal of water for
  blending.
• Commercial bi-products are significant part of
  the equation.
• New technology cellulosic using cheaper and
  ready available feedstock.

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The US Consumer extraordinaire

• Ethanol touches a number of areas
• Environment
• Clean Air Act Amendment of 1990
• Reformulated Gasoline Program
• Mandates oxygenate MTBE (which has been phased
  out) and ethanol. As of May, 2006 the requirement
  has been cancelled.
• Energy Policy Act of 2005
• Renewable Fuel Standards
• Mandates using 15.14 billion litres (4 billion
  gallons) by 2006 increasing each year up to 28.4
  billion litres (7.5 billion gallons) by 2012.
• Cellulosic ethanol counts for 2.5 gallons and
  will receive extra RD funding (grants of 50 to
  70 million to a total 160 million.

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The US Consumer extraordinaire

• Tax Incentives
• Most important is the Federal Tax Credit valid
  until 2010 that amounts to 0.52/gallon for pure
  ethanol.
• Plus, a host of other credits and incentives from
  Federal and State governments that include loan
  guarantees, loans, direct payments and grants.
• Agriculture Support and Trade Measures
• Corn sector is the largest single recipient of
  the U.S. government agriculture subsidy,
  amounting to 37.4 billion between 1995 and 2003
  (1/10 of corn crop used for ethanol).
• 0.54/gallon tariff on imported ethanol (with
  exception for imports from the Caribbean up to 7
  of U.S. market).

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Canada just getting started

• 2004 production of 250 million litres. But, set
  to increase to 1.4 billion litres by 2007 and 3.1
  billion litres by 2010.
• Federal government setting target of 5 renewable
  by 2010, while 3 provinces already have.
• Federal tax exemption of 0.10/litres of ethanol
  blended with gas.
• Approximately Cd118 million support for
  construction/expansion of 11 fuel plants.
• Host of conflicting provincial incentives.

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Canada but way ahead

• Iogen is the only world producer to have an
  existing Pilot Plant (Ottawa) currently producing
  cellulosic ethanol.
• The company is seeking 260 million in loan
  guaranties for the construction of a commercial
  plant with capacity between 75 to 150 million
  litres.

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The Questions

• Is the industry in North America sustainable
  without government support?
• Does the environmental argument hold?
• Will it benefit a large rural constituency or
  mostly large agribusiness?
• What are the impacts on other agriculture
  production?

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Some findings

• Infant industry arguments. Look at the Brazilian
  experience.
• Agreement that the future is cellulosic.
• The rest are really unknown elements, except that
  there is a trade off between energy security
  domestic production, and integrated energy
  markets

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The Geopolitics of the Western HemisphereEnergy
Security

• US The Energy Security Demander.
• Canada The Provider.
• Venezuela and Mexico The insecurity providers.
• Brazil Same objectives as U.S. and Canada.

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Future equilibrium? Only if

• Cooperation in technology development.
• Most efficient supplier with the most efficient
  technology.
• U.S. and Canada join forces instead of competing.
• Access to new technologies reflects governments
  investments.
• Isolate Brazil and the future balance of the
  region is in jeopardy.

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Thanks a million Merci
Beaucoup Mil Obrigadas

• CIGI will publish this material as a
• Working Paper in the second semester of 2006.
• You will be able to find it at
• http//www.cigionline.org/
• Annette Hesters Blog on issues
• related to the Western Hemisphere
• www.theigloo.org/weblogs/hester