Breathing life into biofuels

After years at each other's throats, Brazil and the United States are working together to promote the use of ethanol in a collaboration that could revolutionise global markets and the makeup of the biofuel itself.

The breakthrough came in January when Washington allowed a three-decade-old subsidy for US ethanol producers to expire and ended a steep tariff on foreign biofuels. The tariff, in particular, had poisoned diplomatic relations between the world's top two ethanol-producing countries for years.

Since then, industry executives and government officials from both countries have seen tangible progress in efforts to boost the production and consumption of ethanol around the world, they told Reuters.

The two nations have been lobbying foreign governments to create new markets in Africa and Latin America, planning joint "road shows" to attract new investments in biofuel companies, and pushing for a uniform global standard for ethanol, which could make it easier to trade the biofuel across borders.

Results may still be years away, but officials say the collaboration might breathe some new life into an industry facing an uncertain future because of chronic production shortfalls and doubts about the environmental benefits of many biofuels.

"I think there's a clear sense now that we should be collaborating instead of fighting each other," said Terry Branstad, governor of Iowa, the top US ethanol-producing state.

After a July meeting with senior officials in Brazil, "I was very encouraged by what I heard," he said in an interview. "The more we cooperate, the more we can grow the worldwide demand for what we produce."

Plinio Nastari, the head of respected Brazilian sugar analysis firm Datagro, said he was particularly encouraged by the joint efforts to develop additional ethanol producers.

Because Brazil and the United States account for about 85 per cent of global ethanol production, one-time events like the current US drought can cause wild swings in supply - and prices.

"That holds up ethanol from becoming a widely traded commodity," Nastari said.

Many of the ideas for collaboration date back to a 2007 bilateral agreement signed by previous Brazilian and US governments. Yet progress was slow until this year as diplomats and other officials often spent time hashing out disputes instead of finding ways to work together.

"Unfortunately, the tariff issue made it impossible to move forward on many of these (subjects)," said Geraldine Kutas, head of international affairs for Unica, Brazil's main sugar cane industry association. "The conditions are right, now. This is the moment of truth."

The most promising effort is also the one that has shown the most visible progress: trying to get countries in Central America, the Caribbean and Africa to produce and consume more ethanol.

Officials from the US Department of State, Department of Energy and the private sector, and their Brazilian equivalents, have been working together to convince other governments of ethanol's benefits.

"We're trying to show other nations what ethanol has meant for our economies," Iowa Governor Branstad said. "In our state, it's helped boost our farmers' income and reduce our dependency on foreign oil. Those are ideas with a lot of appeal."

Sugar cane, the main source of ethanol made in Brazil, already grows in many of the countries seen as potential producers of the biofuel.

Cane produces more energy than it consumes during the ethanol-making process, unlike corn, the basis for US ethanol.

Homegrown ethanol holds obvious appeal for small, poor countries that import most of their energy at enormous costs. Honduras, for example, spent $2.1 billion - 12 per cent of its gross domestic product - on fuel imports in 2011.

However, producers and other investors generally refuse to build ethanol mills and other infrastructure unless they have a guaranteed domestic market.

"And implementation of that framework gets to be very technical and difficult," Unica's Kutas said.

One example: In the 1980s, Guatemala passed a law mandating a blend of ethanol in gasoline but has rarely enforced it because of bottlenecks that include a separate law capping the amount of the sugar cane crop that can be used for biofuels.

To resolve such problems, the Brazilian and US governments have helped finance and produce studies of the countries' ability to create and sustain ethanol production. Honduras, Guatemala and El Salvador are where the most progress has been made, diplomats say.

"We have deep contacts in many of these countries, but the Brazilians have the expertise on sugar," said a US official who requested anonymity because the negotiations are politically sensitive. "When we work together, as we have been lately ... it's pretty powerful."

The next frontier: Cuba?

Brazil and the United States have stepped up their lobbying in recent months. Pilot ethanol programs to introduce the biofuel to consumers with blend requirements are set to begin in three countries, starting in Honduras by early 2013, another US official said.

To accelerate the process, Brazil and the United States are planning presentations in coming months to attract new investors interested in biofuel projects in the three countries, officials said.

Brazil's growing diplomatic clout has been critical to opening doors in countries where the nation has deep strategic or cultural connections, such as Senegal, Mozambique and Haiti. And it is uniquely equipped to exert influence in Cuba.

Cuba's once-mighty sugar industry has deteriorated in recent decades under communist rule, but Rice University economist Ron Soligo has said the country has the potential to become the world's No. 3 ethanol producer behind the United States and Brazil.

While Washington has had little diplomatic contact with Cuba in the past five decades, Brazil has a tradition of warm political and economic ties with the Caribbean nation. President Dilma Rousseff visited Havana in January and spoke of how Brazil can help Cuba develop its economy.

Large-scale ethanol production has been largely taboo in Cuba, in part because former President Fidel Castro has denounced it as a "sinister" idea that drives up global food prices. Yet some Brazilian officials say that stance could change dramatically once the 86-year-old leader withdraws from politics.

"Everybody knows that Cuba is an ethanol bonanza waiting to happen," said a Brazilian official who requested anonymity. "We'll be ready."

Mercantile exchanges

Separately, Brazil and the United States are addressing obstacles that have prevented ethanol from becoming a globally traded commodity like oil.

The only ethanol futures trading on the Chicago Board of Trade are for the US-produced corn variety. As a result, US companies that buy Brazilian ethanol must often do so through brokers or purchase complex forms of insurance to limit their risks - all of which make deals more expensive.

The sticking point: Brazil requires higher purity levels for ethanol than the United States does. This lack of a global standard has created a host of other problems, such as delays in the development of universal flex-fuel cars that can use either ethanol or gasoline.

But officials from both countries said technicians had made substantial progress toward a common standard in recent months.

"We're very close now," a US official said, adding that the focus of negotiations has now moved to Europe, where the talks have been more contentious.

At the same time, a flurry of US-Brazil collaboration has taken root in the private sector as companies try to create more-efficient biofuels from a variety of sources and with more uses.

Brazil's cane-based ethanol is seen as a more fertile ground for innovation, while US companies have more resources for research and development.

US planemaker Boeing Co and Brazilian counterpart Embraer announced plans last October to build a research center for developing biofuels for aviation.

Renewable fuel made by Emeryville, California-based Amyris Inc powered a demonstration flight by an Embraer jet at a big United Nations environmental conference in Rio de Janeiro in June.

Solazyme Inc is involved in the Pentagon's biofuel efforts. The South San Francisco, California, company broke ground on a 100,000-tonne sugar-to-oil facility in Brazil in June as part of a joint venture with agriculture group Bunge Ltd .

Brazil and US officials have been brokering frequent introductory coffees and dinners to match up companies from the two countries.

"The Americans seem to be here almost every week," said Adhemar Altieri, a spokesman for Brazil sugar cane association Unica. "We're hearing almost as much English as Portuguese around here these days."

Joint efforts may also be forming to increase academic and research collaboration on biofuels.

Debi Durham, an economic aide to the Iowa governor, said that after returning from Brazil, she contacted the president of Iowa State University to encourage the school to admit more Brazilian students in the sciences - a priority of Rousseff's.

This article was originally published by Reuters. Republished with permission.