Brazil’s ethanol sector, once thriving, is being buffeted by forces both man-made, natural

January 1

This should be a golden era here on Brazil’s farming frontier, where some of the world’s biggest corporations have invested billions of dollars in land, equipment and mills to turn sugar cane into ethanol.

The allure for these giants is Brazil itself, where most cars are built to run on the biofuel. An even bigger, largely untapped market awaits in the United States, where environmental standards favor cane-based ethanol over corn ethanol. Then there is China, with its growing, formidable fleet of cars.

To get the fuel to consumers, crews are building an 800-mile system of pipelines and river barges designed to carry billions of liters from here in central Brazil to bustling ports on the Atlantic. That, at least, was the plan.

But oil — the fuel that ethanol was supposed to be slowly replacing — got in the way.

Cane producers here in Goias state, where plantations can extend 250,000 acres, still churn out ethanol. But the industry is being challenged by forces that could not have been foreseen a half-
decade ago, when this country was being hailed by its president as the Saudi Arabia of ethanol.

The Post's Juan Forero explains the complex development of Brazil's energy market. (Juan Forero/The Washington Post)

The hydraulic-fracturing, or fracking, boom in the American Midwest, which unlocked cheap gas and oil from tight shale formations, has swiftly reduced the need for ethanol in the United States. Brazil, too, made its own discoveries — huge oil deposits offshore, four miles deep and under a cap of salt called the pre-salt.

Then, in a policy decision that has had major implications for ethanol here, Brazil’s government slashed taxes on gasoline, making it cheaper than ethanol for motorists.

“The scenario that we had a half-decade ago is not what we have anymore,” said Mauricio Muruci, who analyzes the ethanol industry here. “We are not thinking about ethanol in our future. We are thinking about pre-salt oil and shale gas.”

While the world is increasingly experimenting with nontraditional and renewable energy sources, the setbacks to the once-thriving Brazilian ethanol industry underscore the vagaries of the energy market and how oil, which not long ago was seen as fading fast, still has a huge advantage over other fuels.

In the 1970s, Brazil wanted to wean itself off expensive, imported oil and turned to ethanol. Cars were built to run solely on the biofuel. Gas stations selling ethanol popped up nationwide. Generous subsidies went to sugar-cane producers and mills.

By 2003, Brazil introduced the flex-fuel car, which can run on ethanol or gasoline. Today, virtually all cars manufactured in Brazil are flex-fuel, and 64 percent of those on the roads can run on ethanol or gas.

“This was the biggest project in the world to replace a fossil fuel with a renewable fuel,” said Adhemar Altieri of the Brazil Sugarcane Industry Association, which represents the country’s cane and ethanol producers. Altieri said Brazil’s emphasis on ethanol has kept 200 million tons of greenhouse gases out of the atmosphere, making the program “among the biggest pro-environment initiatives in the world.”

The United States took note.

In 2005, the George W. Bush administration signed an energy bill mandating renewable-fuel standards. Bush spoke of how Brazilian ethanol, which is far cleaner than fossil fuels and uses much less energy for production than corn ethanol, could help break U.S. dependence on imported oil.

U.S. congressional delegations came to Brazil to tour plantations. Brazilian lobbyists in Washington stepped up efforts to end a 54-cent tariff on every gallon of ethanol entering the United States, a huge hurdle; the levy was scrapped two years ago.

And yet, even with the rosy outlook, the industry here was in sharp decline.

The forces that whipsawed the ethanol industry were partly shaped by nature: heavy rains and a drought that severely damaged harvests. But economic and man-made storms caused the most lasting damage.

When the global economy began to founder, Brazil’s government responded by accelerating state spending. But fearful of rising inflation, it took an extraordinary — and costly — step: It began using the state-controlled oil company, Petrobras, to import refined gasoline and sell it at steeply discounted prices.

That has cost the company $20 billion since 2008 and severely harmed ethanol, said Roberto Rodrigues, an agriculture minister in the government of Luiz Inácio Lula da Silva, which ended in 2010.

“There’s an imbalance because the cost of cane and ethanol production depends on costs of pesticides, cost of labor, and they all go up with inflation,” Rodrigues said. “And yet, the price of gasoline doesn’t go up.”

In 2008, 50 percent of the fuel sold in Brazil was ethanol. Now, it’s just above 30 percent, a drop that is particularly painful to the ethanol industry because car sales are skyrocketing as a result of cheap credit.

It’s easy to see why motorists have gone back to gasoline. Pedro Burba, 34, a court clerk, owns a Renault Duster that can run on ethanol, and he’s well aware that ethanol benefits Brazil economically and environmentally.

But only one thing matters to him.

“What is more important for me is the price,” he said.

‘Fuel of the future’

The collective result of millions of Brazilian motorists switching to gasoline has been what one producer, JoséPessoa, who has five mills and 123,000 acres, calls “the biggest crisis in the history of ethanol.”

Dozens of mills — 50 of them, by some estimates — have gone out of business in three years, leaving about 400 nationwide. The amount of ethanol produced in Brazil, after nearly doubling in the past decade, began to decline fast by late 2011.

The industry, though, was not finished.

In some regions, such as Goias, mills had been switching from manual labor to mechanized harvesting. They had been experimenting with genetically modified cane or cross-breeding of cane species. Smaller, labor-intensive and inefficient mills had closed. And major corporations had come in.

Odebrecht, a Brazilian conglomerate known more for buildings dams and bridges, has invested heavily in ethanol. So have multinational food companies, such as Cargill, and energy companies, including Royal Dutch Shell.

These multinationals can jack up edible-sugar production for the robust export market when the ethanol market is down. But ethanol offers them the most lucrative, long-term possibilities. Biofuels make up 4.6 percent of the fuels used globally for road transport, but that share is expected to rise to 8.5 percent by 2030, enough fuel to power half of the European Union.

“Our decisions are based on the long term,” said Mario Lindenhayn, president of BP’s ethanol operations in Brazil. “We are convinced there will be an increased demand in Brazil and outside Brazil.”

Despite the gasoline subsidies, Brazil remains a tantalizing prospect for the ethanol industry: By 2020, four out of every five cars here will be able to run on ethanol.

But the companies operating here say they are also drawn by what could be. There’s China, which has shown increased interest in renewables but has yet to become a significant ethanol importer, and other big markets such as Europe, which for the moment limits ethanol imports.

“The ethanol industry looks at the global market,” said Abel Uchoa, operations director for SJC Bioenergia, a venture run partly by Cargill that operates two large plantations and mills here. “We see ethanol as the fuel of the future, whether it’s in Brazil or in the world beyond.”

And then there is the United States.

The Environmental Protection Agency recognizes cane-based ethanol as a low-carbon fuel that reduces greenhouse gas emissions by 61 percent compared with gasoline. The United States also mandates a minimum consumption level of “advanced” biofuels.

But gasoline consumption in the United States has fallen in recent years just as oil companies are pumping more oil and gas on American soil. With oil companies lobbying for a bigger role in supplying fuel, at ethanol’s expense, the Obama administration is considering cutting the required amount of ethanol in the country’s fuel stock.

“For ethanol, the U.S. is still a huge market, the largest in the world, but it’s one whose outlook at this point is tough,” said Joel Velasco, a special adviser in Washington to the industry group representing Brazilian ethanol producers. “We’re facing head winds.”

Awaiting opportunities

Still, with billions invested, the modern ethanol industry emerging in Brazil sees a long-term potential.

California, for one, is considered virgin ground. Its car fleet is nearly as big as Brazil’s, and the state has a tough program to cut the carbon intensity in fuels. A quarter of Brazilian ethanol imports to the United States go to California.

Biofuel producers are also well aware that despite the fracking boom, the International Energy Agency predicts that tight-oil production will begin to fade in about a dozen years, leaving it to the Middle East to again meet most of the increase in global demand.

That may lead to a renewed focus on ethanol, a possibility not lost on BP, which has a wheat ethanol plant in Britain and a large team of scientists in the United States trying to develop technologies to find the best formula for turning agricultural waste — from switch grass to cornstalks — into fuel.

Brazil, though, is where BP’s ethanol footprint is particularly large. It has invested $1 billion, runs three six-year-old mills and has developed 400 square miles of prime farmland leased from local owners.

On a recent day, more than 25 harvesters rumbled through a 74,000-acre BP plantation in Itumbiara, the whirling cutters slicing through 12-foot-high cane stalks. Among the drivers was Hugo Dantas, who years ago did the cutting by hand, harvesting eight tons on a good day.

“God set me free,” Dantas, 34, said as his machine cut through a sea of cane. “From here, I can cut up to 700 tons — one machine, 700 tons, every 24 hours.”

The mill, considered among the most modern in Brazil, then crushes the cane and produces the ethanol through a process of fermentation and distillation that leaves a pungent odor, similar to that of a beer brewery, hanging in the hot air.

For now, the ethanol produced here is for the Brazilian market.

But Wilson Lucena, who oversees the plant, said BP is awaiting other opportunities. He speaks of regulations finally falling into place in the United States and how the much-awaited pipeline to the coast will be ready in a couple of years.

“Then we will be in a good position to take advantage and export ethanol,” he said. “I believe, in five or eight years, that this will happen — exports to the United States.”

Reporting for this article was supported by a grant from the Pulitzer Center on Crisis Reporting.

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