The Middle East crisis has revived interest in Brazil's floundering alcohol fuels program only a few months after it had appeared headed for phaseout.
The $18 billion, 15 year ProAlcohol program to mass produce fuel ethanol from sugar cane has gotten a boost with fears of oil supply shortfalls and soaring oil prices caused by Iraq's blitz of Kuwait and resulting war tensions.
The Brazilian government is considering a resuscitated ProAlcohol program as the centerpiece of what would be Brazil's first comprehensive national energy policy.
State owned Petroleos Brasileiro SA recently submitted a 5 year, $16.9 billion plan to boost Brazil's crude output to 1 million b/d from the current 660,000 b/d (OGJ, Sept. 10, p. 21).
At the time, Petrobras sought to distance itself from the ProAlcohol program, which has contributed to its fiscal woes, saying that domestically produced crude oil remains the best substitute for oil imports.
NEW ENERGY POLICY
Critics have drubbed the ProAlcohol program for its massive subsidies, operating inefficiencies, and supply shortfalls (OGJ, July 16, p. 17).
However, in recent weeks the administration of President Fernando Collor de Mello has taken steps to breathe new life into the ProAlcohol program as part of Brazil's energy policy.
Collor soon will name a top level commission to redefine Brazil's basic energy policies, giving priority to the ProAlcohol program.
In addition, Infrastructure Minister Ozires Silva, in an abrupt turnabout, promised the government will adopt all required measures to avoid further shortfalls of alcohol fuels by importing ethanol and methanol and continue subsidies the next 18 months in support of Brazil's sugar cane harvest
Of subsidies to sugar cane plantations, Silva said, "Present incentives will remain, but we will not create new ones."
In addition, the government has granted a 12% price increase to alcohol producers and sugar cane crushing mill owners.
There are about 4.5 million alcohol fueled vehicles in Brazil, about half the nation's vehicle fleet.
IMPORT DEPENDENCE
At the time of the first oil price shock in 1973-74, Brazil's oil imports accounted for about 80% of its supply.
Currently, imports meet about 42% of Brazil's oil demand of 1.1 million b/d, with Petrobras producing about 640,000 b/d of oil for the remainder.
Before Iraq's takeover of Kuwait, Brazil was importing 160,000 b/d from chief supplier Iraq and about 60,000 b/d from Kuwait.
With the cutoff of those supplies under a United Nations trade embargo, Iran agreed to supply 50,000 b/d in addition to the 1 00,000 b/d contracted at the end of July. Iran recently boosted that volume by 50,000 b/d, probably beginning this month.
Still, Brazil remains heavily dependent on the Middle East for much of its oil supply. That led Collor, in a televised talk, to announce plans to increase alcohol fuels production in addition to proceeding with Petrobras plans for stepping up oil exploration and development.
"Although alcohol represents only 4% of Brazil's primary energy sources, it plays a fundamental and strategic role because it is the best alternative to other liquid fuels," Collor said.
While acknowledging his previous criticism of the ProAlcohol program for chewing up vast sections of rain forest and arable land to plant sugar cane and polluting rivers with fermentation stillage, Collor said he now recognizes alcohol fuels as providing a viable contribution to the energy crisis.
He pointed out that for the past 4 years Brazilian sugar cane production had stagnated at 220 million tons/year, while the number of alcohol fueled cars increased.
Collor called for increased productivity without acreage expansion, promising to hike government outlays for research on improved ways to convert biomass to fuel.
One of the main elements of the revived ProAlcohol program will be research on burning bagasse--crushed sugar cane waste byproducts--to generate electricity, thus enabling alcohol producers to increase output. Government studies show sugar cane production costs could be reduced by 30% with use of bagasse.
PROALCOHOL BACKGROUND
The ProAlcohol program was set in motion in 1975 by Brazilian President Ernesto Geisel, a former Petrobras president, as an alternate fuels push in response to higher oil prices following the Arab oil embargo of 1973-74.
Fernando Grandinetti, Shell do Brasil price manager, said part of the rationale behind ProAlcohol was an effort to modernize and make more competitive Brazil's sugar mills in a lagging international sugar market.
A Shell study noted that at the outset the focus of the program was production of anhydrous alcohol to be blended at 20 vol % with gasoline to soak up surplus sugar cane productive capacity.
In 1989, due to severe alcohol shortages and growing motor fuel demand, anhydrous alcohol's share of the motor fuels market dropped to an average 13% at yearend from an average 19% the year before.
In 1979, the ProAlcohol program took off with installation of new capacity to produce hydrated alcohol.
The program ran into setbacks trying to develop dedicated hydrated alcohol--96% ethanol, 4% water--fueled vehicles, especially for heavy duty vehicles. The specially designed Otto engine for passenger vehicles carries a 25% mileage penalty compared with gasoline engines.
The Shell study claims that despite many attempts, Brazil still has not developed a dedicated alcohol fueled engine for heavy duty vehicles.
After a shaky start, dedicated ethanol vehicle sales picked up to the point that by November 1982 they accounted for more than 60% of all new cars sold in Brazil.
Dedicated alcohol vehicles in Brazil by September 1983 totaled 1 million, about 12% of the country's fleet. The remaining 7 million cars and trucks in Brazil at the time ran on gasoline or gasoline/ethanol blends. By May 1984, the total of dedicated ethanol vehicles had climbed to more than 1.3 million.
SUBSIDIES
For the ProAlcohol program to succeed, Brazil's government backed it with easy credit for buyers of alcohol vehicles and subsidies for the fuel.
The government offered 12 year financing with 3 year payment moratoriums for alcohol vehicles. It subsidized ethanol to the point that it was only half the cost of gasoline, resulting in a 25%/km savings for drivers using ethanol vs. gasoline, even with the mileage penalties.
The program still had to overcome several hurdles, including consumer suspicions and disputes over the program's specific policies among government authorities, industrialists, and automakers. At times funds for the program dried up, then were made available again.
Consumers complained about defects, notably problems with corrosion in cars converted to neat ethanol from gasoline. They also worried about the jump in the price of alcohol fueled cars relative to that for conventional vehicles in view of the rapid initial market penetration of ethanol vehicles.
In addition, the ProAlcohol program has been hit with claims of being badly administered and that it lost sight of its original objectives and became merely a means of enriching sugar mill owners.
Some industry officials put the total ProAlcohol subsidies to date at more than $7 billion.
ENGINEERS CRITICAL
Brazil's Association of Petrobras Petroleum Engineers (Aepet) has been in the forefront of criticism of the alcohol program (OGJ, July 2, p. 27).
"If the present situation continues, by 1995 gasoline will have only a 2.8% market share of the petroleum derivatives market, compared with 12% in 1989 and 20% in 1979," Aepet said. "This decrease would be chaotic for domestic supply."
Consequently, Aepet said, "if the government does not adopt measures to immediately change the present situation, by 1995 Brazil will be forced to export 200,000 b/d of gasoline at low prices (vs. current gasoline exports of 80,000 b/d) and import 50,000 b/d of diesel oil and 30,000 b/d of LPG."
Aepet criticized alcohol subsidies funded by gasoline sales revenues, which result in huge losses for Petrobras.
It warned the transfer of financial resources from the petroleum sector to cover ProAlcohol's losses will force Petrobras to slash already scarce exploration and production outlays.
Petrobras Pres. Luis Octavio da Motta Veiga last month said, "Few people know that the real price of a barrel of alcohol is $42 while a barrel of crude purchased on the Rotterdam spot market costs $28. If Iraq invades Saudi Arabia and crude reaches $45/bbl, the alcohol would help, but only in such a situation."
Motta Veiga added, however, the ProAlcohol program is a strategic policy question for only the federal government: "Petrobras cannot and should not interfere."
A Petrobras official estimates the state oil company has paid about $700 million in alcohol subsidies the past few months alone.
DIESEL CONCERNS
The artificially inflated price for gasoline needed to sustain alcohol subsidies has created a boom in demand for diesel fueled vehicles and consequently for diesel fuel used in light trucks and farm vehicles that otherwise would have run on gasoline.
As a result, increased Brazilian demand for diesel has begun to outstrip domestic capacity to produce the fuel. Total Brazilian diesel demand is about 400,000 b/d. Diesel demand grew 1.5% in 1989 and now has about 37.1% of Brazil's energy mix.
The ProAlcohol program accounts for about 22,000 b/d of that diesel fuel demand in thousands of trucks and tractors to harvest sugar cane and transport alcohol from mills to refineries and from marketers to retail outlets. Ethanol producers are prohibited from selling alcohol to retail outlets, resulting in added storage and transportation costs for Petrobras.
Because diesel generates 25% more energy than alcohol, the total energy spent just to produce and distribute alcohol is equivalent to 27,500 b/d of alcohol demand. In addition, Brazil's refineries have had to change their products slates to accommodate increasing demand for diesel.
ALCOHOL SHORTFALLS
Shortages of hydrated alcohol have added to ProAlcohol's problems.
Through 1985, new alcohol cars were produced at Sao Paulo assembly lines at a ratio of 9:1 compared with new gasoline vehicles. At the same time, however, Brazil's ethanol production remained flat. As a result, severe shortfalls began occurring last year.
As subsidies fell with declining oil prices in the 1980s, Brazilian investment in expanding sugar cane plantations and the alcohol industry began to dwindle to the point of stagnation in recent years.
Last year, distillers produced 11.9 billion I. of alcohol, and the results were runouts at service stations across the country. Industry sources estimate the shortfall at 1.4 billion 1. This year, distillers estimate production at only 11.3 billion I.
Another setback for the ProAlcohol program is its failure to live up to a promise of being a major source of hard currency revenues through exports of ethanol, mainly to the U.S. Instead, ProAlcohol must import methanol, corn ethanol from the U.S., and grape alcohol from Europe to meet domestic alcohol fuels demand.
Copersucar, a cooperative representing 50 companies accounting for 30% of Brazil's alcohol production, claims Brazil could have distilled as much as 15 billion I. this year if enough sugar cane had been available. Sugar mill owners blame the government for the shortages, saying low prices discouraged sugar cane planting.
On the other hand, critics of the program say, soaring international sugar prices made it more profitable for farmers to refine sugar cane into sugar instead of distilling it into alcohol, with the added advantage of earning hard currency export revenues.
Compounding the situation, Brazil's continuing economic crisis has dried up investments throughout the economy.
PROALCOHOL DEFENSE
Jaime Rotstein, head of Sondotecnica SA, a Rio de Janeiro engineering company, and author of several books on Brazilian energy policy, disagrees with the government's criteria for calculating the real price of fuel alcohol.
He claims the government's method of estimating fuel costs overlooks the high costs of borrowing foreign money to import crude, a factor that has contributed substantially to the rise in Brazil's foreign debt, currently $130 billion.
Rotstein contends all options for boosting domestic fuel production should be given equal weight, regardless of relative costs, because outlays for domestic projects are in cruzeiros instead of dollars, thereby not worsening Brazil's foreign debt.
Rotstein also thinks diesel demand could be reduced by switching to alcohol or compressed natural gas, including gas imported from Bolivia and Argentina.
Rotstein advocates a coherent energy policy for Brazil that includes maintaining an alcohol fuels program for national security and environmental protection reasons as well as stepping up research in new energy technologies.
ALCOHOL FUELS R&D
Brazil's overall track record on research and development investment could stand improvement, however.
Even during the so-called Brazilian economic miracle of the 1970s, when growth rates soared for gross national product, Brazil invested less than the international average with R&D absorbing only 1% of GNP. Bank of Boston, Sao Paulo, pegs Brazilian R&D outlays at 0.6% of GNP in the 1980s.
Brazil's R&D efforts on alcohol fuels have focused on uses in Otto and diesel engines, gas turbines, boilers, stoves, and as chemical feedstocks.
In production technology, R&D has covered agricultural and conversion technologies that generally indicated technical feasibility but economic barriers.
After a Brazilian capital investment of more than $10 billion in alcohol fuels development the last 15 years, ProAlcohol proponents claim that today's alcohol fueled motors have achieved a performance equal to 83-85% of the gasoline motor.
They also foresee more productivity gains in ethanol output of about 3-4%/year due to improvements in sugar cane planting, harvesting, and production efficiencies.
"If there are shortages of alcohol again, the consumer will definitely lose confidence in this fuel, causing the bankruptcy of the ProAlcohol program and of our business," said Werther Annicchino, Copersucar president.
ETHANOL DEMAND TO RISE?
Automakers such as General Motors do Brasil think alcohol fueled vehicles may stage a comeback if continuing Middle East tensions keep oil prices high.
"As of October, we expect to have 15% alcohol fueled vehicles in the assembly line," said GM Brasil Vice Pres. Andre Beer, who adds the shift is warranted by market conditions brought about by Persian Gulf tensions.
"Furthermore, compared with gasoline, alcohol is a much purer fuel," Beer said. He pointed out that, after running their vehicles on alcohol for a while, many motorists changed to gasoline but now want to go back to alcohol for improved performance.
Autolatina, Ford, and Volkswagen do Brasil also have announced plans to increase production of alcohol fueled cars.
Brazil's automobile industry produced 399,578 alcohol fueled vehicles in 1989 for about 52% percent of the domestic market, compared with 698,563 alcohol vehicle units in 1986, or almost 81% of the market, according to Anfavea, the national automobile industry association.
PROALCOHOL OUTLOOK
Collor's party badly needs to win this month's congressional and gubernatorial elections to gain majority congressional support for his antiinflation, austerity, and deregulation measures.
However, almost half of Brazil's car owners--who believed in previous governments' promises of no shortfalls of alcohol -500 distilleries, more than 1,000 big sugar cane plantations, and almost 1 million seasonal farm workers can't be ignored in an election year.
Added to that clout is the environmentalist lobby, which points to the advantages of a high octane, "cleaner" alternate motor fuel.
Whether that enthusiasm will be sustained remains to be seen.
A top ProAlcohol executive wondered if this time the Brazilian government will again lose its enthusiasm for alternate fuels when the Persian Gulf crisis is over and oil prices again slide, following the pattern after the oil shocks of the 1970s.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
