BP Makes Brazilian Play for Ethanol

As reported last week, British Petroleum is acquiring a fifty-percent stake in Tropical BioEnergia SA, a joint venture established by Brazilian companies Santelisa Vale, the second-largest sugar cane crusher in Brazil, and Maeda Group, one of the largest cotton producers in the world, which is constructing a 435 million liter-per-year ethanol refinery in Edéia, Goias State, Brazil. Assuming all the required approvals are received, the transaction should be completed before the end of June, with BP investing $59.8 million for its 50-percent stake.

The initiative is significant because it is — to date — the largest investment made by an international oil company in the burgeoning Brazilian ethanol industry. Production from the first facility, scheduled to be fully operational in 2010, will be targeted at the domestic Brazilian market.

While BP has invested in wind power generation projects in the US, it is doubtful that BP would initiate an ethanol deal in the United States, for corn remains the primary agricultural feedstock of choice — backed by both a strong corn/ethanol lobby and a sugar industry.

U.S. ethanol producers insist the 54-cent tariff on ethanol imports needs to be in place or the government will be subsidizing Brazilian ethanol, according to Ethanol Producer magazine.

The sugar lobby remains firmly behind sugar cane import quotas, and fearful of Brazilian cane flooding its home market, blocks the elimination of the 54 cent/gallon tariff on ethanol imports, too. Curiously, the tariff, which expires on December 31, 2008, does not apply to Caribbean Basin countries.

The United States and Brazil currently supply almost 70 percent of the global inventory of ethanol, producing approximately 7.0 billion and 4.4 billion gallons in 2007, respectively. Ethanol producers, which get a 51 cent tax credit/gallon, support trade barriers, too, receiving protection from imports in the form of a 2.5 percent ad valorem tariff. (In fairness, Brazil levies a 20 percent ad valorem tariff on ethanol imports).

Despite the net energy production of ethanol from sugar cane being greater than that of corn, the latter remains the preferred feedstock in the United States (97% of production). There are an additional 72 refinery projects currently underway in the United States, which should add 6.4 billion gallons of new capacity in the next 18 months.