2. Economic Agents of Sugar Cane Industry Sugar and Alcohol Industrial Phase Fuel Distributors Gas Stations Exporters Sugar Cane Agriculture Phase Regulatory Domain: Ministry of Agriculture 50 thousand sugar cane growers 346 Industrial Plants 32,030 Gas Stations sell alcohol. (92% of total gas stations in Brazil) Mercado de Preços Livres 160 Operating Distributors Only distributers may blend ethanol with motor gasoline 2.38 Billion litters exported in 2004 Fonte = MAPA – MME – MDIC - 2005 Regulatory Domain: Ministry of Mines and Energy / ANP (National Petroleum Agency)

3. Why BIOFUELS?  Environmental gains - carbon sequestration - lower emission levels in consumption  Renewability - short production cycle - man-controlled process  Economic aspects - new demand component - impacts on trade balance  Social aspects - jobs creation - income deconcentration

4. Equator Trop. Capricórnio 30 o S Trop. Câncer 30 o N BIOFUELS: a natural aptitude in Brazil

5. Why choosing ETHANOL?  Renewable: Zero Carbon Balance Not dependent of petroleum Large scale of production  High miscibility with gasoline and it is a perfect substitute for tetraethyl lead  Oxygenated Compound: Reduces row emission  Low toxic  Sulfur free

6. Why choosing SUGAR CANE?  Exceptional life cycle balance (the production of 1m³ of alcohol allows for the reduction of 2.6 tons of CO 2 ).  Highly favorable energetic balance.  Increases in industrial efficiency, with lower sugar production costs.  Improvement in sugar quality.  Market diversification and the reduction of oil dependency.

7. Why choosing SUGAR CANE? (continuing)  Equivalent energy: 1 ton / sugar cane = 1.2 barrel / oil.  Energy distribution: 1/3 on sugar juice, 1/3 on bagasse, and 1/3 on straw.  Process otimization allows to transform mills into thermoelectric plants.  Possibilities: straw and bagasse burning or gasification, or alcohol production by hydrolysis.

8. Physical productivity comparison Source: MAPA

9. (*) Current Matrix of Vehicle Fuels (1) The gasoline available in Brazilian Gas Stations is added with 25% of alcohol. Share of alcohol 8.7 + 8.3  17% 2005 Share of Regular Gasoline (1) 26.2% + 8.7% = 34,9% Diesel 53.9% VNG 2.9% Hydrated Alcohol 8.3% Anhydrous Alcohol 8.7% Gasoline A 26.2% Source: ANP; ABEGAS – 2006 Elaborated by MME - 2006

10. ALCOHOL FUEL HISTORY IN BRAZIL

11. Alcohol with motor gasoline: 80 years of experience First tests using ethanol blended to gasoline 1979: vehicles manufacturers started selling 100% hydrous alcohol cars

12. Brazilian Automotive Market by Fuel Kind Great share of alcohol cars: more than 80% Sales of new alcohol cars fallen

13. Brazilian Experience: nowadays… 1) Since 2003, 31 new models of Flex-Fuel Vehicles, by nine automakers: it can use any mixture of gasoline and alcohol, from 0 to 100%, without any action of car driver. 2) In December-2005, Flex Fuel vehicles sales represented 73% of total light vehicles sold (2003-2005: 1,245,201 units).

14. Nowadays: Brazilian Automotive Market by Fuel Kind Source: Anfavea - 2006 Flex (Alcohol or Gasoline)Alcohol (Pure)GasolineDiesel 5% Brazilian Light Vehicles Market Sales 0% 20% 40% 60% 80% 100% jan/03jun/03nov/03abr/04set/04fev/05jul/05dez/05 73% 20% Start of Flex-Fue l Sales

15. 1 ton of sugarcane = 80 liters of alcohol 1 hectare of sugarcane = 6 m 3 of alcohol Sugarcane: Cropped and Preserved Areas due to Technological Improvements Source: CIMA productivity cropped area preserved area Productivity (tons/hectares) Area ( thousand hectares)

16. The success of the ethanol replacing gasoline... This curve shows how much gasoline would be necessary to satisfy the fuel demand for light vehicles supposing the non-existence of the Brazilian Ethanol Program Total economy of 1,09 billion boe or 22 months of the present Brazilian petroleum production IN THIS PERIOD, THE USAGE OF ETHANOL FUEL IN BRAZIL HAS PREVENTED THE EMISSON OF 615 MILLION TONS OF CO 2 Source: Ministry of Mines and Energy Brazilian Energy Balance – 2005 and Laura Tetti – USP – 2002

17. ETHANOL as a new commodity...  Good business for tropical countries  Challenges to overcome: - regular supply (short-term) - predictable prices - guaranteed supply (long-term)

18. How to start a program of blending ethanol with gasoline?  Infrastructure installations and logistic;  Technical and formal questions  Economic questions;  Instruments for supply garanty;  Fiscal questions  Consumer reaction GENERAL RULE: There isn’t any general prescription to launch such a program. Each Country has to design its own model.

19. Conclusions:  Ethanol can be an excellent business, specially that traditional sugar cane producers;  Producing and blending ethanol with gasoline are simple tasks, if all the process is carefully planned;  Brazil learned with its own mistakes. The other countries don’t need to do the same;  We are interested in share our experience, specially because we need the help of other suppliers to organize the market.

21.  Alcohol price lower than gasoline price  Guaranteed remuneration to the producer  Tax reduction for hydrous alcohol cars  Loans for alcohol producers to increase their capacity  Gas stations were obligated to sell alcohol  Maintenance of strategical alcohol stocks Incentives established by the Pro-Alcohol at That Time

22. Auxiliary gasoline tank Problems and solutions of a alcohol-fueled cars Ignition difficulties during cold weather Metal corrosion (tank, exhaust pipe, fire injection bomb components) Substitution of tin and iron for aluminium and stainless steel Drying of plastic and rubber parts (pipes in general) Substitution for more resistent materials and the use of additives Consumption increase (alcohol’s heating capacity is 30% lower than gasoline’s) Increase in compression rate, R&D and subsidies to consumers during the program’s initial phase.