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Cablegate: U.S. Scientists Visit Brazil for Mou On Biofuels

VZCZCXRO2637
RR RUEHRG
DE RUEHSO #0314/01 1701726
ZNR UUUUU ZZH
R 181726Z JUN 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8324
INFO RUEHBR/AMEMBASSY BRASILIA 9456
RUEHRG/AMCONSUL RECIFE 4139
RUEHRI/AMCONSUL RIO DE JANEIRO 8760
RUEHBU/AMEMBASSY BUENOS AIRES 3183
RUEHAC/AMEMBASSY ASUNCION 3431
RUEHMN/AMEMBASSY MONTEVIDEO 2729
RUEHSG/AMEMBASSY SANTIAGO 2431
RUEHLP/AMEMBASSY LA PAZ 3842
RUCPDOC/USDOC WASHDC 3114
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 0733
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 05 SAO PAULO 000314

SIPDIS
SENSITIVE

STATE FOR WHA/BSC, WHA/EPSC FOR FCORNEILLE, E FOR GMANUEL,
EEB/ESC/IEC FOR BHAENDLER
STATE PASS USTR FOR KDUCKWORTH
STATE PASS DOE/NREL FOR HCHUM
DEPT OF TREASURY FOR JHOEK, BONEILL
DEPT OF ENERGY FOR AMIRANDA, GWARD, CGILLESPIE

E.O. 12958: N/A
TAGS: ENRG EAGR ECON EINV TRGY BR
SUBJECT: U.S. SCIENTISTS VISIT BRAZIL FOR MOU ON BIOFUELS

REF: BRASILIA 0126; BRASILIA 097; 07 BRASILIA 1826; 07 BRASILIA 905.


SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY

Summary
-------

1. (SBU) As part of the U.S.-Brazil Memorandum of Understanding to
Advance Cooperation on Biofuels, a U.S. delegation of eight
scientists and engineers from the Departments of Energy and
Agriculture visited Sao Paulo and Rio de Janeiro states from May 30
to June 6. Their visit follows a similar one by a delegation of
Brazilian scientists to U.S. renewable energy laboratories in
September 2007. The U.S. delegation accomplished its mission to get
a greater appreciation for Brazilian research and development in
biofuels and use lessons learned to promote U.S.-Brazil
collaboration on advanced biofuels research, particularly on
cellulosic ethanol production. The group explored several areas for
joint cooperation including the possibility of sharing biomass
samples to unify bilateral research opportunities and facilitating
scientific exchanges to strengthen Brazilian analytical
methodologies.

2. (SBU) Despite the opportunities for joint research
collaboration, the U.S. delegation also witnessed several short-term
challenges to furthering our bilateral relationship on biofuels. In
particular these challenges include the high costs of financing
research and development in Brazil, an industry focus on producing
bioelectricity which would reduce feedstocks for cellulosic ethanol
production, and the persistent view by Brazilian industry that
consistent efficiencies in production utilizing existing
technologies will continue. Even with these challenges, both sides
agreed to work on the joint challenge of getting a positive biofuels
message out via better education about the advantages of biofuels.
The U.S. delegation appeared satisfied with their visit to Brazil
and left with several tools to tackle the challenges and
opportunities ahead. End Summary.

Visiting University Laboratories
--------------------------------

3. (U) The U.S. delegation visited several of Brazil's top research
universities that have been studying biofuels since Brazil's ethanol
program began in the 1970s. Brazil's largest university, the
University of Sao Paulo (USP), is widely viewed as among Brazil's
best universities. Professors from the Polytechnic Department
outlined the four major research areas in Brazil: pre-treatment of
bagasse (USP-Lorena campus), enzyme production (UFRJ, USP, Goiania),
fermentation (USP-Lorena and UFRJ), and the energy balance for new
mills (UNICAMP/NIPE). The USP professors told the U.S. delegation
they need more collaboration on enzyme production and protein
engineering of enzymes. The U.S. side suggested sharing biomass
pretreated samples would be a good way to collaborate on research
and corroborate results. The group also suggested an exchange of
doctoral candidates or post-doctorate researchers with advanced
training in analytical techniques to a U.S. laboratory to
collaborate on methodology and learn U.S. methodology. Likewise, at
the Federal University of Rio de Janeiro (UFRJ), the U.S. delegation
met with professors from the Chemistry Department and toured some
biofuels research laboratories. They discussed the University's
chemical and microbiological research on biofuels, and similarly
raised the issue of sharing bagasse and lignin cake samples as a way
to collaborate on research.

4. (U) The U.S. delegation met with University of Campinas
(UNICAMP) professor Marcelo Mendessi, who runs the Agency for
Innovation (INOVA). UNICAMP is one of the few Brazilian examples of
university collaboration with the private sector. Mendessi
explained that INOVA's role is to encourage technology transfer of
developing technologies by facilitating the patent and development
processes. Although UNICAMP is Brazil's largest patent holder, the

SAO PAULO 00000314 002 OF 005


number it holds is about the same as research universities outside
Brazil. Mendessi explained to the U.S. delegation the lack of
private sector innovation and the low preponderance of Brazilian
companies seeking patents.

Government Sponsored Research
-----------------------------

5. (U) The U.S. delegation toured Sao Paulo state's Institute of
Technological Research (IPT), a think tank primarily focused on
biomass gasification for syngas generation. IPT has received
significant research funding for biofuels development. According to
IPT researchers, 30 percent of funding is from the Sao Paulo state
government and 70 percent from research and service contracts.
Investment for this year is 20 times greater than last year because
of Petrobras' increased investment into biomass research,
specifically on gasification plants. Both sides pointed to the
challenges of harmonizing research when performed on different
substrates; despite many commonalities neither side could
corroborate the other's research without sharing substrate samples.
One area of possible collaboration discussed with IPT was cellulosic
conversion of sugarcane "trash" (leaves and stalks) to ethanol. The
U.S. delegation pointed to American analytical methods for other
feedstocks that could serve as a model. As with USP professors,
both sides agreed there is a need for more training for Brazilian
researchers in analytical methods. The U.S. delegation suggested
encouraging exchanges to U.S. research centers for the period of one
year or more to improve and collaborate on analytical methodologies.
IPT Chief Operating Officer Marcos Tadeu Pereira noted that IPT has
funding for this type of exchange to pay expenses for professionals
with five to 10 years of experience.

6. (U) The National Laboratory for Synchrotron Light Technology
(LNLS) outlined for the U.S. delegation its proposed Center of
Science and Technology of Bioethanol (CTBE). LNLS receives half of
its budget from the Ministry of Science and Technology (MST), eight
percent from private companies that pay fees to use its facilities
(primarily Petrobras), and 42 percent from the Foundation of
Research Assistance of Sao Paulo State (FAPESP). CTBE's Director,
Marco Aurelio Pinheiro Lima, explained that the center would reach
out to industry and would be fully dedicated to research into
ethanol production from sugarcane. Their goal is to have 100
researchers on staff and another 100 associate researchers from
other institutions. Pinheiro Lima told the U.S. delegation that
CTBE's two projects would be on hydrolysis technology to convert
bagasse and trash into ethanol and low-impact mechanization.

Private Sector Research and Development
---------------------------------------

7. (U) Visits to two separate groups, the Center for Sugarcane
Technology (CTC) and the joint operation of two Votorantim companies
Canavialis and Alellyx, gave the U.S. delegation a somewhat
different view of the short-term viability of second generation
cellulosic ethanol production. Both groups genetically engineer
sugarcane seedlings to produce higher yields and withstand disease
and climate changes. Fernando Reinach, a General Partner for
Votorantim New Business Ventures, explained that Canavialis produces
2.2 million seedlings each year and has one million hectares under
management as part of its technology package management service,
which is about 20 percent of Brazilian market share of sugarcane
planted. They also have a project in Angola where they are
reintroducing varieties to reestablish the Angolan sugarcane
industry.

8. (SBU) Both explained that productivity gains in Brazil could
reduce crop expansion needs. Reinach noted that genetically
modified sugarcane enables Brazilian cane farmers to produce 80
percent more sucrose per hectare, which by itself would almost
double production without increasing production areas. Similarly,
William Burnquist from CTC said it has existing technology to
increase production by 20 percent or more from 85 to 100 tons of

SAO PAULO 00000314 003 OF 005


sugarcane per hectare without increasing hectares planted, but that
many mills lack the necessary capital to invest in this technology.
Burnquist told the U.S. delegation that CTC believes that the
Brazilian ethanol industry has already reached sustainable
productivity because productivity gains are up on average two
percent per year over the last 65 years. Brazilian mills are
crushing approximately 600 tons of cane per hour, double what they
used to with using only half the energy. In their view, there is
nothing to suggest that the productivity gains will not continue
into the future.

9. (SBU) Both Votorantim and CTC voiced concern that the prospects
for cellulosic ethanol development in Brazil in the near-term
appeared limited. In Reinach's view, the opportunity cost of using
bagasse for cellulosic ethanol instead of for producing electricity
implies that sugar mills would face losses because electricity
prices per megawatt in Brazil are greater than what they would gain
by turning this bagasse into ethanol. He noted that Brazil's
electricity demand would ultimately determine the use of trash and
bagasse for this purpose, and that Brazil would likely buy
cellulosic technology from the U.S. if producers opted to employ
ethanol production via cellulosic transformation in the future.
Reinach pointed out that electricity generation from bagasse is
inexpensive and clean and that Brazil potentially has enough bagasse
to provide for half of its electricity needs. (Note: Please see
septel from Sao Paulo for more information on the bioelectricity
sector as part of Mission Brazil's ongoing electricity series. End
Note.) Burnquist expressed similar views, saying Brazil does not
need second generation ethanol to meet its projection of 100 million
liters of ethanol or to help supply ethanol to the U.S. under the
new U.S. ethanol targets. He noted, however, that Brazil provided
the easiest industrial situation to employ second generation
technologies because Brazilian mills already have fully integrated
biomass, fermentation, distillation, and waste management processes.


10. (U) In addition to on-going collaboration between CTC and USDA,
the group discussed more possible joint projects including
non-competitive engineering tools that could be used on all
feedstocks and a larger-scale project to help mills reduce costs.

11. (SBU) The U.S. delegation also met with biofuels scientists
from Petrobras' Research and Development Center (CENPES) in Rio de
Janeiro and received a series of briefings on the energy company's
research in areas such as biodiesel and lignocellulosic ethanol
production. As Petrobras holds a monopoly on Brazil's ethanol
pipeline system and distribution network, the group also discussed
ongoing research on pipeline and transportation issues such as why
U.S. pipelines, which transport corn-based ethanol, are showing
signs of stress wear while Brazilian pipelines which transport
sugarcane-based ethanol are not. The group also visited Petrobras'
bagasse-to-ethanol pilot plant which was inaugurated in 2007.

12. (U) The U.S. delegation also met with Brazilian capital goods
manufacturer Dedini, which manufactures 80 percent of all Brazilian
ethanol distilleries and also supplies products across the entire
ethanol/sugar production spectrum. Jose Luiz Oliverio, Dedini's
Senior Technology and Development Vice President, told the
delegation that Dedini has money to develop new technologies from
FAPESP and is very interested in collaboration on gasification
technologies. He noted that Dedini signed a confidentiality
agreement with General Electric to develop gas turbines for
gasification of vinasse. Despite Dedini's interest in developing
equipment, however, Oliveiro pointed to the high cost of capital as
the number one impediment in Brazil for technology development.

13. (SBU) John Melo, CEO of U.S. company Amyris, outlined its
recently signed joint venture with two Brazilian companies to
develop a business model to produce biodiesel and jet fuel. Amyris
has been developing the technology since 2001 and the Gates
Foundation put money behind the idea in 2004. Amyris chose to build
its business in Brazil to tap into existing scale and business

SAO PAULO 00000314 004 OF 005


know-how and because sugarcane is the cheapest feedstock. Melo
projected that the first sugar mill would be converted and capable
of producing diesel by June 2010 followed by a two year period of
scale-up to full production. Melo said that Amyris estimated that
it would cost USD 20 to 30 million to convert the mills to diesel
production.

14. (SBU) The U.S. delegation also met with the Brazilian Sugarcane
Industry Association (UNICA) to exchange views. With respect to the
U.S.-Brazil MOU on biofuels, UNICA representatives noted that
multiple certification systems are counterproductive and that UNICA
is lobbying for one or two harmonized and transparent systems that
cannot be used as veiled non-tariff barriers. UNICA's Chief
Representative to the U.S. Joel Velasco noted that continued
collaboration in forums such as the U.S. Interagency Biomass Board
and working closely with DOE's Office of Biomass Program was needed
to educate third parties on biofuels developments. Velasco
advocated creating a more regular mechanism to communicate (perhaps
a periodic conference call) to keep the flow of information
constant. UNICA also suggested organizing a bi-national scientific
convention after which the participants would release a public
statement of their findings. UNICA criticized the scientific
communities in both countries for its relative silence on biofuels
issues.

Bilateral Meeting with the GOB
------------------------------

15. (SBU) The U.S. delegation met with their Brazilian government
counterparts the final day of the visit at the Consulate General in
Sao Paulo. Minister Andre Correa do Lago, Director of the Energy
Department, Ministry of Foreign Affairs led the Brazilians, along
with Adriano Duarte Filho, General Coordinator for Technological
Sectors, Ministry of Science and Technology, Jose Monserrat Filho,
Head of the Board for International Affairs, Ministry of Science and
Technology, and Daniel Machado da Fonseca from the Division for New
and Renewable Energy Resources, Ministry of Foreign Affairs. (Note:
Fonseca accompanied the U.S. delegation throughout the visit. End
Note.)

16. (SBU) Lago opened the meeting by commenting on the High-Level
Conference on World Food Security in Rome which Lago reported that
the U.S. and Brazil had worked together to "avoid damaging language
on biofuels." Likewise, Lago referenced the upcoming meeting of the
Global Bioenergy Partnership (GBEP) which was held in Rio de Janeiro
on June 18 and 19 as another important opportunity to make the case
for biofuels. Lago said that the scientific community needs to be
more engaged in the food versus fuel debate and noted that the GOB
is considering lobbying for a special scientific commission to write
a report from the scientific perspective. He said that the GOB
envisioned a multinational commission made up of Brazilians,
Americans, Europeans, and others with a view to make the
commission's findings as objective as possible.

17. (SBU) Regarding the MOU on Biofuels, Lago complemented the
progress of the Standards Committee, but noted that a few details
still needed to be worked out on ethanol standards and quite a bit
more work on biodiesel. When questioned whether the Europeans had
been constructively engaged in setting standards, Lago simply
responded that "the Europeans are engaged" indicating that they had
not always been constructive, but said that the Europeans had been
cooperative on a technical level.

18. (SBU) Overall, members of the U.S. delegation told the
Brazilians that they were impressed with the work Brazil has been
doing on biofuels. The DOE's Amy Miranda suggested that DOE could
team up with UNICA and others to showcase for third parties the
latest developments in bioenergy. James McMillan from NREL said
that Brazil still has huge untapped opportunities and highlighted
Dedini's rapid hydrolysis technology (a process using hydrolysis to
convert sugarcane bagasse into sugars that, fermented and distilled,
result in ethyl alcohol) as one example. Joseph Rich from USDA said

SAO PAULO 00000314 005 OF 005


that Brazil's infrastructure to support the biofuels business was
impressive and that the U.S. could learn from the Brazilian
expertise. Richard Bain, also from USDA, complemented the first
generation integrated mills and agreed that the decision for mills
to produce bioelectricity made sound economic sense. He suggested
bioelectricity as an area for future collaboration, especially for
sustainability issues.

19. (SBU) USDA's Edward Richard highlighted crop production
technology for further collaboration, specifically to assess the
value of sugarcane trash. Patricia Hu reflected on the
lessons-learned in the area of transportation. She noted that the
focus of her office is assessing the "demand problem" which exists
right now in the U.S. Demand will determine eventual infrastructure
investments along the supply chain, from feedstock to fuel station.
She said her office is looking at the need for dedicated ethanol
pipelines, as ethanol is causing cracking in the current pipelines.

Comment
-------

20. (SBU) Although the public rhetoric to separate Brazilian
sugarcane-based ethanol from U.S. corn-based ethanol has divided the
two governments in recent weeks, the technical visit as part of our
MOU with Brazil was very successful. Both sides avoided the fuel
versus food debate and tried to find common links for shared
research on second generation cellulosic ethanol. Despite the
interest among Brazilian researchers for sharing techniques and
methodologies, the Brazilian private sector lacks the incentives for
implementing cellulosic ethanol over the short and medium term.
Without a tangible export demand for ethanol (and a proportional
price increase), many sugarcane mills probably would chose to
produce electricity with excess bagasse and trash instead of
incorporating cellulosic ethanol production into existing mills.
However, even given the lack of incentives and vagaries of demand,
the U.S. delegation saw that Brazil could still be a perfect test
laboratory for integrating cellulosic ethanol into its existing
production system if the right set of incentives were in place. The
challenge for furthering the MOU will be addressing these
opportunity costs for Brazilian producers in such a way to drive
mutual incentives for advancing cellulosic research. End Comment.


21. (U) This cable was written jointly with US Consulate Rio de
Janeiro and coordinated and cleared with Embassy Brasilia.

STORY

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