Diamond bits are a Brazilians best friend

Sao Paulo, Brazil, November 24, 2007 – I was in Sao Paulo for fours days, meeting automotive executives and heads of state, and attending a party with some Brazilian journalists and economists. Brazil is well known for their ethanol, but in the last month they have announced that they have found oil. What will this do for Brazil? I have filled in some facts, so you can understand some of the complexities of Brazil: their global and domestic issues.

In the Western Hemisphere there are three major energy consumers: United States, Canada and Brazil, in that order. According to EIA, the largest share of Brazil’s total energy consumption comes from oil (48 percent, including ethanol), followed by hydroelectricity (35 percent) and natural gas (7 percent). Because Brazil is off the dependence of foreign oil and is now a net exporter of energy, Brazil is of particular interest.

According to Oil and Gas Journal (OGJ), Venezuela had 80. billion barrels of proven oil reserves in 2007, the largest amount in South America, Brazil had 11.7 billion barrels of proven oil reserves in 2007, second-largest in South America. In the last month, Brazil has announced that they have found another 5-8 billion barrels of crude oil and natural gas off the coast of Rio De Janeiro. Venezuelan oil is heavier than Brazil’s and has more sulfur. The new found Tupi oil is reported to be even lighter than some of Brazil’s other oil, meaning easier to refine, with the possibility to be mixed with some other Brazilian oil.

Petrobras is saying they will be producing oil and natural gas within three years. They will need lots of diamond bit’s, as the oil is not only off the coast of Rio De Janeiro, but also beneath the sea floor, under salt and rocks.

Cars

Brazil is still a developing nation with a great deal of potential for car sales. According to Sergio S Szmoisz, Director of Marketing, Audi Brazil, for every one car on the road there are eight Brazilian citizens. Compared to the United States of America, for every one car on the road there are 1.2 US citizens.

Brazil is still a developing nation with a great deal of potential for car sales. According to Sergio S Szmoisz, Director of Marketing, Audi Brazil, for every one car on the road there are eight Brazilian citizens. Compared to the United States of America, for every one car on the road there are 1.2 US citizens.

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Unlike the United States, the smallest vehicles in Brazil are the number one sellers: Fiat Palio, Volkswagen Gol, Chevy Celta, Ford Fiesta and a Renault. The Volkswagen Gol was the first flex-fuel vehicle in Brazil, arriving in 2003.

All gas stations offer gasoline or alcohol, as mandated by the Brazilian government. Gasoline costs BRL $2.39 a liter, or BRL $9.56 a gallon, or USD$6.70 a gallon. Alcohol costs BRL $1.29 a liter, or BRL $5.56 a gallon, or $3.89 USD a gallon.

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Flex-fuel vehicles are the rage in Brazil. Flex-fuel vehicles can take gasoline or alcohol, so the price of the energy is the commanding force, not what energy the engine will allow. According to Renault Brazil, sales of flex-fuel engines have grown significantly in Brazil over the last three years. From 20% of the market in 2004, they overtook petrol engines in 2005 to take 80% of the market (total industry volumes, passenger cars) in 2006.

Financing has almost been prohibitive in previous years because of inflation. About four years ago the interest rate was around 30 percent a MONTH! There was no way one could have afforded to buy a car with a loan that volatile.Today, to get a personal loan it is around 100 percent per year interest rate, but with the stabilization of the economy, car companies are winning car sales with fixed interest rates. A flex-fuel Volkswagen Gol costs about BRL$ 23,000, or USD$12,881.

Szmoisz says that sixty percent of Audi’s sales in October were financed. Paulo, from Chevy Carrera said that 95 percent of their cars were financed, with only a three percent default on the cars. Audi has started offering promotional “zero percent interest” with fifty percent down, on cars they want to get off the lot.

As more people buy cars, congestion in Sao Paulo increases, increasing pollution and the need for energy. The congestion in the Rodizio,”the ring”, during rush hours (7-10am and 5-8pm) has become so bad that the government has mandated that certain cars cannot drive during rush hours on certain days. On Monday, cars with the license plates ending in 1 and 2 cannot drive during rush hour, on Tuesday cars with plates ending in 3 and 4 are restricted, and so on. Businesses are allowing for flex times to accommodate this mandate, but some economists wonder if putting more money into public transportation wouldn’t be better for a long-term effect.

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Ethanol

Ethanol has helped Brazil become independent of foreign oil. Philippe Reichstul, CEO of Brenco and former President of Petrobras, believes there is still a good deal of growth in ethanol in Brazil. “We will not only produce ethanol, but will produce the cleanest ethanol we can. Currently, some sugar cane fields are in hills and the cane has to be burned before people can cut it down. Brenco has made a commitment to produce sugar cane on flat land, so that machines can cut the cane.”

Brenco is still a privately held company with investors such as former CEO of Sun Microsystems and well-known environmentalist Vinod Khosla, and Steve Case, AOL founder. The company is expected to have a public IPO offering the second half of 2008 and begin production in May, 2009.

Asia

Roberto Rodrigues, former minister of Agriculture of Brazil under President Lula, and current coordinator of the Agribusiness Center at the Getúlio Vargas Foundation (FGV) discussed Brazils new Tupi oil field with me. Rodrigues talked strategically, “What about refining the oil in Brazil into gasoline and mixing 10 percent ethanol into the gasoline before exporting it to Asia?”

I mused, this would allow Brazil to capitalize on their ethanol and lengthen their gasoline production, at the same time helping Asia with their Kyoto Protocol, CO2 reduction commitment. Hmmm…

Japan

Japanese auto companies were the last to bring flex-fuel vehicles into Brazil (except for luxury cars, which may not bring them into Brazil at all). That is why it is of interest to know that Mit’sui, a Japanese company has entered the Brazilian agricultural production business. Mit’sui owns 25 percent of Multigrain S.A., whose core business is the origination and export of soybeans in Brazil. Multigrain is projected to expand it’s product range from soybeans to corn and cotton and will also create a coherent management system from production to exports. Multigrain is also considering ethanol production from sugarcane produced on it’s own farms.

China

Brazil has iron, a component needed to make steel. China tried to buy into a joint venture for iron with Brazil. I was told that China wanted to bring Chinese people over to work in the joint venture and they also wanted Brazil to subsidize the electricty to extract the iron, instead of paying market prices for electricity. This was brought up after talking about Japan, more of a way of saying that Japan is investing in Brazil and China is buying Brailian products. Brazil seems to hold countries that invest in Brazil and work with Brazilians in higher esteem than countries that just buy their products.

Brazil – a developing nation

Brazil is developing and like any other developing nation it is done on the back of using more energy. Certain industries – such as aluminum – are using large amounts of electricity, produced from water. Environmentalists are concerned about using water from the Amazon, so the water supply is of concern. Brazil needs water, or natural gas, yesterday.

Brazil buys it’s natural gas from Bolivia and Bolivia is not producing as much natural gas from it’s natural gas field as the contract says Brazil and Argentina can buy. A couple years ago Bolivia’s Morales nationalized it’s energy reserves, including the natural gas that Brazil had invested with Bolivia for production of that natural gas.

The Tupi oil field contains both oil and natural gas, but drastic measures need to happen now. There is talk of discontinuing the subsidy for natural gas at the gas pumps. This could hurt the taxi system, as all Taxis run on natural gas. There is a small percentage of Brazilian cars that are sold with natural gas and some are retrofitted to take natural gas because the natural gas at the pump is cheaper than gasoline or alcohol.

There is also a plan to collaborate with Mexico in training and infrastructure to develop an ethanol industry by the Brazilian government.

United States

Brazil is very proud of their ethanol production, it has led to their ability to get off the dependence of foreign oil and to pay off their International Monetary Fund debt early. The EIA reported that in 2006, Brazil exported 29,500 bbl per day of ethanol to the United States. Brazils ethanol has a 54 cent per gallon import tariff on it, due in large part to the effective lobbying of the corn ethanol group in the United States.

Wholesale price for imported Brazilian ethanol should be around $1.75 per gallon (after you deduct the $0.51 ethanol blender’s tax credit). U.S. made ethanol should cost around $1.40 wholesale (after you deduct the $0.51 ethanol blender’s tax credit). The import tariff, longer ocean shipping distance,and the higher value of the Brazilian “Real vs. the dollar tipped the balance towards U.S. corn ethanol.

There was much discussion as to whether the Tupi find gives Brazils President Luiz Inacio Lula da Silva (LuLa) more leverage when it comes to the question of importing ethanol to the United States. There was differing viewpoints. One economist thought perhaps this could be a strategic reserve for Brazil. With Tupi oil, Brazil will have about ten years worth of consumption. Certainly, President Lula is very proud of Brazil being self-sufficient. But will the lure of making money on the oil, or ethanol/gasoline blend be more inviting?

It will cost about four times as much to produce this oil as it does other oil. $18 was the figure quoted to produce oil, making the Tupi oil cost out at $72 a barrel. Currently, with oil prices hovering around $100 a barrel, there would still be a profit in those barrels, but if prices fall…

In either case, Petrobras has to start production right now, as they need the natural gas more than they need the oil.

Venezuela “ our old buddy Chavez

Gasoline is no longer driven by market fundamentals but by speculation and geopolitics. I never think of peak oil, but of premium or political oil. Premium, in the case of how expensive it costs to produce, political in the case of Venezuela.

Chavez has virtually nationalized Venezuelas oil, having gotten rid of Chevron and Exxon Mobil and firing thousands of workers. This makes the value of Venezuelas oil different from countries that are our allies. We buy Venezuelan oil because we need oil, but if our friends found a large reserve we would gladly switch nozzles.

There is concern that Venezuela may be in trouble because Chavez is not investing money back into the production of his oil, but using the money for his own gains. This makes Brazilian oil more valuable to the world, because there are economists that say that about the time Brazils Tupi oil starts production Venezuelas oil production will be declining.

Mercosur

Mercosur is Regional Trade Agreement (RTA) between Brazil, Argentina, Uruguay and Paraguay. Think NAFTA, only bigger and better, more like the EU agreeement. It allows these countries to work together and travel between each other freely. The four countries mentioned above have voting status, all the others, Chile, Bolivia, Argentina, Colmbia, Ecuador and Peru all have only membership status.

Renault has just finished producing a vehicle under the Mercosur trade agreement that would not have been financially feasible before. They built the car in Curitiba, Brazil and will be able to sell it in different South American countries without paying tariffs for importing the car.

Chavez is now trying to become part of the voting membership. They have applied but still need to be ratified by Paraguayan and Brazilian parliament. There are reports that some of Venezuelas views are not sitting well with Mercosur and the voting membership may not happen.

Venezuela is sort of a part of the Andean Community agreement, which consists of Bolivia, Colombia, Ecuador and Peru. It is rumored that Venezuela started to pull out when Colombia and Peru signed trade agreements with the United States. If that is true, it may be the reason Mercosur is having second thoughts about allowing Venezuela voting membership status.

It was a whirlwind four days of partying and meeting with officials. To see Brazil in person is to remember that on many levels Brazil is still a developing third world country. Poverty and crime are rampant. Brazils commitment to ethanol and energy independence is world-renowned and with this new oil find Brazils development might become a lot easier.

But when you talk to the person at the gas station filling their vehicle, Brazilians are like the rest of the world. They buy whichever energy is cheapest.

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About the Author:

Lou Ann Hammond is the CEO of Carlist and Driving the Nation. She is the co-host of Real Wheels Washington Post carchat every Friday morning and is the Automotive, energy correspondent for The John Batchelor Show and a Contributor to Automotive Electronics magazine headquartered in Korea. Hammond is a member of the North American Car and Truck of the Year (NACTOY), Women's World Car of the Year (WWCOTY), and the Concept Car of the Year.

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