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DE RUEHBR #1480/01 2051142
ZNR UUUUU ZZH
P 241142Z JUL 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6104
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 2500
RUEHSO/AMCONSUL SAO PAULO 7515
RUEHRG/AMCONSUL RECIFE 5138
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RUEHRC/USDA WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001480 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EWHITE OES/EGC AND PKELLY OES/STC; OES/ETC GTHOMPSON; BSC 
WPOPP 
DEPT PLEASE PASS TO SLADISLAW DOE 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: TRGY SENV ENRG KSCA ETRD EAGR BR
SUBJECT: THE VEGETABLE OIL REVOLUTION - FROM THE KITCHEN TO THE CAR 
 
REF: 05 BRASILIA 1992 
 
BRASILIA 00001480  001.2 OF 002 
 
 
¶1. Summary: Brazilian energy parastatal Petrobras recently 
publicized the development of a new diesel fuel, H-Bio, further 
bolstering Brazil's already prominent position in the world of 
biofuels.  A hydrogenated synthesis of petroleum and vegetable oil, 
Petrobras is touting the social, environmental and economic benefits 
of the fuel as well as its capacity to reinforce Brazil's energy 
independence.  Industrial tests of H-Bio began on June 20, and the 
company expects commercial/industrial production to commence by the 
end of 2006.  While certain obstacles still merit attention, H-Bio 
fits into Petrobras' long-term emphasis on green fuel development. 
End Summary 
 
¶2. Petrobras officially announced H-Bio in May of 2006 and later 
executed a test of industrial production on June 20, replete with 
President Lula's attendance.  Developed by CENEPES, Petrobras' 
division for research and development, over the past 18 months, the 
parastatal claims that H-Bio has proven technically and commercially 
viable.  Accordingly, Petrobras has recently patented the fuel's 
production process. 
 
¶3. H-Bio is a fusion of vegetable oil and petroleum, refined into a 
single diesel fuel via hydrogenation, or the addition of hydrogen 
molecules to the mixture.  It should not be confused with biodiesel, 
which is a pure vegetable oil that distributors blend with 
previously refined diesel.  Analysts predict that the principal 
vegetable component for H-Bio will be soy oil, which represents 
Brazil's largest commercial agricultural crop and, according to 
experts, would not be subject to scarcity issues often associated 
with ethanol.  As Petrobras President Jose Sergio Gabrielli 
affirmed, if the price of soy is too high or there is an 
insufficient crop, the company can revert to producing conventional 
diesel.  According to initial estimates, Petrobras will utilize 
roughly 256 millioQcubic meters of vegetable oil in 2007 and 425 
million cubic meters in 2008.  The latter accounts for roughly 16.4% 
of Brazil's annual soy oil exports and would represent a stable 
internal demand for soy.  That said, one of the purported benefits 
of H-Bio, is the capacity to manufacture the fuel from a variety of 
different oils, including but not limited to soy, castor, cotton and 
sunflower. 
 
¶4. As a "green fuel" H-Bio, according to Petrobras, offers consumers 
a myriad of advantages.  These include higher ignition potential 
(and therefore decreased emissions), increased fuel efficiency, 
decreased sulphur emissions, and lower production costs.  Petrobras' 
officials also claim that H-Bio does not generate harmful byproducts 
normally associated with diesel refinement.  The most significant 
advantage, however, for Brazil is the dollar cost savings on 
imported diesel.  While Brazil is self-sufficient in oil production 
it still imports petroleum derivatives, including diesel, of which 
it imports 10% every year.  By the end of Q08, Petrobras' predicts 
a 15% drop in imported diesel at a savings of approximately US$ 145 
million per year.  By 2011, increased production should save Brazil 
nearly US$ 240 million a year on diesel imports.  Long-term 
estimates for H-Bio production and the substitution of conventional 
diesel have not yet been defined. 
 
¶5. Petrobras' implementation time-line will proceed in two phases. 
In the short-term (2007 to 2008), Petrobras will develop logistics 
for large-scale production in three refineries.  Commercial 
production should begin in December 2006 at the Regap refinery in 
Minas Gerais and expand into two more refineries: Repar in Parana 
and Refap in Rio Grande do Sul in 2007.  An estimated US$ 38 million 
in investment is required to retrofit the plants.  Phase two (2009 
to 2011) should witness infrastructure expansion into two additional 
refineries, requiring an additional US$ 23 million in investments. 
The overall cost of retrofitting refineries to produce H-Bio is 
relatively low and the task is not technically difficult. 
Refineries simply require a hydrogenation facility.  Moreover, 
handling and storage requirements remain the same for H-Bio as for 
conventional diesel, meaning that it is unnecessary to invest in new 
distribution and holding infrastructure.  Petrobras' director of 
supply Paulo Costa has also highlighted that conventional diesel 
engines require no modifications to run on H-Bio.  Other analysts 
have claimed that engines might benefit from the fuel's property as 
a lubricant. 
 
¶6. Despite the optimism surrounding H-Bio, the vegetable oil supply 
chain and potential environmental repeQussions need to be 
addressed.  One question facing Petrobras, at least in terms of 
 
BRASILIA 00001480  002.2 OF 002 
 
 
investment, is the infrastructure required to transport and store 
large quantities of vegetable oil prior to refinement.  Sylvestre 
Calmon, a technology manager for refinement technology at 
Pretrobras, admitted that the company's refineries do not currently 
have adequate facilities to receive large quantities of vegetable 
oil.  Moreover, there is a lack of economic analysis accounting for 
the cost of transporting vegetable oil to the refineries.  Some 
analysts are questioning the economic viability of the fuel. 
Petrobras also needs to determine the excess Hydrogen requirements 
necessary to propel H-Bio into large-scale commercial production. 
There are also potential environmental concerns.  Recent studies 
have revealed links between soy cultivation and both biodiversity 
loss and deforestation in the Amazon.  Providing a stable, long-term 
incentive to produce additional soy may put additional stress on 
Brazil's conservation efforts. 
 
¶7.  In spite of these concerns, the creation of H-Bio appears to fit 
into Petrobras' and the GoB's long-term strategy of both leading the 
world in biofuel production and partnering with developing countries 
to promote their distribution.  At the June 20 ceremony, Lula stated 
that the technology allows for partnerships with African countries 
which can then export products to Europe.  He added, "this is not 
just a project for Brazil, but for other poor countries."  H-Bio is 
also consistent with the GoB's National Biodiesel Program (reftel) 
as distributors will add biodiesel to both H-Bio and conventional 
diesel.  According to Petrobras President Gabrielli, "biodiesel and 
H-Bio are complementary and represent a new type of fuel-economics 
in the world scenario".  Most importantly, H-Bio augments Brazil's 
self-sufficiency in diesel.  Dilma Rousseff, former Minister for the 
Ministry of Mines and Energy and currently President Lula's Chief of 
Staff, stated that Brazil was seeking self-sufficiency in oil and 
effective participation of green fuels in the energy matrix.  H-Bio 
should achieve this. 
 
¶8. Comment:  H-Bio is yet more evidence that Brazil is the world's 
leader in biofuels, from both technological and production 
perspectives.  With further investment in the technology, H-Bio has 
the potential to count prominently as one of the solutions to the 
world's looming carbon crisis.  And, while one can predict neither 
the long-term impact of H-Bio nor the influence that it will exert 
on energy development, its development is laudable. 
 
WILLIAMSON