Why Raizen decided to invest into waste-based origin ethanol, capacity plans, feedstocks?

And, where is future demand expected to come from?

Paulo Côrte-Real Neves, Global EVP President Raizen Trading, explains to Josefine Ahlström, Argus VP Business Development Europe.

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Josefine: Hello and welcome to the second episode of this new series, "The Biofuels Report" in which we discuss all exciting things, biofuels. This new series is brought to you by Argus Media, a leading independent provider of energy and commodity price information. With the world becoming greener every day and the fast developments in the market, we wanted to have a dedicated space to cover the global biofuels market from finished fuels like ethanol, HVO, renewable diesel to feedstocks and credits.

My name is Josefine Ahlström, VP, European Business Development for Oil Products here at Argus Media. Today, we have an exciting guest with us from Brazil, Paulo Côrte-Real Neves, who is the global executive vice president for trading at Raízen. Raízen is the largest sugarcane ethanol producer in Brazil and we are extra curious to hear what Paulo has to say as Raízen is the only company in the world that so far produces cellulosic ethanol, also known as second-generation ethanol, in any significant commercial scale.

And due to it using waste-based feedstocks, feedstocks that were previously left unused, the Raízen ethanol production has experienced an increase in production of as much as 50%. And not surprisingly, the greenhouse gas emission savings are therefore better than if you would compare it to traditional first-generation ethanol, so with approximately 30% extra greenhouse gas savings and compared to gasoline, the savings are around 80%. So we at Argus publish pricing for waste-based ethanol in Europe and we are extra curious, as mentioned, to understand more about what are Raízen's plans for the second generation ethanol. So a big welcome to Paulo. Great to have you here today. So, Paulo, tell us a bit about the rationale. I mean, what led Raízen to make such significant investments into waste-based ethanol production?

Paulo: Well, thank you, Josefine. I think our story tells a lot around a big farmland operation out of Brazil. It's more than 1.3 million hectares of operational land that we manage in Brazil to produce our sugar cane. So there's a large-scale operation and, of course, when we realized over the years that there is a lot of waste, a lot of the energy capacity of the plant that was left in the field because we lacked technology to convert it into products, that brought us to this cellulosic ethanol waste-based development that took us, I don't know, almost 15 years to get where we are today.

So one-third of the energy of the plant was used to be left at the field, untouched there in the form of the tops and the leaves of the plant that was not brought to our industrial facilities at the point. And this technology was developed and tested, and we had a pilot plant before, and then the first industrial plant came online in 2015 and took us another five to six years also to make it work in industrial scale before we came to this point to decide to invest in expanding our capacity and really using this additional energy to produce up to 50% more ethanol at the same land with the same sugar cane, the same plant. So just taking this third of the energy that was left before and converting it into sugars and then on ethanol. So that's the main story behind it. We were always trying to make this additional energy to be converted into products as well.

Josefine: So where do you see demands coming from here that sort of made you dare to take the decision to invest into this?

Paulo: Josefine, it has been a while when we started to promote the cellulosic ethanol from ourselves. We started to deliver it in 2016, if I'm not mistaken, or 2017. And of course, with all the climate change discussions getting more attention over 2020, people around the world, and most notably in Europe, but also in the U.S. and Japan, started to chase for waste-based solutions and low-emissions waste-based solutions as an important criteria to be followed to be tackling decarbonization, but also not to be touching all the food versus fuel equation. So that's when it started to peak.

And of course, we had a new product that was not something well-developed in the world, with the first ones producing it in large scale, but it matched all the criteria that were required. It can use the same logistics for the developed ethanol coming from different sources in the world. So it tends to be competitive in terms of logistics, in terms of the terminals, the vessels, but also there is an important thing about our story, which has to do with the feedstock availability. As we have a big operation, and we also are an agricultural company, so we are operating our sugar cane, we control for long term, the feedstocks that we operate. So they are all in our control. So that was an important equation to make it viable economically competitive and led us to face all the challenges that needed to be overcome to make it happen.

Josefine: So what you're saying is that the stars aligned, you have plenty of feedstock, you can improve the yield of your production, and then you have demand coming in to ask for this waste-based ethanol. So it's really stars aligning, isn't it?

Paulo: Exactly. And the demand was fantastically important for that because with the new developments of mandates all over the world to try to tackle decarbonization and try to solve climate change. And the waste-based equation around it was so important so people could really choose to support the investments, because there is a big challenge, Josefine, in the beginning, because of the high CapEx investments that are required. But after the first cycle, as we are producing a biofuel from a waste-based solution, it's actually more competitive than the regular ethanol. You're taking away, so you don't need the raw material again to be purchased like is in the first-generation biofuels of the world. So it's going to be a very competitive solution for the world.

Josefine: So in terms of demand, where do you think the biggest demand is going to come from? Who is willing to pay? Is it over in Europe where you have the Annex 9A, for example, or the RED III regulation? And this is the U.S., for example, target market. So where do you see being the most attractive demand from your side?

Paulo: European RED III regulation and Annex 9A were very important for the development of our solution, for sure, Josefine. And I think when it comes to demand, there is a very important aspect of it, is that the energy markets is so huge, is so big that we cannot imagine even with the ability to grow 50% of our production with the cellulosic technology that we use from sugar cane, even if we consider that, all the sugar cane that is produced in the world can be converted into cellulosic ethanol, all of these wouldn't take more than, I don't know, we've got to be not even close to the 5%-ish of oil replacement in different industries for energy.

Of course, road transportation is the first one to think about because ethanol is actually a booster also to gasoline, so it's not only a biofuel but also a booster. It can be used in several different industries and we've been facing these as a company for the last 10, 12 years in different industries coming from the road transportation to the new energy industries that will require decarbonization like aviation or marine, but also not stopping there as a very competitive raw material for biopolymers or chemicals and moreover moving to other industries like cosmetics and several others, hand sanitizers. So it's a very versatile solution that can be used in different industries. I would say energy demand is much, much higher than what we can think about providing to the world. So we like to think that we are building a part of the solution, just a small part of the solution and there is no silver bullet in this equation. So many others will need to come together to help the world to decarbonize.

Josefine: Just one specific question then on aviation. So alcohol to jet, waste-based, what do you think is more likely going to be a sort of a crop-based, for example, corn-based ethanol that we see being used for alcohol to jet?

Paulo: Josefine, I would say the waste-based, the way I think of the waste-based solution has a place to be because as it's already said, it delivers all...it checks all the boxes, all the required boxes. Then the way we see things, the biofuels or at least the sugar cane ethanol also delivers a very low emission solution at a very competitive cost. In Brazil, as you know, it competes at the pump against gasoline at Є100. So it can't compete clearly over oil prices of Є60s.

So to answer your question, I don't think there is a clear definition why you're going to see a crop-based ethanol or any other solution or other places that we're going to see waste-based solutions. I think we will need both and I think it will be the market, the specific industry to choose what to have. Perhaps developing countries will take as a natural solution as we do in Brazil, more of the crop-based ethanol, or other places on earth as well in Africa or Asia. More developing countries that are looking for a more complete solution will take the waste-based solution. I don't know, just a way of thinking what is driving each place on Earth to find the carbonization solution.

Josefine: Thanks for clarifying that. What you're basically saying is that I guess economics will decide depending on what region and country mandates or voluntary demand there is. But then I know you have a partnership with the Finnish technology company, Wärtsilä. So is sugar cane waste-based ethanol also an option even for the marine fuel sector?

Paulo: We are almost there to answer yes, Josefine. I cannot give you the straight answer at this point, but we are working with this Finnish company. There's a very important collaboration for us, which is about to test ethanol as a solution that works properly on the dual fuel engines for vessels that they produce. So these engines were developed to be using methanol as a solution. But guess what? Ethanol is a very similar molecule, a very similar solution, and it has a very strong power of reducing emissions also on the marine industry, which has not been tackled so far with the competitive solution.

So that's the first step that we're trying to overcome, which is to confirm that these engines can work properly and normally as a dropping fuel with ethanol as well. So that's where we are today. I hope that we soon can share the results to you, Josefine. We are not there yet, but we are very close by. So we expect by the mid of this year to have all the answers found and all the tests and comparisons made. But we are very positive that this will work. And then naturally it's a drop-in, so you don't need a new technology, you don't need anything else. It's going to be like the flex-fuel cars in Brazil, where people can choose at the pump level if they are willing to fuel their cars with ethanol or if they're using any other source of fuel. So that's where we're trying to reach.

Josefine: Good. So we're going to watch this space as simple as that.

Paulo: Yes, you're going to watch it. It's coming.

Josefine: It's coming, definitely. In terms of pricing ethanol, I mean as a price reporting agency, we are, of course, watching that space particularly. We launched waste-based ethanol pricing in February, looking at the UK and the Dutch markets, so it's called double-counting ethanol. So we price this daily, but what we see for sure is that in Europe, the markets differ significantly between the different countries. So you see very different values in Germany and in France. So what's your thinking on this? Do you think these European markets will align value-wise every time? How do we make sure that market participants, I mean buyers, sellers, traders, producers, etc., can ensure there's a fair value in place for waste-based ethanol? I mean, it's going to be such an important thing for demand going forward. So keen to hear your thoughts on that angle.

Paulo: Josefine, I think the straight answer in my opinion for you is yes, they must converge over time. And of course, companies like Argus play a critical role promoting transparency and showing the differences of prices in different places on earth, which are a consequence, as you mentioned pretty well, about the different regulations and the different approaches that we still see in the world happening for the same products. So I think it's natural, Josefine. We are starting these new developments and the approach of each country is different.

So naturally, as companies like Argus again, shows and promotes transparency to the market, developing new indexes and indicators of all these different approaches, we're going to see naturally people evolving over time to find the similarities and to really be able to compare the similar solutions similarly. Otherwise, you know, you're going to see so many arbitrages that won't make sense. So I would say that naturally, structurally, these things will converge, but they only converge because of the transparency that are promoted by companies like Argus.

So I would say ethanol, because of so many different regulations in different places, still lacks this commodity aspect of it, which is really to be global and really to be well defined and understood in different places with its similarities. But it doesn't stop on ethanol, right? It should be similar to other products on biofuel space around it. So I think, for me, it's pretty clear. This will last for a moment and the more transparency can be provided, the more indexes and the more different indicators can be developed, the faster these will converge.

Josefine: Thanks, Paulo, for the reassurance. I can tell you we have scratched our head many times when we looked at the difference feedstock requirements in Europe for different countries. So, okay, we continue to do the work here and with some luck, we then see a bigger European market who is becoming properly commoditized, even on waste-based ethanol. So, no, you keep us continue hoping. We do that. But let's just move. Sorry, go ahead.

Paulo: And it's very important for our development because this transparency really promotes the right incentives for the investments to keep coming. Without them, we cannot go further in our development. So we're very looking forward to also to be supporting and willing to see this development to come.

Josefine: Yeah, that's great. I mean, the way we look at it, we see it as a number of options there, and we then provide the transparent pricing for the different options so people can choose what suits them best. So let's see how we can help support this industry as it develops here. One thing, though, that I think over here in Europe has been a bit of a struggle is really the scalability of producing a sufficient volume of waste-based ethanol. So how did you crack that nut? I mean, how did you do it? Because we know others over here have been struggling for sure.

Paulo: Well, Josefine, I think, as I said in the beginning, first of all, we have a lot of biomass available and we control the supply chain, the value chain of the sugarcane. Secondly, the gas over the years, over the decades in the past, used to be a problem to our industry. So we truly believe that the more we invest in energy efficiency in our industries, the more we're going to have availability of this waste-based raw material to upscale what we're already building here.

So I'll give you an example. More than 80% of the gas and the tops and the leaves of our plant today, they are used to run our industry. So we use high-pressure boilers to operate it, but we're still using 80% of it to run a full-circular economy industry, which is our sugarcane-based production. But as we see in Brazil, solar and wind energy to be upscaling and developing and summit to all the other hydropower and other renewable sources of energy that we see in our country, for example, we see that we can electrify several equipments of our production to use or to import renewable energy from the grid instead of only be exporting.

And by doing that, plus by investing in energy efficiency, we can even more lower our emissions in our production, but also even more leave more gas and tops and leaves available for our cellulosic ethanol. So as I said, we can increase 50% of our ethanol production with 20% only of the biomass. If we could electrify another 20% and use only 60% instead of 80% of our cogeneration to run our plant, we could add another 50% of ethanol production. So if you sum it, not only to our reality in our company, but we can do it and you can see it all over Brazil and all over all the sugarcane productions of the world to really upscale this solution of waste-based ethanol coming from sugarcane.

Unfortunately, I talk a lot about sugarcane. We can be in other steps also talking about other sources of biomass and waste-based equations. Of course, it tells a lot about our story. There's so much to be done today that we are so focused on sugarcane, but we know that the technology that we developed, it was developed 15 years ago, not only for sugarcane, bagasse, but also other biomass. We're not there with the same details that I can share with you about sugarcane, but hopefully, in the future, we can see other streams of biomass also being developed all over the world.

So I truly believe that there is a lot to be seen still, and the reason why, as I said in the beginning, is that bagasse, the biomass used to be a problem. When I started in the industry 20 years ago, we used to see big piles of bagasse in the plants and it was a big problem, an environmental problem. So the industries were made to be less efficient, not to be held with that much amount of bagasse available. So while we are doing that today, we are unlocking these inefficiencies and investing to get more and more available biomass to grow our solution.

Josefine: So it sounds to me that you don't have the same concerns about feedstock availability as we see, for example, when it comes to produce HVO or renewable diesel or half SPK soft because you simply have much more naturally available feedstock that you can even explore further. So there's no major concerns here, is that correct?

Paulo: I think it is, Josefine. I would say it's not that we are not concerned, but, you know, it's such a huge operation, agricultural operation, 1.3 million hectares. It's such a huge amount of effort to manage all this land operation, 45,000 people working for Raízen and more than 90% operating on the agricultural space. So because we are doing all this effort to produce with sustainability all that we are producing, and that's a consequence. It's not about a concern, but it's a consequence of all the efforts that we are making to produce all the value chain since the beginning under our control.

We understand that other industries, other supply chains, that doesn't work the same, but it's now more of a fair comparison, right? It's not just that we are buying all the feedstocks and producing under an industrial facility only. The industrial costs represent less than 10% of our equation. So now what we are seeing is that because of all these end-to-end approach and all the care that everybody now has to understand from the feedstock what is being supplied to the world, our 90% is more recognized now. But it takes 90% of our time, 90% of our efforts to handle the agriculture.

Josefine: I think I hinted to this before, Paulo, where we talked about solutions. So there's not just one solution here. So am I right in guessing that you see your ethanol complement all the other solutions that are there? So it's not about there is some competition between the different sort of pathways for biofuels, but you just simply don't have one and therefore this is a good contribution to the overall mix. Is that the right way to think about it?

Paulo: That's the way we think it. I don't know if it's the right one, Josephine. Every day that's the way we think it. We are building a solution that must be competitive on the waste-based space or in the low-emission space that can be supplied over the world in different industries because demand is there. Demand for solutions is huge and we are not seeing...we are not trying to compete exactly with other solutions like this. We want to promote our piece of the equation to help decarbonize the world. That's our journey. That's what we're trying to do here. And of course, we do recognize that just as an example of that, like I said before, it's easy to sum up everything that we can promote and the world will still need another solution.

Josefine: Yeah, I think that's a very, very fair point. Talking about your piece of the equation here, so what is your 10-year implementation plan for second-generation ethanol production evolving? I mean you have Univalem, Barra, Vale do Rosário, and the Gasa units. Sorry for my bad pronunciation here. But will they come into operation in '24, year 2025, or what's the plan here we're looking ahead at?

Paulo: Josefine, we're very excited with our joining here. And you spelled very well, thank you, of our plants. So we are the ones already producing out of two waste-based ethanol plants in Brazil which is Costa Pinto and Bonfim. Bonfim has just started recently and will produce up to 82 million liters of ethanol per year and we are already building another four plants. Two of them will be ready this year, second semester, which is Univalem and Barra, as you mentioned, and there is another two that are going to be ready mid-2025. So that's what we can and we've been prepared to be developing over the years, which is to be building two new facilities per year. So we have these four and we're starting another two this year to be ready in 2026.

Josefine: So to sum up as the last point here, Paulo, before we close out for today, so how much volume do you then estimate you will have in production that is waste-based ethanol once all these plants are up and running?

Paulo: So, with the 20% of the biomass only, so as a base case, with our own biomass only, we know we can build 20 plants like these ones that I just mentioned, the same one, and these will drive us to about 1.6 million cubes, 1.6 billion liters of ethanol per year by 2030, 2031. So that's the plan, that's the goal. But that's only with the 20% that I mentioned. And our efforts now, it's to really release more biomass and that allows us to have more waste-based ethanol coming from the same land that we are building these actual facilities.

Josefine: Thanks a lot, Paulo, and great having you here today. Thanks for joining us. We will actually see you already again next month at our Argus Biofuels and Feedstocks Latin America Conference in San Paolo. For the listeners, we will continue to follow the developments of waste-based ethanol, but also developments of other waste-based biofuels, given the major role they're expected to play as we move ahead in the decarbonization for transport fuels. For the listeners, as always, many thanks for tuning in, and for more information on Argus biofuels coverage and in particular, for our pricing of waste-based ethanol in Europe, please visit our oil products commodity page. See you next time. Bye-bye.